Some options that enable you to invest in the commodity markets
The trading volumes in the commodity market here is picking up by the day. The commodity market provides another avenue for investors to invest or trade and earn returns based on the price volatility of various commodities in the international markets. Electronic trading in commodities makes it easier for individuals and small investors to trade in commodities.
Investments in commodities can be made by day traders as well as medium to long term investors. Investments in commodities come with higher risk than equity but they are rewarding as well if done with proper due diligence. The prices of commodities have been volatile, and have given many investment opportunities for investors and traders.
The commodity prices move based on the demand supply scenario in the global markets. Therefore, there are various factors that influence and play a key role in deciding the prices of various commodities, like rainfall, sowing-harvesting cycle, government polices, macroeconomic outlook etc.
On the trading front, commodity trades are highly leveraged trades. It means the margin requirement for trading in commodities futures is quite low in comparison to total holding. Therefore, it magnifies the gains and losses an investor can incur while dealing with commodities.
These are some of the ways an investor can invest in commodities:
1) Stocks
Investing in commodity based stocks is one way. You can invest in commodity based stocks like sugar companies, metal companies etc for an indirect exposure to commodities. However, it is important to note that there is no one-to-one co-relation between commodity prices and commodity stock price movements. The stocks' performance in the markets depends on many factors like order book, management team, cash flows and overall market sentiments.
However, with other factors equal, commodity prices do form the most important factor in pricing of commodity-based stocks. Investing in commodity based stocks makes it easier for small investors rather than directly investing in the commodity market which is a different ball game altogether.
2) Mutual funds
The commodity-based mutual funds invest in companies which are in a commodity-related business - oil and gas, metals etc. Therefore, investors with a medium to low risk profile and looking for portfolio diversification can indirectly invest in commodities this way that is relatively safe. The returns from mutual funds would be lesser than direct exposure to stocks or commodities itself, but it provides the advantage of diversification due to exposure to a wide range of companies in different commodities.
These are also safer as the funds are managed by experienced fund managers and backed by the team of the fund house that analyses demand and supply conditions in various commodity markets before taking investment decisions.
3) Commodity futures
Investing in the commodity future market is another way to trade in commodities. However, it is much riskier than other alternatives. Traders and investors can trade in future contracts of more than 50 commodities. Some of them are highly liquid and volatile in nature like gold, silver and crude oil.
Commodity contracts are highly leveraged and hence it has the potential of higher gains and losses. Therefore, it is important to take due care while trading in commodities futures and maintain strict stop-loss and profit targets on trading positions.
