A Comprehensive Guide to Commodities Investment

Investing in Commodities: Everything You Need to Know

Commodities are another type of option available for investors to invest. They help in diversifying your portfolio with better returns. They are very volatile and can deliver better returns if invested for a long period. 

What Are Commodities in Investing?

Commodities are nothing but raw materials that are produced for everyday use. They are the building blocks of our global economy. The slightest change can significantly impact the global economy. The Commodities include:

  1. Precious metals like Gold, Silver, and Platinum.
  2. Agricultural goods like wheat, corn, soybeans.
  3. Oil.

How Can I Start Investing in Commodities?

There are many best ways to invest in commodities. The direct way is to purchase precious metal bullion. However, most investors prefer to invest or trade through future contracts or exchange-traded products (ETPs). It is also important to understand that they are highly volatile and a bit complicated investments, and hence, only well-trained and knowledgeable investors must consider trading in commodities.

The best thing about commodity investing is you can do it in many ways.

1. Physically invest in commodities

Physical investment in commodities can only be done with precious metals. Gold and Silver are the two commonly used commodities for physical investment. If you want to invest in physical commodities, you can purchase precious metals in bullion that come in standard size and purity. However, you can invest in other commodities, too, but they have storage issues and less shelf life.

2. Investing in commodities through futures contracts

When a buyer and seller agree to buy or sell a commodity at a specified price and future date, it invests in commodities through future contracts. You will be required to open a trading account. 

3. Investing in commodities through individual securities

You can indirectly invest in commodities. You can invest in companies that are specifically involved in the making or processing of commodities. It is also important to understand that many companies are involved in the production, extraction, transportation, and marketing of commodities, and even small geopolitical and environmental issues can impact the company concerned with them.

4. MFs, ETFs and ETCs

MFs, ETFs, and ETCs are popular, low-cost options for investing in commodities. ETF and Mutual funds track the index or basket of investments, while ETCs track the prices of commodities. You can easily buy and sell them just like the company shares. 

Pros and cons of investing in Commodities

Like other investment options, Commodity investing has pros and cons.

Pros of investing in commodities

1. They offer diversification

Commodities are a good option to diversify your portfolio. Commodities and commodity stocks have distinct price patterns that differ from other stocks and bonds. It helps to manage market volatility. However, it is also vital to understand that diversification doesn't guarantee profits.

2. They are suitable for hedging.

Commodities tend to follow inflation. Commodities can be a better option to defend against rising prices. Inflation that often erodes the price of stocks can make commodities perform well. 

3. They offer a significant return.

Commodities' prices fluctuate due to factors like demand and supply, exchange rates, inflation, and the situation in the global economy. Wars are the best example of a problem that results in a rise in the prices of commodities due to a partial or complete shutdown of the supply chain. 

Cons of investing in Commodities

1. They are highly volatile.

The greatest risk of investing in commodities is that they are highly volatile, and any change or disturbance in the global economy can significantly impact their prices. Government regulation, economic conditions, import control, etc, can affect its prices. Even there are chances that your investment can lose its value.

2. They are not fully diversified

Commodity funds offer diversification, yet they still need to be fully diversified. It is because these funds, like companies, ETFs, and mutual funds, invest their significant portion in similar assets. Therefore, any change in the market value of a single investment can largely change the share price.

3. They do not offer other income.

Like shares, commodities do not offer dividends. The income only comes in the form of profit only if you accurately predict the price.

Are commodities riskier than stocks? 

Commodities are riskier than stocks because of their volatile nature. While investing in shares, we consider the company's fundamentals associated with it. After evaluating all the odds, we consider investing in them. This option for price evaluation is not available when you want to invest in commodities. This is because no underlying assets back commodities. Also, a slight change in the world economy and a geopolitical situation can majorly impact its prices. Therefore, commodities are riskier than stocks.

How do you trade in commodities for beginners? 

Commodity trading has different characteristics than stock trading, but the approach is similar. As we have already discussed, commodities, too, have certain types. You can stick to one or try multiple commodities. Pick your strategy to stick to it to build your wealth.

Just by following the steps below, you can easily trade in commodities.

1. Choose a commodity:

There are many options available for traders to trade in commodities. You can choose from physical assets like bullion, hard commodities like gold, Silver, iron, rubber, soft commodities like Sugar, wheat, coffee, etc, Commodity ETFs, commodity Stocks, etc.

2. Learn how prices move:

Different factors are responsible for price fluctuation, such as supply and demand, inflation, and geopolitical situations. All these factors greatly influence the prices of commodities. Understand how the market works and step towards your trading journey in commodities.

3. Create an account:

Many online brokers offer commodity trading. Some may charge brokerage, and some may not. Please choose the one that fits your needs and sign up for it; before making your first trade, discover how commodity trading works.

4. Commodity trading:

There are different markets for commodity trading- Commodity futures, Trading in commodity spot prices, Commodity options, Trading in commodity stocks and ETFs. Evaluate the risk factors associated with them, learn technical analysis, and pay attention to news and other factors that may cause the price change. Take a move and make it successful.

Final words

Commodities are a good option to diversify your portfolio. They have a unique nature and different strands that influence their price. They follow inflation and are good to hedge against it. Investing in commodities is like investing in stocks. However, they are riskier than stocks as even a modest change in the world economy can significantly influence their prices. Before making your first move, thoroughly evaluate the risks related to it. Commodities can build your wealth and lose your wealth. 

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10 Dec, 2023


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