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Investing in Commodities

By Edited Nov 13, 2013 1 1

Investing in commodities can be a great way to add diversification to your investment portfolio, but it also adds substantial risk at the same time. True, the maxim of "risk equals reward" does apply, but when it comes to commodities the nature and degree of risk may outstrip any potential reward. What continues to draw investors to commodities and what does it take to buy and trade a commodity? The market for commodities is akin to the stock market, but there are also many key differences. It takes practice and real financial understanding to launch a successful strategy and this type of investment is not for the faint of heart.

Commodities are generally thought of as raw materials with little variance from producer to producer. Historically popular types include grain, oil, natural gas, beef and precious metals like gold or silver. Modern times see things like currencies being added to the list. With the exceptions of a spot commodity, the trading of these investments is normally in the form of a futures contract or option. The same uncertainty that swings the stock market can swing the commodity futures market as well. It is a very hard game to play and win.

Novice or inexperienced investors with a yen for investing in commodities should establish a solid relationship with a commodity broker, but also seek out a reputable commodity training course either online or in their area. It is very important for the investor to understand the mechanics behind a trade and what future market conditions can mean for their investment. Fees and turnover rates are also something that should be understood and factored into the investing strategy. Education is everything. Many people grow up with a rough working knowledge of stocks and even bonds, but few young people are ever exposed to commodities and this is not commonly encountered even in adult life.

Once an investor spends a year or more growing comfortable with the terminology and logistics of trading, it may be time for investing in commodities with the guidance of a broker. Hopefully, the investor will have been active in commodity forums or chat rooms or even set up dummy accounts to test strategies on paper before committing real dollars. It is easy to get caught up in the excitement of trading, but this is real money at risk.

Investing in commodities can be a great way to offset inflation and some older investors enjoy owning "real" property instead of a share in a dream or some complicated financial derivative. This is one of the reasons that gold and other precious metals remain one of the most traded commodities. Many people trade this as a spot commodity and actually take ownership. Do the research and if possible narrow down the type of commodity you are most interested in to just two or three. It is far better to master just a couple than dabble haphazardly in many. Investing in commodities can be a really useful strategy and it works for many people. Learn the dangers and assess your own risk tolerance level. Companies like Forex and others offer easy metals trading or index funds based off of commodities. There are still many ways to buy into the market without generating unnecessary risk. Good luck in your trading!



Feb 23, 2011 11:08am
I have had good success investing in commodities such as gold and potash. The recovery in prices of these goods have been spectacular for a couple of years.
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