Saturday, May 7, 2011

5 Ways to Invest Commodities

If you want to include commodities as part of your long-term portfolio investment, below listed are the 5 ways to invest in commodities:

The 1st way to invest in commodities: Spot Trading
Buying and selling commodities can be done on the spot through “spot trading” where delivery takes place within a few business days. Spot trading is not the main way in which commodities are almost always bought in large quantities, few buyers would want to take the risk of accepting whatever the spot price is at the time of purchase, and immediately delivery.

The 2nd way to invest in commodities: Futures Trading
Commodity futures trading is the most popular ways of buying and selling commodities. Instead, most commodities are traded on futures exchanges such as NYMEX and CBOT. The prices of commodities are efficiently and transparently discovered through the participation of thousands of buyers and sellers.

The trading strategies
Those who participate in futures markets usually have two main trading strategies.

One may speculate by taking a position, either long (buy) or short (sell) for example, a gold futures contract in the hope that the goal would rise or fall in price respectively, and get profited in the expected price movement direction.

Or one may hedge to mitigate the risk of a natural position in the commodity. For example, a soybeans farmer can insure against a poor soybeans harvest by purchasing soybeans futures contracts. If the soybeans crop is significantly less due to bad weather, the farmer makes up for that loss with a profit in the soybeans futures contract, since the overall supply of the crop is short everywhere that suffered the same conditions.

In futures trading, investors trade directly in commodities futures and encounter high level of risk not only because of the volatility of commodity prices. It also involves sophisticated skills, correct trading methodology, and dedicated time to follow the commodities market that is dominated by large commodity trading houses and financial institutions with professional traders.

The 3rd way to invest in commodities: Commodity index funds
For investors looking into diversify their portfolios without wanting to trade directly, commodity funds are a good choice. This is because invest in commodity index funds are less risky than invest directly into commodity futures. Some funds specifically track commodity indices like the Dow-Jones-AIG Commodity Index, the Reuters/Jefferies CRB Index, the Goldman Sachs Commodities Index (GSCI), and the Rogers International Commodities Index (RICI).

The 4th way to invest in commodities: Commodity unit trusts
For investors who are unit trust lovers. There are dozen of unit trusts investment funds available for retail investors. Some unit trusts generally invest broadly across the major categories of commodities. Some even focus on more specific sectors of the commodities market, such as gold & silver, energy, metals and agriculture. Therefore, for a better investment diversification, one can consider to add in commodity unit trust funds into the long-term investment portfolios.

The 5th way to invest in commodities: Commodity stocks
Finally, investors can buy commodity stocks that are linked directly to light crude, palm oil, iron, copper, ore and energy related stocks to be profited directly from the stocks price appreciation. For example, Australian company BHP Billiton is one of the world’s largest diversified producers of diamonds, coal, iron ore, aluminum, oil and natural gas.

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