How to Invest in Commodities as a Beginner Investor
If you have been wondering how to invest in commodities or flirting with the idea of diversifying your portfolio by moving into this area of investing, you’re in the right place.
Commodities have somewhat of a bad boy reputation in the world of investing, with many steering clear of them altogether for fear of losing money due to the volatility of commodities prices and the mind-boggling leverage available on futures contracts.
Yet this reputation is largely undeserved. If you play smart and put proper risk management strategies in place, investing in commodities can be as safe as any other security, and can be extremely lucrative into the bargain.
What are Commodities?
Commodities, to put it simply, are real things which we can pick up with our two hands and use in the world.
From the grains which make up your breakfast cereal, to the silver and copper inside your computer, to the crude oil that is refined into the petroleum you use to drive your vehicle, commodities are many things, but what they all have in common is they are physical in nature and traded on the world markets.
There are many other commodities bought and sold on world markets. In this quick guide, we will look at how to invest in commodities as a beginner.
Who Should Invest in Commodities?
If you are completely new to the world of investing, we recommend taking a step back and mastering the basics of stock investing first.
Commodities can be a risky game if you don’t know what you are doing, and it will be much more profitable long-term to get a grip on the basics first then proceed to commodities later.
If you have a firm grip on stock investing but have limited capital to invest, then it is best to approach commodities through ETFs.
These funds are a back door into the commodity markets, and allow you to buy and sell commodities just as you would stock and shares. If you choose not to invest through ETFs, you will need to use more exotic instruments like futures contracts, which require in-depth commodities knowledge.
On the whole, commodities are best suited to investors with a large chunk of capital to spare and it is best to manage risk by making commodities a part of a balanced portfolio, rather than putting all your eggs in one basket, so to speak.
So, anyone can invest in commodities, but they are best suited to investors with larger amounts of capital and at least some experience.
Commodities Investing Choices
When it comes time to put your hard earned dollars into commodities, you have the following choices.
Commodities Investing Pros and Cons
Like every way to invest, there are pros and cons to commodities investing. Some of them are as follows:
How to Invest in Commodities -
3 Steps & Some Tips
The real key to mastering a commodity, however, is discovering what affects supply and demand.
For example, demand for pork bellies skyrockets around Chinese New Year, since this is a food consumed in vast quantities at celebrations in China, which has a colossal population.
Another example is what happens to the price of oil when trouble flares up in the Middle East, particularly when Iran might be involved, since most of the world’s oil supply travels through the Straight of Hormuz, which Iran controls. If investors panic that supply might be affected, this causes a buying spree.
You will learn to spot these patterns, many of which are cyclical in nature.
Once you are fairly confident you have at least a basic grip on what causes the prices of the commodity in question to move up or down, it is time to tie all the elements of this plan together and begin trading.
As far as tips go, there are three main ones to focus on:
Commodities can be seductive, with their promise of potentially lucrative returns and the many stories of instant wealth made in the commodities markets.
Like all things seductive, it is wise to approach commodities with caution, and realize that jumping in before you are ready and thinking clearly could be a costly mistake.
That said, if you make sure you fully understand what you are doing, develop a strategy with an exit plan built in, and never get in over your head, commodities can make for a great addition to your portfolio!