Commodity Investment is among the oldest ways to make money from fluctuating commodities prices. However, as time passes, the way of investing is also changing. But not to worry, in this article, we will have a brief overview of how to invest in commodities. So stay tuned.
An Introduction to Commodity Investment
A commodity can be defined as a raw material or product that people consume to fulfill their day-to-day needs. These commodities’ prices rise and fall due to their demand and supply that’s why people invest in them.
Commodity Investment has prevailed in the world for years. Earlier, people used to store commodities like gold, silver, spices, wheat, rice, and many others. And, when the demand for these commodities increases they sell it and make a profit with the increase.
A quick glance
A commodity can be defined as a raw material or product that people consume to fulfill their day-to-day needs.
- Metal
- Energy Products
- Agriculture
- Live Stock
- Investment Portfolio Diversification
- Hedge against Inflation
- Global Demand
- Potential Returns
- High Volatility
- Regulatory Restrictions
- Risk of Investment
- Identify the commodities
- Select a way to invest in commodities
- Select a Broker
- Analyze the market
- Invest in Commodities
Even today, many people store commodities intending to profit from the rise in their value. However, you can invest in commodities without even physically holding them.
There are numerous methods to invest your money in commodity products online. Let us understand it with a commodity investment example:
Suppose a person thinks that the demand for silver is all set to rise in the upcoming months. In order to take advantage of the rise, he buys 1000 ounces of silver from a commodity broker platform at the rate of $25 ounces.
In this case, after 10 months, the silver price reached $30 per ounce. Now, he decided to sell the silver. So he made a profit of 5000$ on an investment of 25000$, which is around 20%.
Types of Commodities To Invest In
Generally, when it comes to commodity trading, the first word that comes to mind is gold products. However, there are many other commodities to invest your money in.
Commodities are majorly divided into two categories: Hard and Soft. Hard commodities are derived, mined, or extracted from the earth’s surface, while soft commodities are generally agricultural products or products derived from animals. Let us have a look at popular commodities:
Metal
Metal commodities are mined or extracted from the earth’s surface. These are used in jewelry making, machines, infrastructure development, etc.
High demand and wide usability keep metal products always in demand. Gold, Silver, Platinum, Aluminum, Palladium, and zinc are some popular comex products to invest in commodities.
Energy Products
The energy sector is growing at a fast speed due to its use in different industries. The limited availability and huge demand make energy products popular amongst traders. Crude oil, Natural Gas, Gasoline, Petroleum, and Kerosene are some examples of energy products.
Agriculture
Agriculture products are plant based or products that are derived from animals. The demand and supply of these products are affected by different factors, including weather, production, and geopolitical events.
Wheat, cotton, coffee, sugar, rice, corn, silk etc are some popular agriculture products.
Live Stock
Livestock includes animals that are domesticated for different purposes, including food production like milk, eggs, or labor. Cattle, hogs, sheep, goats, and poultry are popular livestock.
How to invest in commodities
Commodities investing for beginners can be complicated with various options and strategies. However, not to worry. Here is the step-by-step process of commodity investment to assist you:
Identify the commodities
Your journey of commodity investment begins with the commodity selection. As we have studied above, numerous commodities are there to invest in. However, selecting commodities for investment requires a proper understanding of that market.
Under this step, you must select a commodity based on your knowledge, capital, risk, interest, profit expectations, etc. For example, people looking for secure options can go for silver and gold trading; for huge returns, highly volatile commodities like crude oil and natural gases are good.
Select a Broker
For trading or investing commodities over the internet, you must open an account with a commodity broker. These broker platforms provide you access to different commodities and instruments to trade them.
The number of brokers is also increasing with the scope of commodity investment. Selecting the right broker can be tough; however, check factors like regulation, commodities offered, broker fees, educational resources, etc, to make the right choice
Select a way to invest in commodities
There are different ways to invest in commodities like commodity futures, commodities ETFs, commodity stocks, mutual funds, etc.
ETFs are ideal for investing in a basket of commodities in one go, while future contracts have some specifications. Also, you can invest in the companies involved in extracting or mining commodities.
For example, if you think gold prices are increasing, you can invest in the stocks of Gold Jewelry, mining, and extraction companies. When the price of gold rises, the stocks of these companies will automatically have a positive impact.
Analyze the market:
Once you are done with all these formalities, it’s time to analyze the market to plan your investment. A commodity price is affected by weather, season, technology, news, geopolitics, human resources, etc.
Suppose you are interested in crude oil trading, in this step, you have to analyze the above factors affecting the supply and demand dynamics. It will help you in predicting whether its prices will rise or not.
Invest in Commodities:
After properly analyzing the market, it’s time to invest your money. Although commodity investment is less risky than trading, proper decision-making is also a must.
If you are a beginner, start with a small capital and invest in the preferred commodities. Try to spread capital rather than investing in a single commodity. Once you feel that the price reaches your favorable level, you can withdraw the profit.
Pros and Cons of Commodity Investing
Every activity has two sides, positive and negative. Commodity Investment also has both advantages and disadvantages. So before starting investing in commodities, learn about them:
Investment Portfolio Diversification
Diversification is the most crucial element of investment. Putting all your money in stocks, cryptocurrencies, forex, or any other market is not a good idea.
A smart investor spreads the investment capital into different markets. And commodity market is great for diversification and less complex than the others. Also, when the stock market and other markets are down, commodities like gold and crude oil tend to move upwards.
Hedge against Inflation
Investment has become popular amongst people because it helps to fight inflation. During inflation, when the value of money drops, commodities prices tend to rise. And that’s when you can benefit from commodity investment.
Global Demand
One of the key reasons you should invest in commodities is global acceptance and demand. Stocks are generally popular within the boundaries, and even the acceptance of foreign currencies is limited.
However with commodities, the demand is global. Commodities are used everywhere in manufacturing, infrastructure, and other sectors. So these are ideal options for investment.
Potential Returns
Commodity investment can give you huge returns on your capital. Gold is closed around 1940$ in 2023 and is currently around 2300$. It means the increase is around 360$ that too in five months. So commodity investment can give you a good profit.
Cons of Commodity Investment
High Volatility
Commodities prices tend to be affected by different man-made and natural resources. And, the degree of rise and fall in the commodities price is also high.
One event or news can change the entire market scenario of a particular commodity. High volatility can give you both high profit and high loss. Also, it makes the prediction game too difficult.
Regulatory Restrictions
Like any financial market, commodity markets have certain regulatory restrictions. Also, the regional authorities and financial institutions keep updating the regulatory rules. It can have an impact on your investment.
Risk of Investment
The chances of making a good amount of money in the commodity market are high, so the risk is high. Unpredictable disasters, war, and weather can make commodity investment more risky. Short-term investment can further increase the risk. So, if you invest in commodities, stay aware of the risk element.
Bottom Line
Investing is amongst the most popular ways to make money other than your full-time profession. Apart from commodities, you can also invest in stocks, bonds, cryptocurrencies, and other financial products.
However, regardless of the market you are investing in, one thing you need to understand is the considerable amount of risk included in investment. Also, when it comes to commodity investment, the market is huge, dynamic and complex.
So first, grab the knowledge of the commodities market and how it works and then start investing in commodities.