The term “commodities” refers to natural resources that are derived from nature. These are mostly used as raw material for other products. In this sense, commodities are resources that are eventually consumed, for example oil or gold. Each commodity market will have its particular cycles, determined by supply and demand.
What are Contracts for Difference?
Before we delve further into commodities and other CFD asset classes, it is important to explain what CFDs are. Contracts for difference (CFDs) are derivative products which enable you to trade on the price movement of underlying financial assets (such as commodities).
A CFD is an agreement to exchange the difference in the value of an asset from the time the contract is opened until the time at which it’s closed. What is important to understand is that when trading a CFD you never actually own the asset or instrument you have chosen to trade, but you can still benefit if the market moves in your favour, or make a loss should the market move against you.
On our platforms, you can trade CFDs on the world’s most popular commodities. The most common of these are gold and oil, and these two have a very important thing in common: At some point in history, people selected a specific weight and currency at which these would be traded.
Oil and specifically crude oil, which is pumped directly from the ground, refers to a lot size called a barrel, which corresponds to an amount of 159 litters and is valued in USD (US dollars).
If a tanker ship, carrying 400,000 litters of oil, sinks, it causes a major environmental disaster. The sea will be vastly polluted and oil-coated marine animals will be featured on TV. As tragic as this news might be for nature, the financial market will process it. Viewed objectively, this amount of oil wasted in the ocean is now gone, which means that oil supply falls short. Limited supply can cause the price of crude oil to rise and thus create a trading opportunity for the CFD investor.