Skip to main content

Commodities Investment options

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.

 


Popular posts from this blog

All about "Derivatives"

What are derivatives? Derivatives are financial instruments, which as the name suggests, derive their value from another asset — called the underlying. What are the typical underlying assets? Any asset, whose price is dynamic, probably has a derivative contract today. The most popular ones being stocks, indices, precious metals, commodities, agro products, currencies, etc. Why were they invented? In an increasingly dynamic world, prices of virtually all assets keep changing, thereby exposing participants to price risks. Hence, derivatives were invented to negate these price fluctuations. For example, a wheat farmer expects to sell his crop at the current price of Rs 10/kg and make profits of Rs 2/kg. But, by the time his crop is ready, the price of wheat may have gone down to Rs 5/kg, making him sell his crop at a loss of Rs 3/kg. In order to avoid this, he may enter into a forward contract, agreeing to sell wheat at Rs 10/ kg, right at the outset. So, even if the price of wheat falls ...

SBI bonds FAQ

  Maximum retail subscription and over – subscription There is a lot of excitement around these bonds, so I won't be surprised if they get over-subscribed on the first day itself. So, I thought Sameer asked a very good question about over-subscription. Here is that discussion. Here are some other questions that you may find useful. Can I trade the SBI bonds on NSE after it lists? Yes, these can be traded after listing. Where can I get the application forms, and can I buy the bonds online? You can get the application from notified branches, and then fill it up there and submit it. To the best of my knowledge, there is no way to invest in them online, but if anyone knows otherwise then please leave a message, and let us know. Can NRIs apply for these bonds? NRIs can't apply for these bonds as they fall under one of the ineligible categories. Can you take a loan by keeping the SBI bonds as security? The terms of the issue in the prospectus state that the bank shall no...

ICICI Prudential Balanced Fund

 ICICI Prudential Balanced Fund scheme seeks to generate long-term capital appreciation and current income by investing in a portfolio that is investing in equities and related securities as well as fixed income and money market securities. The approximate allocation to equity would be in the range of 60-80 per cent with a minimum of 51 per cent, and the approximate debt allocation is 40-49 per cent, with a minimum of 20 per cent. An impressive show in the last couple of years has propelled this fund from a three-star to a four-star rating. The fund has traditionally featured a high equity allocation, hovering at well over 70 per cent, which is higher than the allocations of the peers. But in the last one year, the allocation has been moderated from 78-79 per cent levels to 66-67 per cent of the portfolio. ICICI Prudential Balanced Fund appears to practise some degree of tactical allocation based on market valuations. Within equities, well over two-thirds of the allocation is parked i...

Fortis Mutual Fund

Fortis Mutual Fund, a relatively new player, it is still to prove its case and define its position in the industry. In September 2004, it came onto the scene with a bang - three debt schemes, one MIP and one diversified equity scheme. And investors flocked to it. Going by the standards at that time, it had a great start in terms of garnering money. Mopping up over Rs 2,000 crore in five schemes was not bad at all. The fund house has not been too successful in the equity arena, in terms of assets. Though it has seven equity schemes, it is debt and cash funds that corner the major portion of the assets. Most of the schemes are pretty new, and the two that have been around for a while have a 3-star rating each. The last two were Fortis Sustainable Development (April 2007), which received a rather poor response, and Fortis China India (October 2007). Fortis Flexi Debt has been one of the better performing funds, after a dismal performance in 2005. It currently has a 5-star rating. None ...

Zero Coupon Bonds or discount bond or deep discount bond

A ZERO-COUPON bond (also called a discount bond or deep discount bond ) is a bond bought at a price lower than its face value with the face value repaid at the time of maturity.   There is no coupon or interim payments, hence the term zero-coupon bond. Investors earn return from the compounded interest all paid at maturity plus the difference between the discounted price of the bond and its par (or redemption) value. In contrast, an investor who has a regular bond receives income from coupon payments, which are usually made semi-annually. The investor also receives the principal or face value of the investment when the bond matures. Zero-coupon bonds may be long or short-term investments.   Long term zero coupon maturity dates typically start at 10 years. The bonds can be held until maturity or sold on secondary bond markets.
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now