Forex Brokers Enable Investors To Invest In Commodities
In financial markets, commodities are classified as either metals, energies, or softs, intermediate products. The common metals are gold and silver, while energies are oil (Brent and WTI) and gas. On the other hand, softs are agricultural products such as wheat, soybean, livestock, and corn.
Traditionally, commodities were traded in established markets such as the Tokyo Commodity Exchange, the New York Stock Exchange, London Metal Exchange, Tokyo Commodity Exchange, and the New York Board of Trade, among other markets.
Futures And Cfds Explained
Investors can either invest in futures contracts or contracts for difference (CFDs).
There is a formal agreement in futures contracts where the buyer commits to purchase a commodity at a specific date at a pre-agreed price. The contract is binding, and all parties must not breach any condition or warranties unless otherwise allowed by clauses such as the force majeure.
CFDs, in contrast, are agreements between a buyer and a seller to pay the difference between the opening and closing price. A gain in the value of the commodity is debited to the investor’s account when the contract matures. On the other hand, if there is a loss (the quoted price of the commodity depreciates), the difference is credited to the investor’s account, which depletes the investment portfolio. Therefore, it is vital to note that in CFDs and Futures, the investor’s account must hold enough funds to finance any price fluctuation and sufficiently execute the contract.
How Forex Brokers Facilitate Commodities Trade
Forex brokers were initially offering forex trade services, but they have since diversified to offer other trade options such as exchange-traded funds (ETFs), Indices, commodities, and more. By the nature of futures contracts, there must be an actual exchange of the commodities that constitute the financial instrument. Therefore, there is no need for an online broker. The only requirement is an established market where buyers and sellers can haggle and enter into a futures contract in compliance with regulatory standards defined by institutions such as the US Commodities and Futures Trade Commission (CFTC).
Some conventional markets that offer commodity futures are the Chicago Board of Trade (CBOT) and the Chicago Mercantile Exchange (CME).
Forex brokers, on the other hand, are ideal for CFD commodity trading. There is no need for an actual seller of the commodities in the trade arrangement as no actual exchange occurs. Thus, the investor deals directly with the broker, who is the dealer. Since it is a valid contract, there must be a consideration which is a deposit held in the account of the investor. There should be enough reserves to debit the investor’s account when the CFD has a positive outcome on the broker’s account.
Aspects Of Commodities CFDs
Commodity prices do not vary in global markets. The financial markets have a mechanism of ensuring uniformity to reduce arbitrage and market manipulation.
Some of the aspects that investors need to consider when coming up with the ideal trading strategies include:
Leverage is a strategy that enables an investor to increase the risk exposure in a CFD investment which magnifies a potential gain or loss without depositing a deposit commensurate with the bid price of the commodity. The requirement is that an investor deposit a fraction of the required deposit known as the margin, and the broker finances the remaining balance in theory.
In regulated commodity trading forex brokers, the margin is capped at 10% as per the European Securities and Markets Authority (ESMA) standards. However, offshore brokers are not limited by these standards, and they can offer competitive leverage.
A spread is a difference between the bid and the asking price in a commodity CFD contract. This is usually the cost to pay in investment and usually caters to the commission and other broker fees that may be applicable.
Forex brokers offer spreads that are classified as either high low, or medium. If an investor wants to maximize the gain by a spread reduction, investing a large margin or making a large order is ideal.
Maturity And Trading Periods
CFDs have a maturity period that is defined during contract opening. Regarding trading periods/sessions, offshore forex commodity brokers are perpetually open with the exclusion of brief break periods during public holidays or weekends.
Tick And Lot Size
Tick size is the measurement for an instrument price fluctuation and can be quoted to four decimals or more.
A lot size is the minimum commodity batch that an investor can purchase. The tick and lot size determine the minimum deposit and margin required to invest.
Leading Commodity Trading Forex Brokers for 2021
According to FX-list, the leading Commodity Trading Forex Brokers for 2021 are: –
· IC Markets
· IG Markets
· XM Group
· XTB Group
· Global Prime
· HQ Brokers
· Think Markets, etc.