Why You Should Invest in Commodities

August 19, 2015
Jess

A commodity is something which can be interchanged with other produce which are the same type. This means that it’s a way in which goods are sold and bought around the world. CFD trading on commodities means that many investors can profit from either falling or rising prices.

There are four main categories of the most popular markets for commodities. These includes agriculture, softs, precious metals, and energy. Basically, a commodity is a raw material or good used in commerce. Oil is a good example of this as it has so many uses from electricity to heating to transportation. Crude oil is the most commonly traded commodity in the world, however other commodities include orange juice, gold, copper, platinum, sugar, cattle, and wheat.

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You may have a diverse profile, with ETFs, stocks, cash, and bonds, but trading in commodities could greatly improve your investment profile. However for investors who are young or inexperienced, it can be a tough decision as to whether commodity investment will be beneficial in the long run.

While some people believe that you need to trade future contracts which could be risky in order to invest in commodities, there are actually plenty of available investment options which makes the whole process much easier.

There’s no need to ensure that commodities are making up the majority of your profile, however they can be a good way for you to diversify your portfolio which lowers your risk.

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Let’s look at why you would want to consider investing in commodities. The price of commodities usually tends to rise during times of inflation as a nation’s currency is losing value and investors want to preserve their purchasing power.

However, they also usually fall harder during inflation periods. During the Great Recession in 2008 the price of crude oil plummeted from $140 to $40 in just four months. This is why it’s a good idea to keep your commodity investment conservative.

A good idea is to invest 5-10% of your profile in commodities, depending on how much risk you are comfortable with as an investor.

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Commodity trading is interesting as there can be so many factors which influence how a commodity does, including world politics, production, seasonal changes, and storage capacity. If you’re new to investing it’s a good idea to think of commodity investment as a bet. It’s riskier than other investing, but you could end up with a large return- providing you play your cards right.

When you choose asset classes, it’s a good idea to ensure that they’re as uncorrelated as that can be. That means your risk is spread out and if one commodity doesn’t do so well, you still have your hand in with others which could make up for it.

While commodity may be riskier investing, with their value fluctuating over time, if you build it into a solid asset investment plan, they can be a very smart way to diversify your portfolio.

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