Don’t put all your financial eggs in one basket, as the old adage goes. While it’s true that broadening your portfolio won’t eliminate all of your exposure to risk, it will increase your chances of successfully meeting those goals. Commodities are the building blocks for a wide variety of different products. There is a wide variety of commodity trading available for both novice and seasoned traders. But before you take the plunge, here are some key points to remember regarding commodities investing, commodity stocks, as well as the top options to think about.
What Is Commodity Investing?
So, the question arises what is a commodity market? The commodity market predates the stock and bond markets by millennia. It was a crucial trade that brought together individuals from all backgrounds. Commodities have been widely used as a means of investing since the first spices and silks were exchanged.
There are a variety of options available to investors interested in participating in the commodities market, you can look at the commodity price index and decide. Investors who want to get their hands on commodities can do so in one of two ways: either by acquiring the actual commodity itself, or by purchasing shares in a commodity company, mutual fund, or exchange-traded fund (ETF).
Benefits
Commodities offer some of the best protection against inflation, making them a popular asset class. Commodity prices tend to rise during times of high inflation because of increased demand. Commodity prices tend to climb when the U.S. currency falls since this is a strong bet against the dollar.
Commodity investment offers a diversified portfolio and the chance to earn high profits. The commodity charts are very similar to those of currency charts. Global demand is robust despite the fact that commodity prices are volatile due to market factors such as currency exchange rates, interest rates, and the state of the economy overall. Overall, this is good news for the equities of commodity-focused businesses, which might mean higher profits for investors.
Possible Risks
One thing to bear in mind is that, on average, exchange-traded commodities are far more volatile than other types of investments, particularly funds that follow a single commodity or a particular sector of the economy. Speculation is inherent in futures trading, and investors should keep that in mind. Futures contracts are based on the underlying commodity’s or index’s performance. This may affect the contract’s performance and provide the investor with a net positive (or negative) differential.
Risks associated with futures trading are distinct from those of the underlying commodity and require careful attention for buying commodities.
Pros
- To hedge against inflation
- Investment portfolios should be diversified
- Protect yourself from a possible decrease in the base currency
- To aid in hedging pricing risk
Cons
- Enhanced risk relative to other investments
- Commodity margin trading has a high risk of substantial loss
- The inherently risky and speculative character of trading
Crude Oil
Thinking about investing in crude oil? It helps to have some background knowledge of what factors influence pricing and how to go about doing so. Among the various byproducts of crude oil refining is the gasoline used to power automobiles. However, this issue extends beyond merely gas prices. Plastics, medications, linoleum, shingles, ink, cosmetics, synthetic fibers, solvents, fertilizer, asphalt, and dozens of more products are all derived from petroleum.
However, what factors cause price changes? Oil prices tend to move in response to supply and demand. Prices tend to rise when demand is greater than supply. To put it simply, prices fall when demand decreases but supply remains relatively stable. For instance, the price of gasoline increases when demand is strong, such as during the summer driving season, leading to an increase in the price of crude oil.
The expanding economies of developing countries like China and India are driving increased demand. Crude oil prices are also significantly affected by geopolitical factors. Oil prices have been known to a spike in response to unrest in the Middle East, the region responsible for producing a significant portion of the world’s supply of crude oil.
Guide to Crude Oil Investing
Unlike other commodities, you can’t merely buy a barrel of oil and put it in your investment portfolio. If you’re looking to invest in commodities, futures are the next best thing to actually owning the commodity. However, substantial cash is required for futures trading, and the market is sometimes quite unpredictable. In addition, they call for a high level of expertise, making them inappropriate for inexperienced investors.
Oil company equities, mutual funds dedicated to crude oil, and exchange-traded funds (ETFs) are all viable options for investors. These cars are readily available since they trade on stock markets. One such institution is the U.S. Oil Fund. It follows the price of a barrel of West Texas Intermediate crude oil, which is a light, sweet commodity.
Mutual funds and exchange-traded funds (ETFs) focused on the energy industry are two more alternatives for investing in oil firm equities. Due to the greater variety of services and features provided, these alternatives typically carry less danger.
Gold
The gold market is growing and diversified. There are fluctuations in its market value due to its varied applications across the global economy, including in the jewelry industry, the IT sector, the financial sector, and central banks. Gold has long been seen as a stable currency and a safeguard against inflation. You can bet that gold prices will rise in tandem with a decline in the value of the U.S. dollar.
Gold’s price follows the trend of crude oil upward when demand rises. In addition, gold prices react when central banks, holders of gold, seek to increase their portfolio diversification by purchasing additional gold.
Tips for Buying Gold
Investors may really acquire physical ownership of the commodity, unlike with crude oil. Gold bullion bars and coins are available for those who like to have a real product. However, this comes with the cost of renting a safe deposit box, vault, or other secure location to keep it in.
As with crude, a futures contract is an alternative. Margin calls occur when an investor’s contract’s margin requirement is not met. A word of caution, though: any investment has the possibility of loss. It’s good for investors if the price goes up, but they lose money if it falls.
The alternatives for stocks, ETFs, and mutual funds are extensive. Those interested in purchasing gold stocks can do so not just in producers but also in those engaged in exploration and mining. Investors should as always, undertake their research to learn about the operational risks faced by each firm.
Gold exchange-traded funds, on the other hand, allow investors to get exposure to gold while also following its price. For example, the SPDR Gold Shares Exchange Traded Fund (ETF) allows investors to gain exposure to bullion without actually owning any of it.
Base Metals
Most metals utilized in the commercial and industrial sectors, including building and manufacturing, are base metals. Examples include aluminum, zinc, and copper. Because they can be found just about anywhere, they are cheap and plentiful.
However, base metals are abundant, therefore their values are often lower than those of precious metals. However, increased worldwide demand for these metals, especially from China and other emerging nations, has had, and will continue to have, a beneficial effect on base metals prices.
Tips for Buying Base Metals
Aluminum, zinc, and copper may not be the most productive metals to hoard. Due to their low pricing, traders and investors would need to stockpile massive volumes of these goods to make a profit.
Instead, investing in firms that produce basic metals, such as Alcoa for aluminum or U.S. Steel for steel, is a good way to get your foot in the door. In addition, investors who own exchange-traded funds (ETFs) like the SPDR S&P Metals & Mining ETF have exposure to firms in the metals and mining industries.
Conclusion
Commodities are risky investments in their own right, but they may be a smart strategy to spread your money around if you know your stuff.
Other commodities to think about include platinum, palladium, silver, lithium, cotton, and food goods including coffee, corn, oats, wheat, soybeans, and sugar. Do your homework or talk to a professional broker before making any financial commitments.
