How to short commodities
If you have a keen interest in trading commodities, you’ll know that markets are easily affected by unpredictable events. That’s when many traders look for short-selling opportunities. Read on to learn about shorting commodities.
What does it mean to ‘short’ a commodity?
To ‘short’ (sell, or short-sell) a commodity means that you’re betting against the price of a raw material, such as oil or gold. In other words, you think that the market price will fall. If you’re right, you will make a profit, but if the market price rises, you’ll make a loss.
For example, if you think that a natural disaster will have a negative impact on the price of wheat, you can open a short position and profit from falling prices.
So, how do you short a commodity? The good news is that you don’t have to own any physical materials to do this. Commodity shorting can easily be done via derivatives such as CFDs, which enable you to speculate on price movements. One of the benefits of CFD trading is that you can trade using leverage. This means you only need a small deposit to open a position, while still getting exposure to the full value of the trade. However, your profit and loss will be based on the full position size.
How to short commodities
If you want to short commodities, you can do so through CFD trading. Both methods enable you to sell the market without owning any underlying assets. Follow these steps to short commodities:
- Create an IG trading account or log in to your existing account
- Open the platform and search for the commodity you want to short
- Choose your position size
- Select ‘sell’ in the deal ticket and confirm the trade
Reasons to short a commodity
The biggest reason why you may want to short a commodity is to take advantage of a market that is declining in value. This means more trading opportunities in volatile market conditions. However, there are other advantages to shorting, such as hedging. You can use short-selling to hedge open positions and protect against losses on a long position.
For example, if you owned gold and were worried about it falling in value, you could use a short position to offset the risk. This short position would turn to profit if your physical holdings fell in value, and make a loss if the price of gold increased. Hedging a position may not necessarily prevent a loss entirely, but it can lessen the impact.
Gold shorting example: how to sell gold with CFDs
Consider this example: gold is trading at 1494.05 with a sell price of 1493.90 and a buy price of 1494.20. Because you think the price of gold is going down, you want to short the market using a CFD. So, you short ten contracts at the sell price of 1493.90.
In this case, the contract size is £1 per point so your position value is £14,939.00 (10 x £1 x 1493.90). The margin for commodities is 5%, so you have to put down £746.95 to open your position.
The gold price falls to 1479.60 and you decide to close your trade and take your profit. To do this, you reverse the trade by buying ten contracts at the new buy price of 1479.75. These contracts are valued at £14,797.50, which means you will pocket the difference of £141.50 (£14,939.00 - £14,797.50).
If your prediction was wrong and the gold price goes up, you can still reverse your trade to close it, but you will make a loss.
Risks when shorting commodities
Short-selling does come with some risks, which is why it is so important to set up a thorough risk management strategy. One of the main risks when shorting commodities is that the commodity price can theoretically increase indefinitely. If this happens, short sellers all try to cover their positions at once. This causes a ‘short squeeze’, which pushes the price of the stock up even further and magnifies losses.
To limit your risk, make sure you have a good trading plan and appropriate risk management steps in place. You can use tools like guaranteed stops to limit your losses, if the market price goes up.
Shorting commodities summed up
To short a commodity means that you’re betting against the price of a raw material. You can short commodities through CFD trading, enabling you to sell the market without owning any underlying assets.
Follow these steps to short commodities:
- Create a trading account or log in to your existing account
- Open the platform and search for the commodity you want to short
- Enter your position size
- Choose ‘sell’ in the deal ticket and confirm the trade
You can read more about short-selling in this comprehensive guide
This information has been prepared by IG, a trading name of IG Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
CFDs are a leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your initial deposit, so please ensure that you fully understand the risks involved.
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