CFD trading is distantly related to futures trading (which is the method most commonly applied for the purpose of trading in commodities). It basically indicates that somebody trades the units of different commodities at a virtual price which would be much lower compared to the actual price of a particular number of commodity units. An example is required to adequately explain this. Suppose the price of 10 ounces of crude oil is pegged at USD $1,349. In such circumstances, traders can purchase ten ounces of oil for a margin of USD $100. Then, for every single gain that each ounce’s price makes, it would be multiplied by the price prevalent in the market (i.e., the stand taken by the trader), thereby making it possible for the trader to reap a profit. Similarly, when the reverse or a decrease takes place, the trader runs into losses, which might go well beyond the deposit amount; and it often does. However, there are a huge number of benefits which are associated with CFD trading. The greatest advantage is that one would be able to profit from the commodity market, notwithstanding the increase in unit prices. If the market is bullish or prices are charging ahead, then you would be able to let the units sit it out for the long-term, and get it pegged to a suitably high level of ‘take profit’. If on the contrary, the market is bearish (prices are sliding down) and there are a lot of downturn in prices, then a stop-loss level would be there based on calculations; following which traders can sell the units short and earn profits. (Information credit: easyMarkets).
Another huge benefit of trading CFD is that it has great use as a hedging tool. This means that it can be used to protect against losses which might be endured by the trader in another market (E.g. the stock market or the foreign exchange market). If a trader happens to suffer the loss of a tremendous amount of money in the forex/stock market, then one can offset that loss by short-selling CFD of exactly that amount. This is an effective tool in preventing loss of portfolio value.
Like the forex market, the commodity market offers traders the benefit of an extended period of trade. Though admittedly a commodity market would not be able to remain open for 24 hours, it can snatch up to about 22 hours per day. And even when a few markets might be closed, following the lead of indices like the Wall Street and UK-100 can be of great help.
The amount of leverage one is able to garner by trading in commodity is completely unparalleled when you compare it to all the other markets. One can enter and secure a trading position in exchange for just one-fiftieth of the actual price of a particular amount of a commodity. If the trader were to instead purchase the real, physical equivalent of the commodity, they would most likely end up bankrupt or economically devastated otherwise. But when you’re trading expensive commodities online, you get to trade substantial quantities of it at minimal prices and reap huge profits.