Commodities are generally not considered to be an important part of any investment portfolio. Typically, several financial advisors emphasize on allocating funds to stocks and bonds or perhaps the kind of funds that are inclusive of the two asset classes. Yet, there is still a certain segment of investors who are of the opinion that diversifying portfolios further help in spreading out the risk. This is where commodity investing comes into the picture: Visit multibank broker
What is commodity investing?
There are multiple options to invest in commodities that are essential raw materials that could be used directly like food, or indirectly for manufacturing a further refined item. A commodity such as oil has many uses and is important for the production of several goods and services. Airlines tend to spend a lot of money on fuel and thus, the price of oil could play an important role in determining the airline’s profitability.
To invest in commodities, you could buy physical goods like gold or buy ETFs which trace certain commodity indexes. You could even purchase stocks of businesses that deal with various commodities like oil and gas producers. Commodities are volatile in nature and thus, you should make sure that you’re well aware of the risks you’re about to take.
You could earn a profit on commodities via futures contracts, which is basically an agreement between two parties to purchase or sell a commodity at a certain price and date. You could earn a considerable sum of money using futures contracts if you’re able to predict the moves of the underlying commodity price correctly but do bear in mind that there’s also an equal probability of making a loss. Ensure that you’re well aware of the risks before you start trading.
5 ways to invest in commodities
Investors and traders who wish to invest in commodities could purchase futures contracts, shares, or ETFs in the companies which deal with such commodities in some form or other.
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Futures
Purchasing commodities via the futures market is one of the most popular ways to invest despite the fact that it may not be the easiest thing to do. Futures are risky but the rewards are also high which attracts many traders to it.
Futures let you operate with relatively low sums of money so you can use leverage to boost your gains (and even losses!). If the trade keeps moving your way, you wouldn’t ever have to add more funds and keep speculating in an economical way.
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Physical commodities
You can also take direct ownership of some commodities but well in doing so, hogs, cattle, and oil probably aren’t the best picks. Rather, commodities like gold or silver are better and also offer a hedge against inflation.
You could buy bullion in many different ways such as via online dealers or pawn shops, or you could even purchase gold and silver coins for their bullion value.
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ETFs of physical commodities
If you’d like to gain direct exposure to physical commodities without getting into the tricky business of owning the goods or trading on the futures market, you could invest via ETFs.
ETFs offer a great and easy-to-manage way to open a position in a commodity or a group of them. For instance, you have the option to purchase an ETF that owns gold, oil, or even multiple commodities. Therefore, you could be able to experience proper exposure to a commodity paired with the ease of dealing with an ETF.
The main advantage, in this case, is that you can gain exposure to the commodity and the prices that are based on the market’s move so you get the best rates when you need to sell the holdings.
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Stock of commodities producers
If you wouldn’t like to take ownership of physical commodities since they do not directly bring any cash flow, you could choose commodity producers and still earn profit when the commodity prices increase. Stockholders have two advantages with producers. One, should the commodity prices rise in value, the underlying company generally profits. Another point is that the company could boost production over the course of time for more profit.
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ETFs of commodities producers
Your exposure could be diversified as you buy an ETF and add it to your portfolio. Besides the advantages of diversification, you’d be able to get concentrated exposure to producers of a specific commodity. For instance, when you purchase a gold miner ETF, you could get the benefits of cash-flowing producers while also speculating on increasing gold rates.
5 essential steps to start investing in commodity
Besides the factors we’ve discussed above, traders need to be familiar with the key details and prerequisites before beginning to trade commodities:
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Step 1 – Getting Familiar About The Commodity Trading Exchanges
The initial step for every trader who wants to invest in commodities is to learn about the various exchanges.
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Step 2 – Selecting the Efficient Stockbroker
Next, they need to begin trading commodities only with a trustworthy stockbroker. Choosing a reliable and efficient stockbroking company can be very challenging since the stockbroker would be the one who would be in charge of your account and also take care of the trade executions. The brokers can even help traders learn about commodity trading so they can make wise decisions using their suggestions. When choosing a broker, the trader needs to be fully aware of the brokerage fee they charge and the other kinds of fees involved such as clearing fee, platform fee, commission, and more.
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Step 3 – Opening The Commodity Trading Account
When a trader chooses the broking company they can depend on to trade commodities, they need to open a demat account. On the basis of the investor’s credit, trading experience, and risk-taking capabilities, the company may choose to accept or reject your request to open a demat account.
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Step 4 – Making An Initial Deposit
When a trader opens their commodity trading account, they should add their first set of funds to the account to start trading. Visit multibank
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Step 5 – Create A Trading Plan
With all formalities in place, traders can start trading commodities. To do this effectively, they should create a trading plan that is unique to their needs, financial goals and risk appetite.