When you step into the world of investments, then you’ll undoubtedly come across commodities as an investment option.
Commodities are natural resources or agricultural products that are traded in bulk on major exchanges.
Popular commodities include minerals such as gold, silver and copper, as well as energy resources such as oil and natural gas. Agricultural products such as cotton, wheat, maize and even livestock are also commodities.
When growing your investment portfolio, you may consider commodities as an option.
So, it’s important to understand how commodities work as well as the opportunities and risks of investing in commodities.
Understanding How Commodities Work
In most instances, companies that produce commodities sell their goods to companies that use them (in bulk).
With this in mind, commodities are not a popular investment option for individual investors. Instead, the most common players in the commodities market are farmers and miners who produce the goods, businesses that buy or use the goods, investors and speculators, and consumers and strategic users.
Commodities are traded as futures, a derivative financial contract whereby those involved agree to buy or sell an asset at a predetermined future price and date.
Commodities of the same grade are fungible, meaning that they can be exchanged with one another regardless of the production company. The most important consideration when exchanging commodities is that the resources are of the same quality.
Opportunities and Risks of Investing with Commodities
Before trading commodities, it’s important to consider the risks and opportunities.
Opportunities of Investing with Commodities
There’s a reason that commodity trading is such a popular option, offering the following opportunities:
- Hedging against inflation or geopolitical events
- Diversification of portfolio
- Facility for high leverage
Risks of Investing with Commodities
Before investing in commodities, it’s important to assess these considerations:
- High leverage can make it difficult to control overtrading
- Increased dependence on macroeconomic factors
- Excessive volatility can be confusing
Note: Please do not invest money or assets in the financial markets that you cannot afford to lose. This article should not be construed to be investment advice and is for information purposes only