In planning for the future and deciding how to invest money, there are many areas to consider. Most people are aware of stocks, bonds, mutual funds, retirement accounts, and savings. However, another type of investing is in commodities.
Everyone buys goods and services, and typically we call anything exchanged a commodity. In the financial world a commodity has a particular meaning, referring to raw materials of manufacturing or physical goods. Commodities trading has been around for centuries and is another way to add to ones investing portfolio.
Types of Commodities
There are many types of commodities that are traded upon. The various categories include agricultural, energy, precious and base metals. Things traded in the agricultural market are items like coffee, sugar, corn, and fibers like cotton. The energy category includes oil, natural gas, coal and ethanol. Examples of items in the metals category include gold, copper, and iron. These are just examples, and there are thousands of commodities to consider investing in.
Commodities trading is done much like traditional cash or stocks, on an exchange. However, commodities are purchased for future delivery, resulting in future prices and contracts. Individuals trading on commodities are making a bet on the future value of the commodity. Prices in the commodities market are based on supply and demand and investors hope to make a profit from the ever fluctuating prices. It is a difficult type of investing and learning how the commodities market works is imperative before trying to trade in this market. Commodities are traded in time frames and studying and learning the time frames is important for investors. If a particular investor wants to trade hourly, then the individual should study the market for a week or so to determine which time frames and hours are best for trading.
Commodities trading is a more complex form of trading. Beginning investors should be extremely cautious and need to become educated and understand how commodities trading works. There are specific strategies with commodities trading to avoid loss and the commodities market needs to be watched closely. Investors should consider commodities as just a small part of their portfolio or investment plan and should not rely heavily on commodities trading. Most commodities traders initially lose money until they really understand how the commodities market works. Individuals considering entering the commodities market should keep this in mind. Those with the most success are those who invest small and watch their losses.
The most popular and most watched commodities are ones that might not surprise the average investor. They are commodities that even a lay person would be familiar with. These include oil, natural gas, gold, sliver, coffee and cocoa. Oil and natural gas are watched closely because their value can determine what is going on with the economy. So many other products and industries depend on oil and natural gas that the price has a far reaching effect. Gold is still the commodity held by most banks and it’s value is closely tied to the US dollar, which is why it is watched.