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4 Reasons to Invest in the Commodity Market

Reasons to Invest in the Commodity

Commodities are naturally available materials that are either directly consumed or further processed for human use or consumption. Earth is the chief source of commodities as most of them get mined, drilled, or tilled. Base metals or industrial metals like iron ore, bauxite, copper, etc., are mined. But crude oil or gas get drilled, and food grains, cotton, etc., get tilled.

Classification

Commodities Market are broadly classified into two categories: hard and soft.

Hard commodities

  • Industrial metals: Aluminium, copper, nickel, zinc, etc.
  • Energy: Oil, gas

Soft commodities

  • Agricultural produce
    • Grains
    • Sugar
    • Cotton
    • Tea & coffee etc.,
  • Livestock
    • Cattle
    • Hogs and their products

Commodities price dynamics

The commodity price dynamics are purely driven by demand and supply. On the other hand, they are governed by many factors like economic growth, inflation, interest rates, geopolitical risks, weather conditions, climate change, inventory availability, production planning, etc.

The Commodities Market is like the Stock Market where the natural materials mentioned are bought and sold. The market function like any other market. 

How to invest in them?

Invest either directly by buying a physical commodity or buying a future instrument or indirectly through commodity-producing companies or Mutual Funds that invest in such companies or Exchange-Traded Funds like Gold ETF.

Physical form: Buy commodities physically for cash. It is called the Spot Market. Buying gold or silver physical is one such instance

Futures: The commodities’ most common or popular form gets listed on exchanges. Being a derivative, you need to open a Margin Market. One prominent advantage in trading in futures is a low margin

Mutual funds: Invest in Mutual Funds that produce essential commodities or products.

Exchange-Traded Funds: ETFs are Investment Funds that get listed on the stock exchanges. These are more cost-effective than buying commodities physically.

Also, Check – 5 Financial Planning Tips for You and Your Family

Reasons to invest

Portfolio diversification: Commodities Market usually has a low or negative correlation compared to Equities. This means rising commodity prices result in falling stock prices and vice versa

Hedge for inflation: Commodities are inputs for finished goods. An increase in input prices results in falling profits for companies. Therefore, investing in them is like hedging.

Exposure to global economic growth: Investment in local equities provides regional economic growth, while exposure to commodities offers an opportunity to ride the boom of global growth.

Better risk-reward profile: The risk-reward profile of commodities has no link to the Bond of Equity Market, making commodities an independent asset class.

Margin trading: A commodity trader, a hedger, or a speculator benefits from a low margin for trading as they get larger exposure for a smaller amount.      

Conclusion

The Commodities Market is highly volatile as it gets exposed to global variables. Any change in government regulations or policies, or economic conditions has a bearing on the market. Stay abreast of international events, geopolitical matters, currency, and trade matters to take quick corrective actions. Trade with extreme caution in the commodity market.

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