Some options for investors in commodities
The trading volume in the commodity markets here is picking up with every passing day, as more awareness is being created among the investor community. Electronic trading in commodities makes it easier for individuals and small investors to trade in them. Investments in commodities can be made by day traders as well as medium to long-term investors.
Trading in commodities is a bit different from trading in stocks. The prices of commodities fluctuate based on the demand and supply in the global markets. There are various factors that influence and play a key role in deciding the prices of various commodities. Rainfall, sowing-harvesting cycle, government polices and macroeconomic outlook are some of them. There has been considerable volatility in commodity prices over the last few months due to the global uncertainty, speculation on demand in China, dollar and euro weakness etc. Investments in commodities come with higher amount of risk than equity but they are rewarding as well if made with proper due diligence.
Commodity trades are highly leveraged. It means the margin requirements for trading in commodity futures is quite low in comparison to the total holding. Therefore, it magnifies the gains and losses an investor can incur while dealing with commodities.
These are some of the main categories of commodities presently traded in the markets, their outlook and ways an investor can invest in them:
Industrial commodities
Industrial commodities include aluminum, copper, nickel, zinc, steel etc. The price movements in industrial commodities mainly depend on the macroeconomic growth in the global economy. These commodities do well when investors feel confident on consumption demand from large economies.
Investors can go for industrial commodities with speculative future positions through a commodity broker or invest in commodity based stocks. It is important to note that there is no one-to-one correlation between commodity prices and commodity stock price movements. However, if other factors are constant, the commodity prices do form the most important factor in the pricing of commodity-based stocks.
Precious metals
Precious metals include gold and silver. Usually, it is seen that investors' interest in precious metals goes up during global uncertainty periods, as precious metals are treated as a safe investment haven. Investors can invest in precious metals through future positions, buying gold exchange-traded funds (ETFs), or by buying physical gold or silver.
Most of the times, small investors take positions in precious metals (gold or silver) which is easier to maintain and handle. However, the physical positions in precious metals come with liquidity issues and are difficult to hold. Gold ETFs provide good investment options to small investors as they can be easily liquidated in the markets, and can also be stored electronically in a demat account.
Agricultural commodities
The category of agricultural commodities includes sugar, channa, chilli, pepper, soya, mustard oil etc. The price fluctuation in the agriculture-based commodities depends on various local factors, production and supply, government policies, and the availability of alternatives. Trading in agricultural commodities requires a lot more knowledge and understanding of the local issues. Therefore, agricultural commodities are difficult investment avenues for small investors.
Energy commodities
The category of energy commodities includes crude oil and natural gas. The price movements in energy commodities are driven by speculation on demand in large, developed nations such as the US. The prices of energy commodities ruled quite firm when the world economy was booming in 2007-08 and nosedived after the sub-prime crisis in the US.
Investors can take exposure to these commodities with speculative future positions through a commodity broker or invest in energybased stocks.
