What are the pros & cons of investing in commodities?
Posted: Jan 11, 2018
A physical or virtual market place for buying, selling and trading raw products is termed as commodity market. Trading has become very competitive these days. Hence, traders prefer taking commodity tips from the providers for maximum earning on their investment. Currently, there are about 50 major commodity markets worldwide that facilitate investment trade in approximately 100 primary commodities.
You need to open an account before you start trading commodities. Opening a trading account is quite easier and opening an account to trade commodities is much easier than you think, but it is a major undertaking and you can expect to fill out some paperwork and wait a couple days before you can begin trading commodities. The first thing to do is to decide a commodity brokerage firm, when you are opening the account.
The sale and purchase of commodities is usually carried out through commodities exchange and futures contracts. Trading gives great opportunities to traders and investors to earn maximum returns on their investments. Whereas, on other hand it is very risky too. Trading in commodities also have some advantages as well as some disadvantages.
The pros of investing in commodities.
Exposure to different growth opportunities- There is a huge demand for commodities and with growing demand in commodity can see its prices rise significantly over time. For example, by huge demand in China and its supercharged economic growth the iron ore prices rose by more than three times in past few years.
Diversification benefits- Historically, commodities have historically shown a low or negative correlation with stocks and bonds. For the traders who are looking to hedge against your stock and bond investments, then investing in commodities might interest you.
Protection against inflation- Commodities usually benefits from inflation, while inflation weighs down your stock and bond investment returns. Because when the price of goods and services rise, the prices of commodities needed to produce these goods and services will rise in tandem.
The cons of investing in commodities.
Highly volatile- Commodities are extremely volatile and it comes under the most volatile asset classes around. There are various analysis took place and as a result, they show that commodities are twice as volatile as stocks and nearly four times as volatile as bonds. This extreme volatility makes commodities risky for certain investors.
No income generation- There are various asset classes which generate huge income for investors when they invest in the market. Whereas, commodities does not generate any income for the investor.
Trader should gain complete knowledge before entering into the market. One should also know about the advantage and disadvantages of investing into market. A stock market advisory can help you to gain information about market performance and market trend. So that traders can invest to earn maximum returns with minimum chances of risk.
I am interested in financial market so I wrote my article on the commodity market. The market is very interesting and once you understand how it works you'll like it too.