Top 5 factors to consider before investing in commodities
Commodities are part of our daily life and their value is constantly shifting as global demand increases or diminishes. Although it is among the most complex form of investing, this financial market is still enjoying an everlasting popularity due to its exciting opportunities. In this article you will find the top 5 factors you need to consider before investing in commodities.
Commodities are volatile
Commodities are proved to be more volatile than any other asset class. A report released by the Deloitte firm showed that prominent commodities such as oil, natural gas, and coffee had price increases of 30% to 60% over a three to six month period. If you’re looking for a slow, secure long-term investment – commodities aren’t the solution! Moreover, it is important to note that commodities don’t pay dividends or interest, so they will most likely not offer great gains over the time. Try to approach a trading strategy that focuses on the speculative nature of this asset and aim to gain quick profits.
You can invest in groups of commodities
Commodities can be categorized into four main groups:
- Energy (oil, natural gas)
- Metals (gold, silver, platinum, copper, etc.)
- Livestock & meat (cattle, hogs, pork bellies, etc.)
- Agricultural (corn, coffee, soybeans, rice etc.)
You can invest in a single commodity, such as gold, through an individual commodity Exchange Traded Fund (ETF); or in an ETF that provides you access to a bunch of commodities in varying percentages. Apart from ETFs, you can also invest in this asset class under the form of stocks, mutual funds or futures. All you need to do is open an account with an online commodities broker. TradeLTD.com is a renowned brokerage firm that puts at your disposal a versatile trading platform in terms of charts, strategy analysis, quotes, and order entry. It also offers low commission rates, as well as a professional environment, which makes it ideal for both beginner and experienced traders.
Commodities are sensitive to a lot of factors
The value of a commodity can be affected by a series of factors, including the supply and demand, the weather conditions, world events, geopolitics or even the U.S. Dollar. Many commodities are often priced in dollars around the world, which means the commodities prices go down when the USD is strong and vice-versa. Weather is another factor that cannot be neglected when it comes to these assets. A drought, a hurricane or a flood can highly impact the production of certain goods, therefore, impact their prices. Making a detailed research about all of these factors before investing in commodities will definitely make a difference for your results!
Commodities are highly leveraged assets
For a future contract, you will need to make a small deposit to control a much bigger financial interest in a commodity. Commodities are arguably the most volatile asset class, which makes the afforded leverage much higher compared to other assets. This can be risky, because you might end up owing more money than you own. Take it easy at first and take on less leverage than you need. If you want to play it really safe, you can create a money management plan and include the initial deposit, the fees & commissions, as well as your available funds and pick the leverage ratio you’re comfortable with. It is also indicated to practice with a demo account before trading with real money. All in all, always keep in mind the golden rule: don’t invest more money than you can afford to lose!
There is some “paperwork” that needs to be done
We’re talking about the opportunity to trade gold, silver and other valuable goods. A more complex process to get there is natural, so be prepared! The broker will require information regarding your trading experience, net worth or any other details that can prove you are eligible to open a commodities account and take on a certain level of risk. There is also a minimum-balance requirement you need to meet that is generally set by the investment firm. Communicate with your broker and ask for additional information if any steps are unclear.
There is a lot of homework left – but the 5 factors we presented in this article are important characteristics that all beginners should consider before making an investment. The commodities market is an extremely complex financial market that takes years to master. You won’t attain success overnight, but once you gather the right amount of experience to understand how it works – you will enjoy its beauty and the superb rewards it can give you.