Some analysts suggest that when stock markets dip, commodity values increase. This means that if you’re looking at diversifying your investments, investing in commodities might be perfect for you.
Commodities are assets you can invest in that are also actual physical items that you’d be able to pick up with your hand. There are dozens of commodities you can invest in but some of the most popular ones are gold, silver, oil, and wheat.
If you’re looking at commodities to invest in, this article will tell you what you need to know.
How to Invest in Commodities
You can invest in commodities without needing to buy the goods you’re investing in.
You can buy shares in the companies that produce the commodities. If you’re looking at investing in crude oil, for example, you might invest in shares in Exxon or Royal Dutch Shell.
Another option is to invest in future contracts. Future contracts are agreements that allow you to buy or sell commodities in the future at a fixed price. Your return on investment comes from the commodity’s change in value.
Futures are a more technical and more complicated way of investing in commodities. You should only consider investing in futures in markets that you are familiar with.
Risks of Investing in Commodities
All investments carry some risk and depending on the commodity you’re looking at, the level of risk and reward can vary hugely.
With stocks and shares, value is based on a company’s current and future profitability, and you can make projections of long-term value.
With commodities, you are subject to supply and demand. This can vary and is prone to short-term volatility. This means a lot of the time, investing in commodities is based on speculation instead of actual data and trends.
For example, gold tends to be considered one of the best commodities to invest in for anyone. It is not prone to huge day-to-day volatility and tends to see a steady gradual increase in value yearly.
The main risk with precious metals comes from counterfeit gold and silver. This can impact investor confidence and make investors question the gold or silver they’re investing in.
Investing in agriculture such as wheat, coffee, or chocolate means you are putting your faith in local climates and nature. A shortage might see prices increase. It can also mean consumers start looking at alternatives and long-term demand for that crop actually falls.
If you’re investing in crude oil or other energy commodities, politics might affect your investment. Recently the price of crude oil rose by over 5% and fell by over 8% all in under 24 hours because of a missile strike by Iran.
Investing in Commodities the Smart Way
Whatever you decide to invest in, be smart about it. No investment is completely free of risk. Some investments are less risky than others though.
The wisest thing you can do is take a long-term view and only invest money which you are also prepared to lose.
For more information on investing and financial management, keep reading our blog.