Are you new to trading? Perhaps you’ve been investing in the markets for a while.
Whatever stage you’re at, it’s important to find ways to diversify your portfolio. As well as giving you the opportunity to get experience in different financial instruments, growing your portfolio can help manage risk as you’re not backing the one market.
One market that has been a constant presence is commodities. These tangible assets open the door to a range of opportunities. If you’re considering trading in commodities, our guide takes you through what they are and why adding them to your trading portfolio could be a good move.
What are commodities?
Unlike stocks or bonds, which represent ownership or debt in a company, commodities are raw materials or primary agricultural products. They are physical goods that are interchangeable with other goods of the same type and can be categorised into groups:
Metals: Gold, silver, platinum, and copper
Energy: Natural gas, crude oil, and gasoline
Agricultural: Wheat, corn, coffee, sugar, and cotton
Livestock and meat: Cattle, pork, and poultry
The value of commodities is determined by supply and demand dynamics, geopolitical events, weather conditions, and economic indicators. This makes them volatile but there are also opportunities for traders to capitalise on fluctuating prices.
How does trading commodities work?
As a commodities trader, you’re buying and selling contracts for the delivery of a specific amount of a commodity in the future. This is at an agreed price. There are two typical ways to trade commodities:
- Futures contracts: These are agreements to buy or sell a specific quantity of a commodity at a predetermined price on a specified future date. They allow traders to speculate on price movements without physically owning the commodity.
- Exchange-traded funds (ETFs): ETFs provide exposure to commodity prices without the need to directly trade futures contracts. They track the performance of a specific commodity or commodities.
In addition to futures and ETFs, some traders use trading platforms to trade with derivatives like CFDs (contract for difference). Here, you buy or sell a contract based on whether you think the value will increase or decrease.
You’ll either make a profit or experience a loss relative to the commodity’s share price between the opening and closing trades.
Adding commodities to your portfolio
Adding commodities to a trading portfolio can offer several advantages:
Diversification: Including commodities can help spread risk and reduce portfolio volatility.
Inflation hedge: Commodities, especially precious metals like gold and silver, are often viewed as a hedge against inflation.
Profit potential: The volatile nature of commodities markets means there are opportunities to make a profit. If you can predict price movements accurately, you can benefit from substantial gains.
However, it’s essential to approach commodity trading with caution. You’ll need to have a strategy and be aware that predictions you make aren’t always going to be accurate. This is due to their volatility and the way these physical products can be affected by things like the weather and global events. There’s a risk that commodities can lead to significant losses if not managed carefully, so it’s important to keep this in mind. Will you add commodities to your portfolio?
© Copyright 2024 Antonia, All rights Reserved. Written For: Tidylife
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