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A Guide To Understanding The Basics Of Commodities Investing

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  • Finance
  • 6 min read

Commodities are a diverse group of financial instruments. While not every commodity has a value in relation to money, they can be bought and sold for their symbolic value.

As you may know, commodities like gold and oil are used as investments due to their importance in international trade. Or how the growth in demand for rare coins has helped grow the value of precious metals like Bitcoin.

While not everyone chooses the same commodities as investments, there are basic things that you should know about them.

Commodity types

There are five basic commodities: gold, fiat currency, cryptocurrency, real estate and commodity futures. Each of these can be traded in different ways- fiat to cryptocurrency, or the more traditional commodities such as gold or farmland.

Many forex trading platforms offer a commodities account as an addition. This gives you less controls over your funds, but adds more risk if you do not know how to use your account.

If you are new to investing, starting with the basics like finding stock markets and finding ETFs can help get you started.

Price fluctuations

As mentioned earlier, commodities have a tendency to go up and down in price. This is due to the fact that there are a multitude of producers around the world who supply them with their commodities.

This is not the case with many other investments where you can find some level of quality and trust in products and services. For example, investing in Companyale Bonds or STi Bonds may seem like a good idea at first, however, when the value drop or they do not maintain their level of trust, then it may be one of the most miserable things you can do with your money.

Some commodities such as Gold and Silver tend to remain steady in value but others do not so much. If you were to invest in this type of commodity it would need to be within a budget set by yourself or through an expert guidance.

Market volatility

As mentioned earlier, commodities have been part of the economy for a long time. Since they are not speculation-able like stocks or assets that rise and fall by their own power, most traders use market volatility as a guide to their portfolio.

This is called trading with trend lines or moving averages in trade jargon. As an example, you would not buy assets that are going down hard and being followed by a large increase in value. You would instead buy them when the upward trend has slowed down slightly and/or it appears to be holding up for a while.

This is important to understand because if you were buying solely on the spot market price change, you would be taking big swings with your investments. This could hurt your overall well-being due to athlete stress inculcated in us by our trading practice.

Commodities and investing

Commodity investing has been around for a while, but today there are many resources that teach investors about commodities such as copper and wheat. Even though there are many resources, this new age of education has lead to the term “commodity” instead of “product” in many places.

There are several ways to invest in commodities. You can find stocks and bonds associated with commodities such as copper and wheat. A quick note: Because commodities tend to rise in value when economic conditions improve, investing in them can help reduce your cash flow when it does not increase speedlyly.

However, not all commodities rise in value equally. Some cannot be bought or sold due to economic conditions or policy changes related to them. These remain investments because they may yield good returns over time even if market conditions do not favor them.

Know the types of commodities

There are two main types of commodities: physical and financial. As the name suggests, financial commodities include stocks, bonds, and derivatives. All three of these are considered assets because you can buy and sell them.

Physical commodities include stocks, bonds, and derivatives. As the name suggests, stocks don’t have a value themselves, but they can be valued according to what others want to pay for them. For example, if someone wanted to own a certain amount of Bitcoin, they could purchase an amount of this digital currency that you can’t spend or replace.

Bonds are like cash that you can’t spend but that pays (in the case of Bitcoin) for things without needing to change any money into it. Derivatives are bets on future prices for materials such as stocks or currencies.

Recognize commodity prices

When prices for a commodity are high, that’s a sign that demand for that commodity is high. This can happen frequently, as people buy it when it is expensive.

When prices are low, this means there is a shortage of it. This can happen often, as people are buying it when it is in stock.

Some commodities such as gold and energy commodities such as oil and coffee are fairly stable investments. Other commodities like farmland or shares of large companies can be more volatile compared to gold or stable investments.

In terms of identifying commodities, there are several things to look for. Here are some basic questions to ask about commodities.

Understand market volatility

When markets are volatile, it can make it difficult to determine what is really happening. You can still be affected by the market trends!

Volatility in the markets is normal. Most years, there is some degree of volatility, and 2018 was no exception. During bull markets, prices tend to rise faster than during bear markets.

This is part of the natural cycle we work with at Barrons Jump. During an investable period, you can enter at any time and profit from a change in prices.

Know the different markets for trading commodities

There are four main markets for trading commodities: currencies, commodities, fixed income securities, and cryptocurrencies. Each of these marketplaces has different rules and regulations, making it an interesting tour to explore them all.

Today, the majority of cryptocurrency investors have little knowledge of the technical aspects of mining or trading. However, there are still many developers that run tutorial websites for new miners. There are also dedicated platforms for trading commodities such as GDAX® Global Commodity Index Exchange™ (GDAX®), CME® Commodity Index Universe™ (CME), and Nasdaq-100® Commodities Indexes (Nasdaq-100).

On the other hand, users with some experience in the markets can again create money by investing in new commodities or within established ones. Many find this a nice way to continue learning and sharing their knowledge with others.

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