How to Invest in Commodities

The commodity market is notably less volatile than the equities or foreign exchange market, with trends lasting for a decade or more. While the overall sentiment of the market may be positive, it is common to see minor fluctuations in the price wherein lies a potential profit for any person who knows to how to invest in commodities. Another distinctive advantage of investing in this market is that theoretically the value of a commodity can never go down to zero, unlike an equity which is often not even worth the paper that the share certificate is printed on.

How to invest in Commodities: Understanding the Commodity Market

Commodities is an umbrella term given to a host of items including food, crude oil, precious metals, spices and other raw materials that may be used in manufacturing such iron, cotton, and other finished products. When trading commodities, the items do not actually exchange hands as few traders would want to go through the hassle of transporting and warehousing the goods. Rather, commodity investments are made in the form of contracts, which are nothing but agreements to buy or sell a certain amount of commodity at a specific price and time.

How to Invest in Commodities: The Futures Contract and Price Fluctuations

This type of trading deal is known as a futures contract and money is made on such trades based on whether the price of the commodity rises or falls between the date of contract purchase and execution. It is imperative to understand that like any other consumable, the prices of commodities are driven by supply and demand. For instance, one of the reasons for a rise in the price of crude oil is increased consumption in developing economies such as India and China.

How to Invest in Commodities: The Risk and Rewards

Commodities have been a historic investment vehicle since Babylonian times. However, in modern times, commodities offer a hedge against other forms of investments. Also, since the commodity market usually works inversely to the stocks and bonds market, they offer a more viable investment avenue. However, this is not to say that there are no risks associated with commodity investments. In contrast, any form of trading has inherent risks that should be accounted for.

How to Invest in Commodities: Trading in the US

In the United States, commodities are traded on the Chicago as well as the New York Board of Trade. However, after the proliferation of the Internet, it is now possible for investors from all over the world to try their luck in the US commodity market. People interested in commodity trading will need to open an account with a brokerage house. Generally, it does not take more than $5000 to open an account. However, it is vital to practice with a dummy account before even considering active trades.

As with all investment vehicles, the rule about greater risks equating to higher rewards holds true even in the case of commodities. With this in mind, it is vital to put in the requisite amount of research before investing in the commodity market. Normally, watching historic and current trends and supply and demand figures should give an investor a fair idea about the direction in which the prices of a commodity are headed.