For centuries, when it came to trading, there were some core commodities that played a part in the whole economy. Those commodities are the same today as they were centuries ago; though they may be traded in different ways and have a more global outlet, they are still viable options when it comes to investing.
These commodities are things like metals, fuels, and even livestock, and they are a central part if you’re looking to diversify your portfolio. For those who are looking into doing some commodity trading, there might be a lot of questions that you need to have answered. There are tons of resources online as well as high-quality financial management consultants available to you.
You can reach out to teams like Capitalist Exploits, but before you do that, we’re going to go over some of the basics so you have a good base knowledge before beginning your dive into trading commodities. So let’s take a look at how much money is required for successful commodity trading so you can get started as soon as possible.
Commodities: What Are They? And What Is Commodity Trading?
The easiest way to understand what commodities are is to understand that they are products that are used to create other goods. In other words, they are raw materials. This can include agricultural products, metals, and fossil fuels that are natural resources that companies and people utilize in their everyday life.
Commodities are physical goods that are traded and sold in markets separate from the stocks and bonds that you may already have in your portfolio. Though there is a long list of different types of commodities, we have grouped them into three categories thanks to the team of experienced investment management consultants at Capitalist Exploits:
- Fuels/Energy – This includes everything from natural gas and oil all the way to renewable energy like wind and solar power.
- Metals – When looking at metals, you’re looking at precious metals like gold and silver. Along with the more precious metals are also the ones used in industrial terms, such as iron and copper.
- Agriculture/Livestock – Livestock and agriculture cover everything from edible goods and those utilized in the manufacturing of clothes and other useful things. Lumped into agriculture is also livestock which, as the name would suggest, includes animals like cows and pigs.
When it comes to trading this type of asset, it is all done based on the price of the physical commodity you’re looking to purchase. Typically this is done in futures contracts, but there are many other ways that you can invest in commodities, and we’re going to take a look at a few of those next.
Ways to Trade Commodities
There is a wide range of different methods that you can utilize to trade commodities. But one of the key things to remember is that you have to stay up to date on everything concerning the chosen commodities you are looking to invest in. Understanding that, we can now look into the different ways to trade commodities.
The most popular way to trade commodities is to work with futures contracts. This is a contract you buy and sell that is basically an agreement between you and another investor that is solely created on the future commodity price of that particular asset is predicted to be.
With this type of purchase, you will need to set up a brokerage account that is designed for this type of trading. Along with this, there will be extra fees that you will have to pay to the Futures Trading Commission whenever you open or close a transaction.
Much like opening up a store where you have no physical inventory but selling things online through a wholesaler, futures contracts mean you never have a physical commodity to take care of. There are some that choose to invest in physical commodities, particularly precious metals like gold or even jewelry. By being able to touch and feel, you get a better understanding of how much that commodity is worth.
Another route you can take is to purchase commodities from a company that deals in them. This would be something like purchasing stocks for an oil company or drilling company. Of course, these investments will follow the markets that you would utilize when you purchase commodities future, but there are fewer risks as you are not specifically tied to the commodity.
When choosing this option, you need to research the company itself to make sure that it is a reliable company and has a good internal structure when it comes to its management.
ETFs, ETNs & Mutual Funds
Exchange-traded funds, exchange-traded notes, and mutual funds are other options that you can utilize to invest in commodities and trade them. This is one way you can use to trade in commodities that offer a lower price of entry because you are working together with other investors to purchase a large portion of a certain commodity.
Most of these are done through professional investment management firms, which also takes the trading process’s management out of your hands.
Commodity Pools/Managed Futures
If you want to go a more private way, you can utilize commodity pools and manage futures. These are sort of like mutual funds but not traded in a public manner. That means you have to get okayed to buy into the fund. These can be a little more challenging to understand than the other methods, and there’s more of a cost when it comes to managing the process.
How Much Money Is Required for Commodity Trading?
With a basic understanding of your options when it comes to trading commodities and what type of assets you’ll be dealing with, you’re probably wondering how much money you actually need for commodity trading. This really depends on you and how you want to utilize your trading in your portfolio. A good rule of thumb is to make sure that you have enough money saved up that you can live comfortably for a year.
Along with this, you’re going to need a commodity account with enough money in it to help build your portfolio for that year and every year to come. Most financial consultants will suggest you look to make a 20% return every year. So that basically means if you’re looking to make about $50,000 a year, you’re going to need $250,000 in your commodity account to start with.
So as you can see, there are many different types of commodities you can look to invest in, and each has its benefits and disadvantages. Along with that, there are a plethora of options when it comes to ways to trade as well as strategies to utilize. It might seem very overwhelming and because everything is in a constant ebb and flow, staying up to date on everything is crucial
Of course, this can be done in a lot of different ways, including checking out Insider Weekly, a newsletter we offer to investors. Understanding the world of commodities can be challenging, but we hope that with the information we’ve given you above, we’ve helped you start your journey and the fast-paced and exciting world of commodity trading.