In today’s global market, commodities have become increasingly popular with new investors. Businesses and other corporations depend on specific materials or commodities for their products to succeed in the market. These materials are not limited to just metals but include things such as oil and other raw material supplies.
What are Commodities?
Commodities are essential goods used in commerce that you can exchange for other commodities. One example of this would be gold coins, which are interchangeable with all other types of coins from any country worldwide because they have the same value and quality regardless of whether you’re buying or selling them.
Commodities have been traded for thousands of years. People have bartered and traded anything from salt to livestock to get what they need. As the technology evolved, so did the methods by which people went about trading their commodities.
Today there are several different ways that individuals can make money through commodities; these include:
- Trading futures contracts on an exchange
- Long term investing (going “long”)
- Short selling (going “short”)
Benefits of Commodities trading
Commodities trading can provide a wide range of benefits to those involved. Many traders get started with the primary goal of making money, but many additional reasons to start commodities trading. Here is a list of some other benefits:
Low Capital Requirement
With no minimum account size or trade size, you can start commodities trading with very little capital.
International Market
With the rise of electronic trading, it has never been easier to invest in commodities than today.
Higher Returns
There is a long history of above-average returns from commodity investing compared to other asset classes such as stocks.
Diversification
Commodities trading can help provide diversification to your portfolio, reducing volatility and increasing returns over time.
No Middle Man
Most commodities are viewed as a direct investment in the item you want to buy or sell without intermediaries. You can buy commodities online using trusted platforms.
No Minimum Investment
Unlike many other markets, such as forex, there is no minimum investment for each trade.
Asset-Backed
Many commodities are backed by physical assets, protecting your investment. For example, you can purchase oil futures for next year and rest assured that the oil price will be stable or higher than today’s prices when you want to cash out.
Liquidity
Most commodities markets are highly liquid, meaning that it is easy to get in and out of positions quickly without any price slippage.
Low Transaction Costs
Many trading platforms and brokers offer low transaction costs, making getting started with a small budget easier.
Economic Growth
As consumption demand rises in developing countries such as China and India, the price of commodities such as oil and corn have historically trended higher over time.
Risks associated with trading commodities
There are some risks associated with each method and potential benefits; the goal is to find a method that fits your personality and risk tolerance. The first step would be learning how things work and then finding out if you like it.
Market manipulation
The price a customer pays for a commodity may not reflect the supply and demand fundamentals of supply and demand. A supplier might hold the commodity off the market to “fix” prices as a means to obtain higher prices.
Unexpected changes in availability or demand
A drought or an unseasonably cold winter can cause demands for certain commodities to increase and ultimately drive up the price of those products.
Counterfeit goods
Scammers can trick an investor into buying counterfeit goods. These products, such as fake gold bars, look like the real thing because they are made to replicate actual items and even carry a stamp of authenticity.
Speculation
This is an investment in a commodity or security such that it seeks to capitalize on market expectations of future prices rather than attempt to deliver any good or service. Speculation can often exaggerate price swings and cause unnecessary volatility.
Final word
Commodities trading is excellent for beginners and new investors. With no minimum account size or trade size, you can start commodities trading with very little capital. Learn more about commodities trading and buy commodities online through reputable online brokers, Saxo Bank.
