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Investing in a Spot Commodity

By Edited Jun 25, 2014 0 1

Many people are considering investing in commodities to diversify their portfolio and offset inflation, but few people know how to invest in a spot commodity. What makes spot commodities so different and why do more people not choose them as part of their investment plan? Logistics are the main problem, but there are ways for anyone to still conveniently invest in a spot commodity.

Wheat as a commodity

A commodity is generally thought of as raw material or something that comes from the earth. The most common examples of commodities include oil, natural gas, gold, grains, and beef. There is little appreciable difference between any given lot of these commodities no matter who the producer is. This is what makes investing in commodities so easy. This characteristic of uniformity is what makes them so easy to swap on the futures market and through options.

A spot commodity works in much the same way and deals in the same kind of tangible assets, but with one notable exception: spot commodities are actually expected to be delivered! The delivery is normally immediate with the exceptions of a few commodities, which may be delivered within a month. Now few investors have the wherewithal to purchase 1000 bushels of wheat and actually take possession of it. The same can be said for beef or oil or natural gas. The only common spot commodity that is easy to invest in for most people would be gold or other precious metals. This is what truly sets the spot market, which is essentially a cash market, apart from a traditional commodities market that is based on futures.

Furthermore, because a spot commodity involves an actual purchase of a specific lot it makes it not only possible, but also even necessary for investors to examine the material either as a sample or fully or have it examined by a representative. This is different from the futures market where the transaction may be completed at any random time with the notion that the commodity will just meet some uniform standard.

This is why the spot market is generally used for precious metals or currency trading through Forex. There are legitimate and worthwhile opportunities for investors to use the spot market as a hedge and instead of a normal futures market, but this takes a very skilled investor. Until an investor really understands contango and backwardation and how it relates to both of these markets it is not recommended to start spot trading.

Investing in commodities of any kind is incredibly risky. It is important to diversify, but only in a safe manner. It is critical for any trader to begin to subscribe to commodity newsletters or join trading chat forums to learn the ins and outs of futures trading. There will come a point when a spot commodity makes perfect sense especially in the currency market, but make sure the knowledge is in place to make the right decision for your portfolio. A commodity training course is highly recommended. For many investors it may come to pass that the spot market is simply never going to be the right decision for their financial goals.



Feb 23, 2011 11:16am
The recovery in commodity values has been quite spectacular for the past couple of years. I agree that the risk is significant but the potential capital gains from spot commodity investing seem to be lucrative.
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