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Pros and Cons of Commodity Trading

  • Written by News Company


Trading is increasingly becoming popular and competitive these days. So, traders are seeking to take commodity tips from the suppliers who are earning the maximum on their investments. 

Commodity trading is quite varied from other types of investments, such as stocks and bonds. It usually refers to trading in the resources like oil, silver, gold, copper as well as other costly metals.

But remember that trading with commodities always comes with some pros and cons. It is both a high-reward and high-risk investment. It offers great opportunities for the traders to get huge profit on their investment, while on the other hand, having too many investments in commodities may sometimes become dangerous too. 

You have come to read this blog. It seems that you are a trader who wants to earn a maximum profit on your investment and interested in knowing the advantages and disadvantages it offers.

So, let's dive more into this blog before getting on this path. 

 Why Is Commodity Market Necessary?

Commodities are the need for modern societies in various countries. The too much demands of these commodities significantly impact their costs and cause them to rise and fall. 

The commodity market works as the center that helps in maintaining the stability of its prices through futures trading or forwarding. A futures contract lets the supplier in maintaining the price of the commodities before these are brought to the buyers. While on the other hand, these buyers fix the future price of these commodities for customers. 

How We Ensure the Quality of Commodities?

Even though there are few differences in the quality of commodities, especially in agricultural products and in oil, they can be categorized and graded. This specific grading and categorization ensure that their quality and features remain uniform.

This helps to solve the major problem of checking the whole collection of products. It is a very precise way because this non-inspecting process is the reason that a large commodity market has existed today. Thousands of investors and traders put their trust in the reliability of these markets.

Just take the example of gold. It has been the standard value for thousands of years. But gold is back in the eyes of the public, due to the current performance of these costly metals, their sustainability as investments, worries. Private and institutional investors are now again started to discuss the advantages of this investment category.

Types of Commodities

Commodities mainly include the following:

Agricultural Commodities:

Examples of these types of commodities are coffee, cocoa, corn, lumber cotton, hogs, live cattle, oats, palm oil, rapeseed, rough rice, rubber, milk pork bellies (bacon), soybeans, soybean meal, soybean oil, orange juice, feeder cattle sugar, wool, wheat. 

Energy Commodities:

These types of commodities mainly include natural gas, heating oil, ethanol, gasoline, purified terephthalic acid, crude oil propane. 

Metals Commodities:

 Continuing the types of commodities, metal commodities include lead, zinc, copper, tin, aluminum, nickel, aluminum alloy, nickel, molybdenum cobalt, recycled steel. 

Precious metals Commodities:

 These include gold, silver, platinum, and palladium. 

Risk Factors for Investing in Commodities:

1.Unpredictability 

The market of commodities is highly unpredictable as it is greatly influenced by demand and supply. While, on the other hand, demand and supply depend on so many factors that are as much unpredictable as the climate. Ease of discovering new sources, natural factors, and delivery time, these are some factors that directly affect the demand and supply of commodities.

2. Impact of Leverage and Rumors

Since these commodities are traded by using the futures contracts, most of the traders use high ratios of leverage. So, most traders get jittery and react accordingly if they get any news that prices are significantly rising or falling. Hence, a prediction may cause the prices of metals to go high. 

3. No income Generation

Unlike other classes of assets, commodities are not a great way to generate any income for the investors. 

4. Poor Money Management

Fundamentals with low margins encourage the poor management of money, which results to lead the useless risk-taking. 

Benefits of Investing in Commodities:

  1. Immense Growth Opportunities

The rapidly increased demand for commodities also causes a significant rise in its prices over time. For example, the prices of iron have risen about more than three to four times between 2008 to 2010, driven by big demand in China and its boosted growth in economic. 

  1. Diversification Benefits

Commodities have traditionally shown a low or negative link between bonds and stocks. If you’re looking to protect the investments of your stock and bond, then you might get interested in investing in commodities. 

  1. Protection against the increase in Prices:

While the increase in prices weighs down the investment returns of your bond and stock, but commodities are mostly seemed to get benefit from these inflations. Because when the price services and of goods rise, the commodity prices required to create these goods and services will rise. 

  1. Best Way to Make Money:

The rapid demand for commodities can also significantly increase the prices from time to time. So, it gives the best way to make money in a quick manner.  

The Most Common Ways to Invest in Commodities:

The three most used ways to invest in commodities are:

  • Purchase them directly in physical form

  • Invest in stocks in the companies of the commodity.

  • Buy indirectly through an investment trust or fund 

  1. Buying Commodities Directly: 

Investing physically or buying them directly means purchasing and then holding the commodities. It also causes the problem of storage. However, there are so many solutions available to solve this problem too.

  1. Investing in the Companies of Commodity:

Another way of investing in commodities is to invest in its companies. 

Do you know how it is possible?

You can easily deal in gold, gas and oil, gas by simply investing in its companies such as BP, ExxonMobil, Tullow Oil or Royal Dutch Shell, etc. 

It is the most appropriate way to get into the commodity market. 

  1. Investment Trust (ETFs):

The investment trust (ETFs) gives the investors to experience the commodities in the form of investments or shares.  

How Can Traders Make Money by Investing in Commodities?  

 The only thing is the time, i.e. you must do it in a short time. The major reason behind this is the prices of commodities frequently change. Higher prices of commodities tend to rise the supply and lower the need for all commodities. Whereas, lower commodity prices cut down the supply and increase its demand. Therefore, the higher and lower limits of the prices of commodities are firmly curbed. So, in this case, the buy-and-hold approach is not a useful step to get huge money or profit.

FINAL THOUGHTS:

Commodity dealers must have to get complete knowledge before entering the commodity market. They should also be aware of the benefits and losses of investment in the commodity market. For this purpose, A stock market advisory can also help you to get complete information about the performance and trends of the market. So that the traders invest to earn a huge profit with the least chances of return.  








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