Over the past couple of decades, many investors have become attracted to commodities for many reasons, including the lower prices, the minimization of risk, the transparency of the price mechanism and the benefits it gives to the farming community.
When compared with stock, for example, it’s also clear that commodities are less volatile.
So, why should you look at trading in commodity futures?
As with any form of trading, managing risk is essential when you’re trading commodities. You can trade anything from corn to rice to cattle, so exactly what you’re trading will have different risks.
When you know about commodities and what’s available, you’ll have a better idea of the market, so you can effectively manage your risk.
Commodities can still be risky depending on the type of year you’re trading them, as they can be influenced by unusual weather patterns, natural disasters and man-made disasters.
Therefore, unless you have particular insight, notice a specific trend or know of a particular event that will influence prices, then it’s best not to invest too heavily as this is the best way to manage your risk.
However, generally speaking, most of the markets are quite stable, with commodities being far less volatile than stocks.
As above, depending on exactly what you’re trading, you could greatly benefit the farming community. Ever since the dawn of time, commodities markets have greatly affected the way we live, and it’s thought that commodities trading goes back as far as 6,000 years, when grain was traded in China.
Nowadays, western consumers are greatly affected by market movements such as with crude oil, and trading has the ability to benefit both farmers and communities through futures pricing.
When trading commodities, you can trade anything from energy to metals to livestock and agriculture. When doing this, agreed upon standards are required to ensure that everything traded is of acceptable quality.
This means that sick cattle cannot be traded, neither can sugar that’s an unacceptable quality, for example.
Investment Characteristics in Trading Commodities
Trading commodities can be different to trading stocks or bonds. Market demand and advancements in technology can influence the price of staple items, such as oil.
For example, the emergence of the developing world, including countries such as China, Brazil and India means that the availability of steel has lowered for the rest of the world, due to the industrialization of the country.
Due to this, economic principals follow the commodities markets: the lowering of supply means prices are forced higher. So, for example, when trading, many investors look for major disruptions in supply when prices rise, because supply is generally stable.
This is a way that money can be won and lost.
To conclude, if you don’t like trading stocks or shares, then commodities are a great option, just make sure you know the market well first so you can spot opportunities.