IS INVESTING IN COMMODITIES A GOOD IDEA?

In the world of investing, every form of financial vehicle holds certain advantages and disadvantages, commodities are no different. After starting to invest in individual stocks and bonds, you might be wondering if getting commodities into your portfolio will add the final touch of diversification to it. Investing in the commodities market is not really difficult and with a bit of research, you can probably profit from your transactions!

Trading in the commodities market has become more popular with the recent volatility in the stock market.

What are Commodities?

A commodity is a raw material or a basic product that is used for commercial purposes. One of the best examples of a commodity would be crude oil because it is used for so many different purposes. However there are other commodities as well in which you can invest, like gold, silver, platinum, sugar, copper, wheat, coffee, etc.

Why should you invest in commodities?

Usually, the price of commodities like crude oil, gold and silver tend to appreciate during times of inflation when a nation’s currency loses value and the traders tend to preserve the value of their purchasing power. Since the prices of commodities are not in any way linked with the prices of stocks and real estate, they tend to operate differently. If 5-10% of your portfolio consists of commodities, any losses that you have to undertake from stocks can easily be overcome by commodity prices.

However, you have to be careful with commodities during hard times like deflation, because prices of commodities tend to fall during such situations. So you have to be careful how much of your portfolio should be made up of commodities and allocate them wisely.

How to invest in commodities?

Commodities trading generally has this risk involved because of the trading taking place technically in the future, and it involves a certain amount of leverage. A trader or an investor agrees to buy or sell commodities at a predetermined price on a future date. However, it is best that you adopt a calculative approach to commodities trading through ETFs and stocks.

You can either invest in ETFs or you can directly invest in a company involved in the production of the commodity of your choice. Traders generally employ two different techniques of analysis to read commodity price movements.

1. Technical Analysis: This process involves decoding chart patterns by extensive reading of the financial markets. It is best suited for people who want to invest in the commodities market for the short term.
2. Fundamental Analysis: This process combines the other factors that influence prices in markets, like global events, tragedies and occurrences. These factors affect commodity prices over the long term, so this process of investing in commodities is mainly for traders who want to invest for a medium to long tenure. It is best to adopt a combination of both technical and fundamental analysis to avoid price swings in the short term market.

Depending upon the risk you are willing to handle, you should consider including commodities in your portfolio.