Individuals who have invested their money in trading precious metals can attest to their price stability over time. There are generally many ways to invest in precious metals. However, in this article, we will narrow down to contracts for differences, or the CFDs.
What does it take to trade precious metal CFDs? What are the unique characteristics of precious metal CFDs as investment tools? This article will present an analysis of precious metal CFDs as a major investment vehicle in financial markets.
What are Precious Metal CFDs?
A precious metal contract for difference, CFD, is an agreement between the asset seller and buyer a that will be cashed out later. To understand how CFDs work, we will work with gold as our case study.
Fundamentally, if you want to trade gold in the financial markets then you will have to contact a precious metal dealer. The dealer will offer you the asset at the market price, and you will be looking to sell it at a future higher price.
A gold CFD, on the other hand, allows you to trade ‘gold’ in the investment markets in a similar way. However, with a CFD investment, physical gold is not involved.
How do Precious Metal CFDs Work?
The dynamics of trading precious metals CFDs are totally different from those of selling precious metals in their physical form. Precious metal CFDs are traded virtually, whereby the investor contacts the broker (the website or an application service provider) and gets into an exchange contract. When you want to sell precious metal in Michigan, you will get a quote depending on the existing prices of the precious metal in the market, as it will also be the case with precious metal CFDs.
When an investor analyzes the market and thinks that prices are going to rise, the investor buys the precious metal and sells it back after hitting the target high price. In CFD trading, buying a commodity is called going long.
However, when investors think that prices are going down, they will sell the precious metals and buy them back at a lower price, which is called shorting. In CFDs, it is possible to invest in any direction the price moves, a phenomenon that is almost impossible when you are trading physical precious metals.
Most people compare trading precious metal CFDs to gambling. CFD trading requires extensive market research and technical analysis to determine how prices will react to various factors. However, gambling is more of a speculative game of binary outcomes than an investment.
Are Precious Metal Futures the Same as Precious Metal CFDs?
Precious metal futures refer to fixed contracts which have a set maturity date (expiration date) and specified amount of the commodity traded. Generally, precious metal futures are more secure than CFDs and are more common in many countries.
Contrary to futures, precious metal CFDs are more flexible and unlimited. It is possible to open multiple positions at any desired amount so long your capital margin allows it. You can also maintain the positions for as long as you want, or until your target price is attained.
How Does Risk Compare with Reward in Precious Metal CFDs?
In the financial world, every investment has its own share of risk and reward. Therefore, making an investment decision depends on how risk and reward compare.
CFDs are traded online at very high speeds. Therefore, one can open multiple trades as well as several positions simultaneously. Multiple trading has better profits if the direction is right. However, the same positions might turn against you if the analysis is wrong.
Leverage allows you to trade up to hundreds of times the amount of money you have available, bringing in high returns.
Conclusion
Trading precious metal CFDs is risky due to conflicts of interest from the parties involved, and it often requires the government to make a lot of regulations to protect the investors. Therefore, you should always conduct due diligence on the broker you are trading through to ensure that your investment is safeguarded.
