Commodity
Commodity trading involves the buying and selling of a large range of instruments including oil and gas, metals like gold & silver, and agricultural commodities.
What is Commodity Investing?
Commodity investing offers trader an opportunity to diversify a portfolio beyond the traditional securities. The investor may form a long-term strategy. Commodities trading refers to the buying and selling of physical assets including gold, silver, oil, wheat, or sugar. These commodities form the cornerstones for the global economy and are traded on exchanges across the world. Commodities are categorized as soft and hard. Soft commodities refer to agricultural products like wheat and sugar, whereas hard commodities refer to energies and metals.
How & where commodities are traded?
Commodities are usually traded as futures contracts. These are simple agreements that enable trading an asset at a decided price and predetermined date in the future. This enables you to trade the contracts themselves without having to own the underlying asset.
Commodities are majorly traded across several exchanges with expertise in select markets, that include:
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Chicago Mercantile Exchange
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Chicago Board of Trade
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ICE Futures Exchange
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London Metal Exchange
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Dubai Gold and Commodities Exchange
Benefits of Commodity investing
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High Liquidity: Commodity markets are known to be one of the most highly liquid markets across the globe. Notably, crude oil is considered the most liquid commodity futures market followed by corn and natural gas.
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Diversification: Commodities provide a way to diversify an investment portfolio. They have low correlation with traditional asset classes like stocks and bonds, which means their prices often move independently of other investments.
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Tangible assets: Commodities are tangible assets that have intrinsic value. Unlike stocks or bonds, commodities represent physical goods that can be stored, consumed, or utilized. This tangibility provides a sense of security for investors, as they own a real asset with inherent value.
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Inverse correlation with stocks: Commodities have historically shown an inverse correlation with stocks. When stock markets decline, commodity prices tend to rise, providing a potential hedge against stock market downturns.
Types of Commodity Investing
Forwards
Commodity forward contracts refer to agreements by which sellers and buyers are obligated to execute the order of the underlying asset in the future, set at a pre-determined price and date. Usually, forwards are not traded on exchanges.
Stocks
Trading commodity focused stocks is another way to gain exposure in the commodity market. This helps a trader to broaden his portfolio and minimize the risk factor.
ETFs
Trading commodity ETFs allows investor to trade physical commodities, including natural resources, agricultural goods, and precious metals. The trader can also gain from transparent pricing.
Steps to making your first investment
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Define your financial goals: Start by determining your investment objectives and the purpose of your investment.
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Assess your risk tolerance: Understand your risk tolerance, which refers to your comfort level with the potential ups and downs of the investment market.
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Meet with a financial consultant: to discuss your financial goals, risk tolerance, and investment preferences.
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Open an investment account: Complete the necessary paperwork to open an investment account. Provide the required identification documents and fill out any application forms.
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Fund your investment account: Transfer funds from your bank account to your investment account.
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Monitor your investments: Regularly review your investment portfolio and monitor its performance.
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Stay disciplined: Stick to your investment strategy and maintain a diversified portfolio.
Top Investment Assets
Vanguard S&P 500 ETF | VOO
Objective: 500 Index Fund seeks to track the performance of a benchmark index that measures the investment return of large-capitalization stocks.