New investors familiarizing themselves with the world of stocks and bonds have probably heard the term ‘commodities’ thrown around and wondered exactly what that covers. Commodities is used in reference to physical things that are traded, as opposed to stocks that only represent intangible value. Common examples of commodities include raw materials such as copper, gold and silver, as well as farming crops like grain, corn and soybeans. Experts will often suggest this sort of investing, because it is linked to the true value of a product. When you invest in the commodities market, you could buy stock or futures, index funds, mutual funds or exchange-traded funds. While commodities investment comes with a significant amount of risk, it also is fairly well protected against inflation. Here are five tips to help you along the path of commodities investing.
First of all, consider bringing on a professional commodities broker to invest on your behalf. Unless you have the time and inclination to make this your full-time job, you might be better off working with an acknowledged expert. Commodities investment is a tricky game, and if you get into something without a full understanding you could end up losing your shirt. If you are adamant about managing your money on your own, consider at least talking to a broker that a friend or associate uses, one that would be willing to give you a nudge in the right direction from time to time.
Right off the bat, you should decide whether to invest in options or futures. A commodities option gives you the chance to purchase the specific commodities. You can buy and sell based on quantity, and will not be locked into a specific turnaround date. You can also sell off your options to fellow investors. When you buy futures, you sign an agreement to purchase at a specific date and at a specific price. There will be a minimum deposit on the futures, meaning you will be able to control a much larger amount of commodities than you actually have to pay for. But if the value drops, you may get stuck covering that loss in a margin call.
Whichever direction you take, try to avoid products that have been problematic in the past. Look into how the commodities funds you are interested in are managed. Even large funds can be poorly organized, and if they run out of units you could get stuck. Keep an eye on the press, and any shakeups or legal issues. You’ll find many different funds that offer the same commodities, so do your due diligence to work with a fund you trust.
You’ll always want to coordinate your whole investment portfolio with your commodities investments. For example, if you are buying exchange-traded funds, there will be several tax issues that could seriously complicate your situation. If you tie in your commodities investments with a ROTH IRA or other tax-deferred product, you’ll significantly lower your tax exposure.
Finally, maintain true diversity in your commodities. Some funds are very specific, while others put together a wide range of commodities. Ask the fund to provide you with a weighted index that truly represents the content of their commodities fund. If the fund you are looking at cannot provide it, check out http://www.tradingacademy.com to see if anyone on its message boards can point you in the right direction. Just remember that you’re better off purchasing some mix of oil, cattle, gold, wheat and other commodities, instead of putting everything into something like natural gas, regardless of how good it looks in the moment.