Diversification is a word that every investor should have in their lexicon. This is the process of investing in multiple different types of assets so that you have a portfolio that will maximize your investments. This means looking at things like stocks and bonds as well as commodities. Commodities are a unique form of investment and come with a lot of different benefits and disadvantages.
Before you start to diversify your portfolio with commodities, though, you really need to understand what they are and which ones are the best for trading, according to our highly trained team at Capitalists Exploits. So let’s discuss this, shall we!
Commodities: What Are They? And Types
Commodities are physical assets that have immense worth in regard to everyday life. These are the raw materials that are utilized to create things we use every day as well as consume to sustain our lives. Things like metal, agricultural goods, and fuels are all commodities. These commodities, though, are lumped into two categories, and we’re going to take a look at each of those to understand which commodities fall into which category.
- Hard Commodities – This category has to do with mined goods. Typically, that means they’re going to be harder substances, but a few of them break this rule. This category includes gold and silver, as well as oil. So as you can see, there are soft materials, but they are lumped into the hard commodities bracket because they are hard to find.
- Soft Commodities – On the other hand, soft commodities are all tied to agricultural products. This will include livestock as well as things like wheat and cotton.
Who Trades Commodities?
Though individual investors definitely trade in commodities, a couple of categories stand out when it comes to participants in that market. Below we’re going to take a look at each of the different types of participants so that you have a better understanding of who trades commodities.
Hedgers are more commercial traders than anything else. They tend to look for market risks and volatility to help prevent them from investing in a commodity that has a potential price fluctuation that could cause losses.
This type of market participant looks to buy and sell these commodities to gain profit differentially across a wide range of markets.
Within this category, there are two different types, both a large and a small speculator. Either way, these are traders who look to future prices and utilize them to help build their wealth.
Best Commodities for Trading
With all that knowledge now available to you, we can begin looking at which commodities are actually best for trading. Though there are many different options, there are a couple that really maintains their value and offer investors a higher return on their money.
So here are three of the best commodities that are good investments when it comes to trading.
There are a lot of different ways that you can invest in commodities, but when it comes to oil, you really need to understand the prices and these methods very well. Crude oil is a great commodity to invest in because it is utilized in a wide range of things, not just gas. Because of the demand for this commodity and the lower amount of production, you will find that the price tends to rise quite dramatically. Many factors can affect the price of crude oil, including politics and growing economies.
Though there are a lot of benefits to investing in crude oil, it is one of the more complicated commodities to do so in. You have to really look into purchasing this commodity through futures which might mean you have to put more money in at the beginning. Perhaps the easier option would be to invest in crude oil companies; that way, it relieves some of the stress off of your shoulders.
There is a lot of growth in gold, as it is used in a lot of technology as well as in jewelry and banking. That means that this precious metal has a lot of global use and it’s a pretty safe investment when it comes to commodities. The increased demand for this commodity helps elevate the value, and that, coupled with the fact that it is used as a standard in monetary reserves, means that it is not going anywhere anytime soon.
Unlike crude oil, this commodity has one more option when it comes to investing in it: it is an actual physical possession. You can purchase coins or bars as well as jewelry crafted in gold and keep this in a safe place as an investment. But along with this, you can do futures contracts as well as stocks and ETFs. These are all viable options when it comes to investing in gold. Just research the options and find the one that is the best fit for your portfolio.
Gold, of course, is a metal that falls into the commodities area underneath the precious metals market. These are metals used in industrial and commercial methods such as construction and manufacturing. Included in these are minerals like aluminum and copper, and these are relatively cheaper metals but have a wide demand globally. There are plenty of sources for these metals, so to buy into these commodities, you’re going to have a lower entry price. Even though they are cheap to purchase, they have a high return and value because of this global demand.
Because there are so many of them, and their prices tend to be lower to purchase, many people opt for ETFs as opposed to utilizing commodity futures or physical ownership. It’s much more lucrative to own commodity stocks in a steel company than it is to actually own commodity futures of the steel itself.
Commodity Trading Strategies
Understanding which commodities to trade in is really important, but you also need to have a firm grip on strategies when it comes to a return on your investment. So here are four tips and strategies that our team of experts suggests you consider:
- Niche Down – Diversification is great in your portfolio, but you might want to opt to be a little more restrictive when it comes to what commodities you’re trading. Most experts will suggest you choose a single commodity and focus on that market. By doing this, you’ll be able to really dive deep into the market itself and get to know everything about it so that you can make an educated decision when it comes to purchasing and trading. Of course, you can start by trying your hand in a few different ones to see which market works for you, but in the end, you need to niche down into a specific market so that you can yield the best returns.
- 200-day MA – For those who want to dive deep into the prediction of commodity trading levels, you should look at utilizing a 200-day moving average scale. If you have a 200-day period where the commodity is consistently moving primarily in favor of profit, then you can rest assured that that commodity is most likely going to be a good option to invest in. (Though that is not always the case, so be careful.)
- Cross Hedging – This is a strategy you can utilize to buy and sell positive commodities. This is a little bit more of an advanced strategy, but if you can master it, you may find yourself with quite a profitable portfolio.
- Trends – Maybe one of the most common strategies is trend following. If you look at the trends of the commodity, and they tend to be in favor of the investor, then this is a great option for investment. Most of the prices for commodities are part of supply and demand, which affects the trend.
In the end, the choice of which commodity to invest your money in is really up to you. There are those that are more lucrative than others, but you have to decide what is right for you. Above, we’ve given you some strategies and tips on the best options, and we hope that that has helped you figure out where to put your money.
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