The Concept of Commodity
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.