Any intelligent investor knows that diversifying their portfolio can quickly help them reach their market goals and push them toward greater returns. Of course, many financial assets can be chosen, such as stocks, currencies, essential commodities, and many others.
Commodities are the materials or assets that can be converted into goods or services that people use every day. Many traders may want to invest in commodities, so we will highlight some of the basics you need before entering this very massive market.
Benefits of investing in commodities
Commodity trading began centuries ago, long before stocks began to trade. This trading was based on connecting different cultures by exchanging various commodities such as spices, gold, silk, etc.
Now it is possible to invest in essential commodities through global exchanges and markets by buying shares of commodity companies, mutual funds, or exchange-traded funds (ETFs).
Protection from the effects of inflation is one of the essential advantages of investing in the basic basket. As the demand for commodities increases during periods of inflation in the market, the price will increase. This drives the emergence of an inverse relationship with the US dollar, so when the dollar falls, commodity prices rise.
Besides diversifying the investment portfolio, essential commodities contribute to maximizing financial returns in the short and long term. Although commodity prices are subject to market fluctuations through exchange rates, interest rates, and the global economy, global demand for commodities is very strong. This always has a positive effect on the stocks of companies that operate in the commodity sector.
Commodities – Crude Oil
The price of crude oil is usually influenced by supply and demand factors. And demand from developing countries like China and India – whose economies are still growing – is also driving up prices. Geopolitics also has a significant influence on the price of crude oil. Tensions in the Middle East, where much of the world’s oil is produced, could skyrocket oil prices.
How to invest in crude oil
In the crude oil market, barrels of oil cannot be physically bought. Instead, the investor should purchase oil through futures contracts, which can also be highly volatile and require significant or sufficient capital to start with. It is also imperative to possess knowledge and experience, and thus futures contracts may not be suitable for novice traders.
You can invest in crude oil also through buying shares of oil companies or oil ETFs. And it’s all done on well-known exchanges, just like stocks.
Commodities – Gold
Investing in gold in the commodity market is an investment that contributes to the diversification and growth of the investment portfolio. Gold is a traditional investment, a safe haven, and a guaranteed hedge against the inflation that hits the markets now and then. Gold also has an inverse relationship with the US dollar; when the US dollar falls, you can bet that gold prices will rise.
How to invest in gold
Investors can acquire the physical commodity of gold by purchasing bullion or gold coins. But that means trying to find safe places to store it
Another option is a futures contract. These contracts require investors to deposit an initial margin. But again, there is a risk to this type of investment. If the price goes up, the investors will win. And if the price falls, the investor will lose his money. On the other hand, gold ETFs provide exposure to the precious metal while tracking its price.
Are commodities a good investment?
Like any investment, commodities can be a good investment, but it also carries risks. An investor needs to understand which commodity markets he wants to enter. The type of investment is also important; As ETFs offer more diversification, less risk, futures contracts have more risk due to margin requirements.
But commodities remain a hedge against inflation, and in particular, gold is considered a safe haven and a hedge against a market downturn.
You can start trading commodities by opening a brokerage account with a trusted financial broker such as Axia Investment and buying shares in a company that operates in the commodities sector.