October 3, 2022
Image default
Finance

Why Should You Invest in Commodities?

Investing in commodities can offer unique opportunities but carries more risks than conventional assets like bonds and stocks. Hence, handling such trade requires specialized knowledge of Commodity Trading Brokers who have adequate market knowledge and can protect client interests.

There are multiple ways of investing in commodities, like purchasing physical raw commodities or investing through exchange-traded products. While this form of investment is quite complex, it can help you gain exposure to the market and diversify your asset portfolio.

Below are some reasons why investing in commodities can be a good business decision and help boost your assets’ long-term performance.

Diversification

Commodities diversify an investment portfolio. So, investing in raw materials alongside bonds and stocks is always better.

When the commodity market is compared against the bond or stock market, the benefit you get is inverse returns.

Hence, investing in commodities can help you gain better ROI even in a stock market downturn and compensate for negative or decreased capital sector returns.

Better returns

Prices of individual commodities fluctuate due to changes in supply and demand, inflation, exchange rates, and the economy’s health. Moreover, increased demand for several global infrastructure projects has recently influenced commodity prices. Therefore, a rise in commodity prices can positively impact company stocks in related industries. So, you can potentially have high returns with the right investment decisions.

Hedge against inflation

Inflation can fluctuate the values of bonds and stock values resulting in hiked prices for commodities. With Commodity Trading Brokers, you can experience a strong performance of commodities even during high inflation.

For example, inflation may increase the price of gold which might benefit investors from the increased worth of the corpus investment. Further, demand for other commodities may climb up or remain stable, but the price graph represents a linear growth indicating the elimination of unsystematic oscillations. Therefore, commodities can be rewarding if you’re considering a long-term investment.

Trading on margin

Commodity brokers charge a lesser margin when compared to bond or stock market brokers. Speculators and hedgers can profit from the transaction by trading on borrowed funds. On the other hand, a commodity trader taking physical delivery gains from bulk orders and has the prospect of later reimbursements profiting from such scenarios.

Transparent Process

When you invest in commodities, you optimize the benefits of a transparent trading process. Unlike the outdated system of the past, commodity trades are made on electronic trading platforms accessible to market participants.

The trading platform enables fair price discovery supported by broad-scale participation without any intervention of the seller or buyer. Also, the determination of price driven by demand and supply eliminates the risks of manipulation.

Price discovery occurs when the quantity and price quoted by the buyer and seller match perfectly. However, during the trade, the seller and buyer remain anonymous, enabling transparent price discovery.

High leverage

Commodity derivatives provide a high degree of leverage. You can control a big position by paying just 5 or 10 percent of the contract value as an upfront margin.

Moreover, any insignificant price movement may result in exponential gains. This way, you can create chances of humongous returns using leverage during trading.

The minimum margins of commodity futures are much lower than stocks. For example, you may need to place 23 percent of total trade value as the initial margin for wheat futures.

You must turn to commodities during high inflation to safeguard your purchasing power. Also, you need to strive to provide downside protection by diversifying your asset class. So, when trading in commodities, do it responsibly to fulfill your investment objectives and keep your funds secure.