Four commodities spread betting traps to avoid
As more brokers offer spread betting, you can now trade most of the world's major commodities. But there are plenty of traps for the unwary. Here are four to avoid.
As more and more brokers offer spread betting, you can now trade most of the world's major commodities. So whether you prefer 'hard' commodities such as copper or gold, or 'soft' commodities such as sugar and coffee, there's plenty of choice. However, if you are new to the commodities world, make sure you don't plunge into any of the following traps.
Volatility
Many commodities markets for silver, say are much smaller than say the market for a currency such as the dollar or an index such as the FTSE 100. So prices can spike and dip quickly. If in doubt, trade small amounts initially and use stop losses.
Tick sizes
Anyone used to trading, for example, the FTSE 100 index will be also used to betting, say, £10 for every one-point movement in the index. But watch out when trading commodities, as the minimum movement on the contract for pricing purposes (the 'tick' size) may be much smaller. Get this wrong and your losses will rack up much faster than you expect.
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- Spread betting The easy way to geared, tax-free returns
- Forex trading- How to profit from currency movements
Trading hours
Out of hours trading is possible in most markets, but spreads are often wider when the main market is closed. So always check with your broker.
Contract expiries
Most commodity contracts have different expiry dates. These might be the last Friday in the third month for a standard financial contract with quarterly expiries (March, June, September and December). However, some commodities expire monthly and others will not even expire in the contract month so an 'April' contract will often expire in the last week of March. Knowing this will help you avoid paying unnecessarily to 'roll over' a contract into the next expiry month.
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Tim graduated with a history degree from Cambridge University in 1989 and, after a year of travelling, joined the financial services firm Ernst and Young in 1990, qualifying as a chartered accountant in 1994.
He then moved into financial markets training, designing and running a variety of courses at graduate level and beyond for a range of organisations including the Securities and Investment Institute and UBS. He joined MoneyWeek in 2007.
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