What counts as a commodity? Well essentially a commodity is anything physical that you can buy or sell on a traded exchange. They are usually categorised as one of five instrument types:
1) Metals: Includes Copper, Palladium and Platinum amongst others.
2) Soft commodities: Soft commodities are foodstuffs and other organic goods, including Orange Juice, Coffee, Cocoa and Sugar.
3) Crude oil. Includes US and Brent Crude (UK)
4) Energy. Includes other energy products, such as gasoline (petrol), Heating oil and Narural Gas
5) Agricultural Commodities: Including the major farmed products. Examples of agricultural commodities includes Corn, Cattle, Pork bellies, rice, Soy beans and Wheat.
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The futures market has its roots in agricultural commodities, where farmers and producers have always tried to hedge their incomes against future events. The commodities market is often influenced by rumours of impending weather problems, bad harvests and fluctuations in world demand; it therefore provides some of the most volatile of the many Spread Bets offered in Spread Betting, and therefore also some of the greatest potential gains or losses.
We will call you Arthur Dent, with the following account details:
Example: Arthur Dent
| Acct Balance: |
£2,000 |
| Credit allocation: |
£0 |
| Required margin: |
£0 |
| Open P&L: |
£0 |
| Total |
£2,000 |
You call the Spread Betting trading desk (or log on to the site) and ask for a quote on the price of July Orange Juice (OJ) (the expiry date being 30th June). The actual July OJ future in the market is trading at 79.15 - 79.25.
We quote a July Orange Juice spread of 79.00 - 79.40 cents per pound.
What you do next:
You think the price of OJ is too high and you sell at the lower figure of 79.00 for your chosen stake of £3 per tick (for this market 1 tick = 0.01).
To place a bet, you must have sufficient funds on account to cover the initial margin (deposit). In this case, the initial margin is charged at a fixed rate multiplied by the stake ie 350 x £3 = £1,050. All or part of the margin requirement is removed from your account when the position is full or part closed respectively.
Account status after opening the position:
Example: Arthur Dent
| Acct Balance: |
£2,000 |
| Credit allocation: |
£0 |
| Required margin: |
£-1,050 |
| Open P&L: |
£0 |
| Total |
£950 |
On expiry July Orange Juice closes at 76.20.
Result:
You were correct in thinking that the price would fall. Your profit is £840, calculated as follows:
79.00 (selling price) - 76.20 (closing price) = 280 ticks
280 x £3 (stake) = £840 (PROFIT)
Example: Arthur Dent
| Acct Balance: |
£2,840 |
| Credit allocation: |
£0 |
| Required margin: |
£0 |
| Open P&L: |
£0 |
| Total |
£2,840 |
PLEASE NOTE - the example above shows a profit but you would make losses if the price moved in the opposite direction.
Get Started!
If you would now like to get started have a look at some of the reviews on the spread betting companies page and choose see how spreadbetting comodities can be so lucrative.
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