Every savvy investor is well aware that putting all eggs in one basket is not a wise decision.
Diversity in an investment portfolio online forex trading can cut out the risks and maximize your returns; hence, you can reach your investment goals.
You can choose from many different investment vehicles, such as currencies, stocks, indices, etc. Any investor who wants to flourish in business should not forget commodities. Commodities are basic goods. They can be transformed into other goods and services.
What are Commodities?
Commodities can be explained as goods that are uniform in utility and quality regardless of their source. For example, when a trader buys a rice or wheat bag, he doesn’t investigate much about where they were grown. Commodity goods are raw materials. They can be consumed directly, for instance, food, or utilized as building blocks to manufacture other products.
Commodities are interchangeable goods or services. Most investors focus on buying raw materials for manufacturing products that are in demand across the globe.
What is Commodity Investment?
Commodity investment is an ancient way of trading, centuries before bonds, cryptos, or stock exchanges. It has been a very important business that has played a role in connecting different nations and cultures worldwide.
Traders can protect their portfolio from inflation by investing in commodities because they provide diversification in the investment portfolio. Just like any other investment, commodity investment also involves some risks. But still, it is better to understand all forms of marketing for an investor.
How to Invest in Commodities?
Trading commodities is different from other investments. You can use four different ways of investing in commodities.
- Direct Investment in commodities
- Future Contracts
- Mutual funds or exchange traded funds ETF
- Buy shares in the stock of companies that produce commodities
Direct Investment in Commodities
Investing directly in a commodity needs some investigation by the trader about the source from where he can buy it and the proper ways to store it. Then, you will need to look for a buyer who is willing to buy it and manage the delivery logistics for selling the commodity.
It is easier to handle all these things for some commodities such as gold, silver, or other precious metals. You can easily find buyers online and exchange the commodity in coins or small bars.
On the other hand, for commodities like barrels of oil, bushels of wheat, rice, or corn, handling, storing, and delivering needs a lot more effort than an investor is willing to put in.
Therefore, direct investment in commodities might be difficult for individual investors.
A great alternative to direct ownership of commodities is Future Contracts. It is an easier way to invest in a specific commodity. It requires minimum cost, and there is no limitation in owning a physical asset.
A futures contract is an agreement standardized between two parties to exchange a commodity within a pre decided time. The price and quantity are also set while making the agreement.
These contracts are standardized and traded by the Chicago Mercantile Exchange. This strategy is not suitable for all investors because it is a very advanced form of trading.
Mutual Funds or Exchange Traded Funds
It is the best way of investing commodities for an average investor. You can gain exposure to a broad basket of commodities through mutual funds or ETFs. This type of investment does not include the risks involved in direct ownership of a physical asset or future contracts.
This type of commodity is easy to buy or sell and can easily be stored in a regular investment account. But it may require some accountability to the taxation department. Therefore, it is advised that the investors carefully review the commodity and the account type to minimize the additional tax.
Invest in Stocks of Commodity Producers
Another popular way of investing in commodities is to buy the shares of the companies that produce goods or services or manufacture products categorized as commodities.
Investors can find companies in various sectors such as the mining and metal extraction industry, energy and fuel producing companies, and the agricultural sector. These are huge markets, and the companies may experience a dramatic fall in their stock if the goods are not produced or delivered according to the investor’s expectations.
Advantages of Investing Commodities
The most remarkable benefit of this trading platform is that it provides diversification to an investor’s portfolio. This diversity has the potential to decrease inflation and maximize the returns on investment.