Investing in commodities can become a life changing decision for an investor. Commodities are an important part of our daily life whether related to livestock, energy or metals. A car owner impacted when the price of oil raised. On the other side impact on the food prices or raise at the soybean oil prices can lead to the rise in meal prices.
For the traders who are trading in another financial market for them, commodities can be a significant way to hedge their portfolio against losses of inflation. Which considered the best option for traders in the non-leveraged market. Commodities traditionally move in the opposite direction of the stocks so it creates opportunities when there is nothing to save in the stocks.
Average investors do not consider commodity trading as it required expertise and time. Nowadays there are many options available to invest in commodities even an investor who is nonprofessional can invest, like in the commodity market ETFs.
It used to be that the average investor did not allocate to commodities because doing so required significant amounts of time, money and expertise. Today, there are several routes to the commodity markets, some of which facilitate participation for those who are not even professional traders.
What Makes up a Commodity?
Commodities are natural, most of them either in the raw form or in the finished product shape. Majority of commodities required human interaction like farming and mining. Only after that, a commodity becomes available to the private and public market.
Investing in the commodities may be a wise decision for many the investors and for a stock trader it acts like a tool to hedge against inflation and risks. Most common and tradable commodities are as under.
|Agricultural resources||-Wheat, Soybean, Barley, Oats, Corn|
|Soft commodities||-Sugar, Coca, Cotton, Coffee|
|Renewable energy resources||-Solar, Ethanol, Hydropower, Wind, Geothermal|
|Non-renewable energy resources||-Crude oil, natural gas, nuclear, coal, propane|
|Livestock||-Live cattle, feeder cattle, pork bellies, lean hogs|
|Precious metals||-Gold, silver, platinum, palladium|
|Industrial Metals||-Steel, copper, aluminum, iron|
Commodities are fungible and this unique characteristic makes them tradable and investors consider it an investable asset, these products sold all across the world under the wide guise of uniformity.
Characteristics of the Commodities Market
Before investing in the commodities an investor must know the characteristics of the commodity market because it is a key to success. The first and important characteristics which make them tradeable is commodities are fungible. The basic principle of demand-supply drives them and participation of day trader sand speculators make them volatile. Global economic developments and technological debates often have the least impact on the commodities and in most cases, this sector remains unharmed. There is a great demand for commodities in the emerging markets like China and India and because of their demand availability for the rest of the world is declining day after day.
Nowadays there are dozens of commodity exchanges especially in the US, all of those have representative offices all over the world. Third-party brokers which are known as online brokers, they are regulated and have a presence in every country in the world. Which makes commodity trading easy for new traders around the world. A trader can access the market online from anywhere in the world. Online brokers offer multiple ways to deposit and withdraw money which makes it easier to invest and withdraw profits.
Standardized contracts offered in these exchanges, means contracts with the same quantity and quality with the same expiry. Which ensure the same price for everyone across the industry. The most common name is CME Group, this own group own several future exchanges and handle the largest volume of this industry.
How to Invest in Commodities?
One practical way for a trader from other financial markets is to invest in the stocks and bongs of commodity producers, in such way they remain in the same market and exchange.
Investing in the commodities isn’t simple as one invests in the stocks or bonds it’s a leveraged market. There is no need to worry for the storage of the commodity as in online commodity trading at the maturity date or delivery date the winner and lose exchange the money instead of commodity delivery.
There is another way which is also common in the investors who are not professionals like investing in the ETF’s, and called commodity future funds. There are professional traders behind these funds who decide where to put the eggs. Like an individual trader, they also experience the same opportunities and risks. They are slow as compared to individual traders but have stable returns.
Futures contract and options on futures are the most commonly used methods of investing in this industry. Because these both offer to get the benefit of the leverage which is helpful to enhance the earning.
It is not possible to trade commodities in the small contracts of own choice like one can in the stock. Commodity futures contracts are the standard contracts and cannot be divided into small portions. So, whenever you have to invest you need to buy or sell a standard contract.
A futures contract is the best choice when you consider the large-scale investment. These allow the business owner to buy and sell a large number of quantities in which they ensure supply and price. It’s risky for individual traders, they must not engage in such activity as where a huge quantity is involved.
Every new investor must take professional advice before investing in commodities. Regulatory body accredited the individual for the same whom we call CTA certified.
Before investing in commodities make your own research and learn to trade. Without the basic knowledge of this market, you may not reach your target. If you are considering this market to invest, then learn the investment options and strategies along with the risk and money management techniques. it will help you a lot. Until you cannot make your own trading decision consider investing in the commodity funds.