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Understanding Commodity Investing

The Concept of Commodity

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In order for you to start making an investment in commodities, you should have a brief idea of what commodity is all about. The commodity is basically a product or raw material that can be changed with other commodities of the same type. The commodity is usually sold and produced by many different companies. It is not the same as other consumer products such as mobile phone. The mobile phone is one of the products that differ greatly between producers even though they are of the same category. It is also cannot be exchanged easily with one another. Even though the quality and characteristics of one commodity with another may be different, producers normally have no problem and willing to exchange the products of the same type. To name a few examples of commodities are coffee, natural gas, oil, gold, silver, and cotton. There are much more commodities out there. You just need to find the right one for you to start your investment.


Reasons For Buying Commodities


Before you start making an investment in commodities, you need to learn the reasons for buying commodities since commodities are opportunities for diversification and profit. Stocks, bonds, cash equivalent and real estate is a kind of asset class. Commodities also fall into this category. It is also an asset class. You should know that each asset class has different properties and by owning commodities, you can make it as a better way of diversifying your portfolio. The commodities strength is, it is not too correlated with other asset classes. It does not move in the same directions or fluctuates as other asset classes. For example, when the stock market falls by 10%, a commodity such as gold may be staying flat or increase. It does not necessarily follow the direction of the stock market to go down by 10% as well.


Commodities and Inflation


Inflation refers to the increasing of the cost of the goods over time. This will happen when money is losing its value. However, when inflation increases, the commodity prices will also increase. Due to this reason that many people buy commodities if they are worried about inflation. To generate a short-term profit, you can trade commodities. Their prices change a lot of times or in another word, their prices are volatile. This result in people to capitalize these situations to generate them a short-term profit.  


Risk of Owning Commodities


Commodities are considered as high-risk investment due to their price volatilities. They can gain or losses a great amount of values in a short time span. A popular way in which commodities can be purchased is via future contract. It involves an investment in which it is made with borrowed money. It is considered as high amount of leverage. However, by using this approach, it can magnifies your potential gains or losses. It is much riskier than other approaches of commodity investments.


That is basically what you should know in order for you to understand the commodity investment. By understanding them first, you can have a better preparation and strategy to start investing with the correct method therefor you can maximize your profit and minimize your loss.


Purchasing Commodities Through Future Contracts

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What Are Future Contracts


Future contracts are basically one of the best ways for you to trade commodities and it is only suitable for those who are willing to take risk as this is one of the riskiest ways of owning a commodity. This kind of commodities purchasing is highly recommended only for advanced investors and traders. Future contracts refer to the agreement which has set a specific time in the future to make or take delivery at an agreed price. Let’s take a standard contract for oil which is around 1200 barrels. You may enter a contract to purchase 1200 barrel at a cost of $50 per barrel which will be worth $60 000. If the price later increase to $55 per barrel then you are going to make a profit of $5 per barrel You could send it to gain profit.


Risks of Future Contracts


As what has been mentioned before, the future contracts are very risky and it is not recommended for those who just starting to learn to trade without extensive research. It involves buying something known as margin which means that you only need to pay just a small portion out of the value of the contract. Then, how about the rest of the value of the contract? The rest being borrowed. Based on the previous example, you would need to pay only around 25% of the total value of the contract. You are going to make a profit from this when you sell the oil. How much profit you make, let’s say 50%, is also going to be how much you could lose. The lose is only if the price is going down. However, for some cases, you may require to put up more than 25% of initial payment. This is all depend on your broker and how the investment is made. Besides that, futures also have a higher rate of commissions. Due to this fact, you are required to have a well-developed strategy and knowledge so that you can make your trade well.


Purchasing Futures Contracts


By having knowledge and information, you can use futures as a trade for commodity that you are interested in. The first thing is to find a broker that offers futures trading and then you can proceed with your plan. Generally, brokers that offer ETFs and mutual funds will have this option of futures trading available. Ask them about it and if they really offer it you can follow these steps:


  • Select the type of commodity that you wish to purchase. Next, set the month that you wish for the contract to expire as well as the number of contracts that you are going to purchase.
  • For example, you want to buy a contract dated 17 August 2017 crude oil contract. The available price is $45 per barrel. You can see that most brokers will have drop-down menus that offer a variety of dates, amounts and what types of commodities that are available. So, what you should do now? Just simply select the options that you prefer and then just click buy.


How To Invest In The Commodity

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Commodities are the basis or the raw materials in producing or making other products. There are a few fields which the commodities are profitable. A few examples of the fields are agricultural, metals and energy. For agricultural, we have wheat, corn, and soy where in each field, there are many commodities that have long been used as trading. For metals, we have gold, silver, and copper while for energy, we have crude oil, natural gas and heating oil. Across the globe, every producers have come into a consensus of the basic grades for the commodity which is known as the basic grades. These basic grades enable the commodities to be interchangeable. Besides, with the presence of these basic grades give each and every type of commodity a value that can fluctuate with the global market’s movement. The investment arises due to this movement where people start to have money trading commodities and commodity securities. There are many things to understand for you to start investing in commodity but worry not since in this article, you are going to learn the best way to invest in the commodity which is very simple and easy to follow. Let’s get started.


1 . Find Out The Amount For Your Investment


You are basically are going to directly jump into the market without knowing your capital. How much are you going to spend? That should be the first thing on your mind before you are going to start investing. You need to be aware that commodities market are one of the high-risk investments since its large gains are balanced by large potential losses too. However, since the fluctuations are uncorrelated with others, it can reduce overall risk.


2 . Get Yourself A Brokerage Account


To start trading in commodities or any other securities, you need to seek help from the stockbroker to create an account for you. This account is used to hold and trade securities. However, if you are going for investment in physical commodities such as buying and storing gold on your own, you don’t have to get yourself a brokerage account.


3 . Deposit Money Into Your Brokerage Account


This is your first investment so how much money you should deposit? It is all up to you. My only advice here is that you should take the lowest risk by putting in a small sum of money first. This commodities market is basically alien to you. It is unknown and still mysterious. You still don’t have enough idea on how it works with you. The best way for you is to slowly and gradually build up your position in the commodities market after you have known the flow of the fluctuations and how it works.


That is basically how to invest in commodity. As with other investment plans, the most important thing for you to remember is that you need to ensure that before you start to invest, you should have enough saving or your emergency fund as you need to be prepared for any unexpected things such as job loss, illness, accident and other. You should have around a year or two funds for expenses before you start your investment. You should also set aside the fund for your living expenses and other things that you are paying monthly for the next 3 to 5 years.