Commodity Investment Tips For Beginners
Commodity market is an inflation indicator of an economy, as it shows the price index of commodities. Hence, if you are planning to invest to hedge yourself against inflation, you must consider investing in this market.
Commodity market can sometimes be quite volatile, but so can be the stock market. The idea is to diversify you investment in varied products, and into the ones not similar to your existing investment. You must expand your portfolio and allocate funds to various asset classes to minimize risk and get decent returns.
The Market
The commodity market comprises of 48 markets from all over the globe, and trades around 96 commodities. People can trade anything from gold, silver, coal to spices, stell and orange juice. One of the biggest commodities market in the US can be found in Chicago. Size of the market may be small. But Chicago Mercantile Exchange (CME) trades in big volume everyday.
Before we actually discuss strategies to invest in commodities market, let us first understand what a commodity is. It can be an oil barrel, gold bar, orange juice, food grains like wheat or rice, and so on. However, gold and oil are the two commodities that contributes most of the trade in this market. When the economy of a country is not performing well, people withdraw money from other assets and invest money in gold.
However, CME is different from a grocery store. It’s not a market where farmers sell their product with cans full of soybeans. Instead, commodity market deals in future contract. In such a contract, you agree to buy a commodity at today’s price at some time in future. This is similar to gambling, and price fluctuation in short term is purely based on speculation.
How to Invest in Commodities as an Average Investor?
First, you will have to decide whether you want to trade or invest in commodities. Trading is certainly risky, and should be done only when you are well-versed with the market, strategies, and factors affecting prices of commodities.
Investing in commodities is a good way to diversify your portfolio. As most of the commodities in this market are inflation-protected, this is a better option during tough economic times.
There are several ways to invest in a commodity. The easiest way, however, is to invest through ETF’s (Exchange Traded Funds). Here are few examples on how you can do it.
SPDR Gold ETF
This is one of the most profitable and reliable commodities in the market. Hence, it is preferred by most individual investors. Besides, this fund is 6th largest holder of physical gold in the world. Most people invest in this fund to receive decent returns during downturns. Hence, having SPDR Gold ETF in your portfolio balances your investment proportionately.
PowerShares
If you have enough gold in your portfolio, you can put some money in PowerShares, which is an ETF diversified in soybean, wheat, corn, and sugar. When prices of these four commodities go up, value of this ETF increases.
Once you are well-versed with this market, you can start trading in these commodities and deal in future contracts. However, make sure you seek advice from an existing trader.
