Are you exploring ways to improve your investment portfolio? Investing can be challenging, especially when the world is changing as fast as it is right now. It can be difficult to pick winners and losers when you don’t know what’s coming around the corner.
You may want to consider investing in assets outside of traditional stocks and bonds. One option is something called commodities, which are uniform materials that are considered to be basic goods.
There are four main types of commodities: agricultural, livestock, energy, and metals. Agricultural is crops like corn, wheat, and soybeans. Livestock is animals like pigs and cattle. Energy includes oil and gas, and metals include things like copper, aluminum, and steel.
Believe it or not, you can trade commodities and even make money from them. There are risks just like there are with any other investments, but it is possible to profit from commodity trading.
Below are a few things you need to know before you start. You may want to open a trading account on this site or a similar one so you can learn about the commodities market.
Commodity Prices
When you invest in a stock, the price usually moves based on how the company performs. If they make more money, the price of the stock will go up.
Of course, commodities don’t perform like businesses. They don’t have revenues or profits. There’s no way to actually judge their performance. So how do their prices move?
Commodity prices are largely based on supply and demand. If supply goes up and demand goes down, the price drops. If supply shrinks and demand increases, the price goes up.
An example is what happened to gas and oil during the COVID epidemic. There was plenty of supply of gas and oil, but little demand because people weren’t driving or flying and supply chains had shut down. Gas and oil prices fell sharply.
There is risk in commodity trading because you don’t know what world event will trigger a change in supply and demand. A commodity could be profitable one day and not the next. Just like any investment, it helps to be cautious and manage your risk exposure to any one asset.
How to Trade Commodities
There are a few different ways to trade commodities. Perhaps the most stable way is to invest in companies that are in a commodity industry. For example, instead of buying oil directly, you could buy stock in an oil company. That way you don’t have full exposure to the volatility of the oil market. You’re trusting the company’s management to a degree.
You can also buy futures of a commodity. These can be effective because you can buy futures relatively cheaply. A futures contract is essentially an agreement to buy or sell a commodity at a future price. You can trade futures on the open market. While they are relatively low-cost to acquire, futures prices can be very volatile.
Another option is to buy ETFs of commodities. ETFs are exchange-traded funds. They are similar to mutual funds in that they consist of many different types of assets with a similar theme.
For example, you could buy an agriculture ETF that has many different types of crops. Or an oil ETF with oil from different parts of the world. An ETF can be a good way to get into commodities while minimizing risk.
Finally, you can invest directly in commodities by buying them through a trading platform. However, this may be the most volatile option. You have to manage the portfolio directly. You’re not trusting an ETF manager or a company executive. It’s your management of the commodity portfolio that will determine your success.
Commodities can be a nice part of a portfolio because they often move in different directions than the stock market. When the stock market is down, very often commodities are up. That can help you minimize risk in your overall portfolio and make you more protected against stock market movement.
Like any investment, there is the risk of losing money in commodities. If you are a complete beginner, you should do your research before diving into the commodities markets. You may even want to take some courses, either online or in person.
Check out some online resources and trading platforms to get started. Start with a small investment and limit your risk until you have a better understanding of the markets. With time, though, you could become a skilled commodities trader.
Also Read: Is CFD Good for Trading?
