The mechanics of dealing
In the underlying market, commodities are usually traded in large sizes called contracts. Gold is traded in sizes of 100 troy ounces, for example, while Brent crude oil is dealt in 1000 barrel contracts, which is the equivalent of 42,000 gallons.
Realistically, these sizes are too large for most individuals to trade. If gold was priced at $1000 per troy ounce, one lot would cost $100,000. Similarly, if Brent crude cost $50 per barrel, one lot would be worth $50,000.
When you spread bet, rather than having to buy or sell contracts, you stake a certain amount of money per point of movement in the underlying price of the contract. Spread betting also benefits from leverage, meaning you only need to pay a relatively small deposit compared to the full size of your bet.
How commodities are priced
Commodities are priced very differently in the underlying market compared to shares, indices or forex. Shares are all priced in the local currency where they’re listed, indices are measured in points and forex rates have a standardised notation.
Now consider the commodity prices in the table below. Each one is measured in a different unit and the currency varies as well:
|Brent crude oil||45.85 USD per barrel|
|Natural gas||2.265 USD per mmBtu|
|Gold||1072.55 USD per troy ounce|
|Cocoa (London)||2272.50 GBP per tonne|
|Rapeseed||383.50 EUR per metric tonne|
|Lumber||250.00 USD per 1000 board feet|
However, as we’ve seen, when you spread bet on these markets you don’t buy the commodity outright, but instead stake a certain amount of money per point. That means you don’t need to pay as much attention to the units and the currency as you would when trading in the underlying market – though you do still need to make sure you know exactly what constitutes a point for each commodity.
To help you, many spread betting providers scale their prices, so that a 1.0 move in the price always represents one point. Most also offer details explaining what one point means. For example:
|Market||Spread betting example price||One point means|
|Brent crude oil||4585.7||Cents/barrel|
|Lumber||25000.0||cents/1000 board feet|
This actually makes spread betting on commodities more straightforward than trading them in the underlying market, though the prices may look a little strange to seasoned commodities traders.
Spreads on commodities
Just like shares, commodities futures are traded on specific exchanges around the world – which means there are official buy and sell prices available in the underlying market. Providers will then add their own spread on top of these as the charge for dealing in that market.
These spreads are often variable, meaning that they tend to fluctuate throughout the trading day based on the market conditions. When advertising their spreads, providers will usually quote one of the following:
- Minimum spread – the tightest possible spread a provider will offer
- Typical/standard spread – the spread a provider will apply most of the time
Here are the standard spreads IG quotes for the markets we’ve already looked at:
|Brent crude oil||3|
While it’s always important to check the details of any market carefully before betting on it, this is especially true of commodities. Due to the different ways commodities are priced and the size of spread they can be subject to, what ‘one point’ means can vary significantly from market to market. A £10 per point bet on lumber, for example, would in most cases be considerably more risky than a £10 per point bet on gold.
Impact of leverage
When you spread bet on commodities, you’ll need to put up a margin payment which may only be a small proportion of the value of your position. Remember that your potential loss could be much greater than this, however.
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