Inside Investing | Apr 15, 2019 16:50
If you’re reading this post, it probably means you’re interested in, or at least curious about trading commodities, but you may not be sure how and where to start, or if it’s even the type of investment you want to make.
To decide if you should trade commodities, you should probably know what they are (if you don’t already know): A commodity is a raw material or agricultural product you can buy and sell, and any physical or virtual market that allows you to do that is considered a commodities market. There are three categories of commodities - Soft, Hard, and Energy.
In total, there are 100 primary commodities, half of which are considered major commodities.
While you can purchase the actual commodities and keep them, most of the commodities trade is done through commodities exchanges and futures contracts. Historically, the earliest known commodities market was in ancient Sumer, sometime between 4500-4000BCE. The contracts were written on clay tablets and represented the amount of each commodity (such as goats or quantity of wheat) that is promised to be delivered - not unlike futures contracts of today.
Important note - some analysts insist that another con is that commodities have no income generation, but as our analyst, Barani Krishnan states:
Non-income generation is something I'd argue against. The popular theory of commodities investing being a zero-sum game (i.e. someone has to lose for another to win), is too simplistic when viewed from a more diverse perspective. For instance, you can be a hedge fund that invests in niche plantations, participating not just in price discovery of the commodity you are growing but also earning income from the products you harvest and sell. The now-defunct Armajaro was one such hedge fund, is one of the largest proprietary investors/fund managers in cocoa/coffee during its time.
Got any other pros or cons? Let us know in the comments.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
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