By Staff Writer
Finding opportunities to invest into commodities can be few and far between, but if you do manage to get into it then it can be an incredibly valuable asset for your portfolio.
Commodity investing can be quite volatile. The market is an essential part of forex trading and is subject to a large level of fluctuation, meaning there’s potential for greater gains as well as significant setbacks.
Because of the higher level of risk involved, you need to right knowledge before jumping into commodities. So, here’s what you need to know before investing in commodities, including why they’re traded and how you can go about buying commodities.
What are commodities?
Financial items like shares and bonds were created for investments – commodities were not.
Commodities are essentially physical goods which have real world, practical applications. This could be things such as:
Soft commodities (grown or ranched)
- Agricultural products, such as coffee and cocoa
- Livestock and meat, like cows or milk
Hard commodities (mined or drilled)
- Energy resources, including crude oil and natural gas
- Raw metals, like copper and gold
The value of commodities is dictated by the industry and are typically purchased for use within manufacturing supply chains – such as gold being used in manufacturing electronics.
Why do people trade commodities?
As the value assigned to commodities can change due to a wide range of factors, such as developments in the industry and demand for related products, there is potential for large gains to be made.
Originally, the main purpose for the commodities market existing was to align producers to manufacturers who needed a steady supply coming in. These would be written up as contracts to deliver commodities to a specific location at a certain time.
These contracts could be exchanged to other buyers if required, or as a way of generating profit. After purchasing the contract, they could buy to goods at a fixed price and then sell that contract on if the price rose.
It wasn’t long before people started speculating on the price of commodities, which is how future contracts were created.
Future contracts are used to speculate on the future of a commodity’s price. This contract involves the agreement to buy or sell a commodity asset at a predetermined price at a specific time in the future.
If a commodities trader thinks the price will go up, they’d buy futures or go long. Alternatively, if they think the price will drop then they may sell future or go short.
How can you buy commodities?
There are several methods you can use to get commodity investing:
- Direct investment – buying and storing a physical commodity yourself
- Investing through an intermediary to store a commodity for you
- Using professional forex broker platforms for investing in commodities
- Investing in futures contracts if you have a brokerage account
What should you consider before trading commodities?
Commodity trading requires a broad yet deep knowledge of the supply-and-demand associated with the commodity market you’re looking to invest in.
It’s a high-risk, high-reward form of trading, so you need to know what you’re getting into. Fully research the history of your commodity and the future prospects within related industries.
The vast majority of commodity trading is speculative. This means that investments can be affected by all manner of factors, such as weather, logistics disruptions, political moves, and natural disasters.
Some commodities can be useful for hedging your portfolio against inflation, and other items are useful for long term investments – such as commodity stocks or mutual funds.
Make sure you know the market inside and out before taking the plunge, or else you may find that the money you invest doesn’t pay off as you’d expect it to.