CFDs radically simplify trade metals. There’s no call for you to invest directly or buy a metal. Instead, you may speculate on market prices, buying/selling CFDs, similar to forex pairs. There are so many avenues to profit. To trade metals, you only have to get hitched to a good broker. Trading precious metals are particularly at the center of attention. Metals form an important sub-section amongst commodities. You will learn the use of CFDs to trade metals.
Investing in a CFD, you don’t in fact, buy the underlying asset like you would when directly trading shares. Instead, you try to profit from price movements.
Derivative instruments, CFDs permit traders to bet on asset price movements, like commodities, shares, or forex. Traders profit in case the underlying asset price moves in the direction laid out in the contract. Hence, rather than trading or owning the underlying asset, it is CFD contacts traders own.
Opening a trade, you may opt to go, whether long or short. Going long implies you expect the underlying asset – say, the share – to appreciate in value. Going short implies you expect it to decline. Provided you are correct in your assumption, the difference in value will be paid to you. Conversely, if incorrect, the difference will be owed.
Difference between CFD trading and buying shares
Investing in shares, you are, in fact, buying the underlying asset. By implication, you are buying a share in a company. In your capacity as a shareholder, you are advantaged by the capital growth of shares value as time goes. You may qualify for voting rights in the company. By selling your shares, you are selling the company’s actual assets.
However, when you buy a share CFD, you do have ownership of the shares. Rather, you own the contract given by the CFD provider. You are just speculating on if you think the share price will appreciate/depreciate without owning or trading the same. This holds true when you buy physical gold relative to trading gold CFDs. It is actually more in the nature of a bet on the price of the asset.
CFD trading – margin and leverage
Traders are just asked to invest a tiny percentage of the trade’s value for the CFD trade to open. This is a margin requirement. This may be as little as 5% of the full trade value. The margin is the deposit, in a manner of speaking.
For instance, let’s make-believe that you wish to trade Nordstrom shares thru CFDs, hypothetically valued at $10 per CFD. You are intent on buying 100 of these CFDs, hence the trade; ’s value is $10000. With a 5% margin, you have to pay just $500 to open the trade.
Notwithstanding your putting forward just 5% of the trade value, you are fully entitled to benefit from 100% of possible gains. Small wonder CFD trading is so very popular!
Nonetheless, it is important to not forget that, since it is the leverage you are trading with, the same holds true when your trade loses. You would have to pay the CFD provider for the loss in its entirety. This would far exceed the initial 5% margin requirement. Moreover, you would be charged a commission on the trade by the CFD provider.
Defining stop loss
A feature that helps to minimize a trader’s risk when trading CFDs, a stop loss enables traders to close a given trade when the CFD falls below the specified price. The latter is the same as the stop loss. This brings about the minimization of losses. The trade is closed at a particular point prior to the continuing reduction in value.
Trade metals with CFDs: benefits
Massive potential profits
Since CFDs are leveraged products, you may make bigger profits out of smaller investments than would have been possible thru share trading;
If you can see stock prices fall in the future, you could offset losses to your portfolio’s value vai CFDs rather than engage in share selling;
CFDs help you speculate on commodity price movement;
Wide market access
CFDs permit you to speculate on countless financial products and global markets where you may otherwise have no access ;
Profit from losses
You can profit regardless of the stock/commodity prices are climbing/plunging;
Dissimilar to some derivative products, CFD products have no set expiry date. The implication is that you may end the contract to realise a profit/loss when you decide.
Trade metals with CFDs: risks
Major potential losses
Since CFDs are leveraged, you stand to lose more than you initially invested;
CFDs are complicated
The complexity of CFDs implies that only advanced traders ought to be market participants;
Similar to any contract, three might be hidden clauses in the CFDs you are unaware of;
Owing to swift market price movements, you could see-saw between gain and loss without predictive insight.
Trading metals with the main CFD types
Once you have decided to open an account with a CFD provider, you ought to determine the kind of CFD you prefer. There are generally three ways to access CFDs:
- Direct Market Access (DMA);
- Market Maker;
Trading CFDs thru market makers and DMAs are the commonest method globally.
Defining the DMA CFD
DMA is the term used for electronic facilities, frequently offered by independent firms, allowing certain investors or financial firms to access liquidity as they trade securities.
As a rule, the authorised investors or firms are generally brokers, banks, and dealers(so-called market makers). The latter are usually a dealer or broker holding a specific number of shares of a certain security at their own risk to encourage and support trading in that security.
By using a DMA, the investor may manage its account, trading directly without the services of dealers and brokers. The implication is that the trader may access the infrastructure of the sell-side firms, costs and commission staying low.
DMA CFDs: pros & cons
DMA CFDs have contributed a lot to trader enterprise, in the sense that traders now can venture out on their own , rather than being totally dependent on agencies. Thanks to DMA CFDs, a trader may send the trade straight to the execution desk to finalise.
- You may have your own trading goals and modify them when you feel it is necessary; you may take more or less risk contingent upon your past performance or on your experience or trading skills;
- The electronic environment permits swift transactions, and less price differences than you would encounter were the order placed with a broker;
- You are the master of the situation insofar as your decisions stem from you and do have the imprint of agencies. You can use more/less liquidity, buying /selling as per your preference;
- DMA CFDs are a great resource for seasoned traders. Newbies best let their investing affairs be conducted with the active aid of good brokers like ABinvesting.
- In case you are an investor less than seasoned, you might risk losing profits since you might be unable to predict trends in time;
- In the event of there being insufficient trading in the underlying market, you will not be able to open and close CFD positions;
- There’s a diminished offer range relative to the market maker.
Defining a Market Maker CFD
A trading company that comes up with its own market, a Market Maker CFD, decides the underlying asset price range on the basis of which CFDs may be traded. The company formulates both the financial instrument/commodity buy and sell price. Hence, in case you buy a CFD over a specific asset, you are a price taker (as opposed to the DMA price maker).
The prices, nonetheless, do not vary from the underlying asset market price. The implication is that you have to deal with a dealer or broker. You simply lack direct access to the market, as opposed to DMA CFDs.
Market Maker CFDs : pros & cons
- The assets gain greater exposure since they reach a comprehensive range of markets, given the higher degree of liquidity in the market;
- Newbies ought to consult their broker about these types of CFDs;
- Higher liquidity implies your trading even if there’s insufficient trading in the underlying market.
- Higher commission and brokerage fees;
- The risks are nearly the same as those of volatile markets;
- You have to accept the trader’s price. This holds true even when it sets a higher price relative to that in the market, the so-called spread or extra margin;
- The broker can requote prices once an order is submitted.
Defining an Exchange Traded CFD
The model permits you to trade CFDs listed on any prominent exchange. These CFDs may only be traded via brokers/dealers authorised to trade them. Said exchange can create standard terms and conditions aimed at risk reduction, the market being separate.
Similar to the DMA scene, traders determine the prices, being so-called price makers. The CFD price follows the underlying asset market price – regardless of these being separate markets.
The trades are processed, registered and cleared by the exchange. Rather than deal directly, buyers and sellers deal thru the exchange. Counterparty risks are thereby reduced.
Counterparty risk is the risk that the counterpart would falter in fulfilling of its obligations. For example, suppose you buy a CFD from XYZ company, selling it at a higher price. In case your counterpart is unable to pay the difference between the exit price and the entry price, you have no profit. Since you do not directly deal with a broker/seller, the exchange guarantees the obligation.
Exchange-Traded CFD: pros & cons
Counterparty risk is diminished with consistency; newbies are allowed to consult their broker.
Higher commission and brokerage fees; in case you are a seasoned trader you are not allowed direct trading. You have to open an account within the brokerage platform.
Leveraged CFD trading: an instance
We are supposing you wish to trade CFDs where the underlying asset is the XAUUSD, called Gold vs US Dollar. Let XAUUSD trade at :
Bid price 1700.64 (sell)
Ask price 1701.19 (buy)
You determine buying 100 oz of XAUUSD – one lot of XAUUSD – since you reckon the price will appreciate in future. The margin rate is 5%. Account leverage is 20:1. The implication is that you have to deposit 5% of the total position value into the margin account.
Hence you have to deposit
1% x [1 x 100 x 1790] = $8950.
The following hour, provided the price moves to 1792/1792.50, a winning trade is on your hands. You can close your position by selling at $1792.
The profit will be
100 x [1792 – 1790] = $200.
Here the price of gold moved in your favor. However, had the price declined, you could have suffered a loss. The continual price movement evaluation and profit/loss are daily occurrences. Correspondingly, it results in a net return – positive/negative – on your initial margin.
In the loss scenario where the free equity – Equity – Margin -plummets below margin requirements – 8950 – there will be a margin call. In case you are unable to deposit the money when the free equity approaches 50% of your initial margin, the contract will be closed at the ongoing market price. This is called a ‘stop out’.
How to trade precious metals: CFD trading
Reasons to trade precious metal CFDs with ABinvesting:
Spot and futures CFDs
Speculate on futures markets, or take a short term view;
Metals on margin
A small deposit gins you full exposure to gold and suchlike;
Risk management tools
Ensure you have total control over every trade with alerts and stops.
With ABinvesting , you may trade CFDs on gold, silver, platinum, and palladium.
There are quotes for all precious metal CFDs on said broker’s trading platform. On taking a position, you speculate on the metal’s rise and fall in value rather than having actual ownership. In case your forecast is correct, you will make a profit.
Factors impacting precious metal prices
Supply and demand
Similar to any product or service, a shortage of precious metals, or an accelerated need for them, renders them valuable. For instance, if a silver mine strike interrupts production, there will be silver price uplift over the short term. Technological advancements could, however, speed up production speeds. That would saturate the market;
Owing to perceived lasting value, precious metals are deemed safe-havens.
Following big elections, there are sometimes precious metal rallies ;
Precious metals have a large base of applications, used as they are in manufacturing across electronics, automotive industry, jewelry sector, and many more.
Particularly with reference to automotive and electronic sectors, it can safely be said that innovations boost demand for precious metals ;
Precious metals are dollar-denominated.
A fall in the dollar witnesses precious metals in the role of a store of value. In all likelihood, this facilitates the appreciation of precious metals’ value ;
Precious metals offer fixed-income investors an agreeable alternative, whose investments tend to suffer when rates are slashed.
The rate announcements impact the dollar, which in turn affects precious metals ;
Precious metals, as a rule, perform better when inflation is rising.
Money printing dilutes the currency’s value, making it more expensive to buy assets perceived as dependable stores of value.
Sans doubt, metals are a good investment. They are particularly compatible with CFD trading. Leverage and ancillary phenomena make metal trading a complex affair. You have to have a good risk management plan. CFDs can bring profit even in losses.
ABinvesting gives you the benefits of leverage across accounts and asset classes. However, per judicious Product InterventionMeasures, leverage limits differ across CFDs’ underlying assets and client categorization (professional/retail).
However, to trade metals with caution and thorough planning is the only course. Please be aware of how much you can afford to invest.