Getting into the commodities market can be confusing. Some people say that you can’t make income, while others say you can make an excellent profit. What’s the deal? Before you get involved in the commodities market, here are five things you should definitely know.
Commodities are Broad
The definition of “commodities” is broad. The word refers to any raw materials or produce that sell on a global market. There are several different categories like metals, agriculture, livestock, consumer, and energy. Metals cover the raw material you may want even if you aren’t involved in the commodities market such as gold, silver, and copper. Agriculture includes goods like corn, soybeans, and grains. Livestock handles items such as lean hogs, live cattle, and feeder cattle. The consumer market refers to goods such as cocoa, coffee, cotton, and sugar. Finally, energy is one of the largest and most volatile and covers light, crude oil, natural gas, unleaded gas, heating oil, and Brent crude.
Profit is Long-Term
Some people state that you cannot make income using commodities, and this is partly right. Participating in the commodities market is a long-term business. Goods of the same commodity type and grade are bought and sold for the same commodity price. However, supply and demand can give investors profit depending on what commodity they own. For example, iron ore saw a huge boost in China in 2008, and the demand hasn’t waned. Iron ore is expensive now, but an investor that purchased iron ore while the prices were low could now sell the good for a much higher price.
Trading Online or Through Brokers
You may already know that you can find a broker close to you. There are thousands of commodities brokers all over the United States, but choosing a good one can be pretty tough. You have to be sure that they’re licensed, among other things. It isn’t necessary that you go through an agent if you’re already experienced or learning quickly. Trading commodities can easily be done online through trading systems such as TradeStation or Generic Trade.
Futures vs. Commodities
While researching information on commodities, you may become confused with futures and commodities. Commodities are any goods, whereas futures are goods that are traded. Futures contracts are mechanisms to carry out trades. They’re agreements to buy or sell a quantity of something at a set price on a specific date in the future. If you hold a futures contract to buy 100,000 bushels of corn, you have to purchase the corn unless you sell the contact to another person.
Commodities are Volatile
Commodities are risky because they’re one of the most volatile markets in trading. Comparatively, commodities are twice as volatile as stocks, but this isn’t necessarily a bad thing. Participating in these markets have a chance to offset losses in other parts of a portfolio. Gains and losses can be quite significant, so some experts suggest that no more than 5% of your portfolio should consist of commodities. This could protect you from significant loss.
