Investing in commodities can be just as risky as investing in stocks. But they are still worth taking a look at.
What Are Commodities?
Commodities are an investing asset class like bonds and stocks. When you invest in commodities, you get market exposure to assets in the real world such as corn, gold or oil.
The commodities are usually divided into 4 key categories:
Metals: commodities under this category include mined metals like platinum, copper, silver and gold.
Livestock: think meat products, hogs and cattle.
Energy: in this category you will find natural gas, crude oil, etc.
Agriculture: the commodities here include sugar, cotton, coffee, cocoa, barley, rice, wheat, soybeans, corn and every other crop you can think of.
You may have heard of the more common investments such as gold but most of the others are not known by regular investors. Investing in commodities doesn’t mean physically owning them.
Commodity investing is considered to be very risky.
Speaking of risks…
What Are the Risks of Commodity Investing?
Types of Risks
A quick internet search will show you how easy it is to lose your entire fortune in market investing. If you choose to invest in commodities, these are the risks you should expect to deal with:
Market factors: when drinking coffee becomes a trend, the demand will rise—and so will the price.
Environmental factors: bad weather can adversely affect a large portion of the crop and cause a shortage. The price will then increase.
Fear: when a recession is looming, fear will cause the price of gold to go up and when the economy is good the price goes down.
Governance action: when a government nationalizes the source of a commodity, the price can either go up or down.
Leverage and margin: even a small investment may have significant results—positive or negative.
If you are okay with these risks, be very cautious and don’t go all in at once.
Advantages of Commodity Investing
Diversification: your portfolio will be exposed to a different asset class. You will be at a better place to manage the stock market volatility.
High return potential: the fluctuation of commodities occurs often. This could mean very high returns for you. But again, you can’t have great returns without great risk.
Hedging against inflation: even with high returns, inflation can mess you up. Commodity investing will offer some form of protection against inflation losses.
The Right Broker to Buy From
Many brokerages have an account through which you can start the process of investing in commodities.
Here are some commodity trading methods:
Futures: these allow you to own assets without having to take control. Stock brokers such as E*Trade offer this.
Options: with options, you can buy or sell a commodity at a specified price at a future date.
ETFs: an ETF will either contain a basket of commodities or just one. It offers an easy way to get into commodity investing.
Mutual funds: if you are looking to invest in commodities for the long-term, mutual funds may be great for you.
Remember to tread carefully so as not to lose all your life savings.