The goods used in the production in other goods and are traded is a commodity. Commodity investing is basically trading in commodities. Some of the commodities commonly traded are grain, precious metals, electricity, oil, beef, and natural gas which are also traditional examples of commodities. Some new entrants like foreign currencies, bandwidth, and certain financial instruments are also part of today’s commodity market.
Investors in commodity investing usually trade both the long side and short side of commodities. Some traders employ a strategy called a “spread” that entails doing both. By buying one contract and selling a related one, these investors hope to profit on the price difference. The sale and purchase of commodities is usually carried out through futures contracts based on exchanges that standardize the quantity and minimum quality of the commodity being traded. In commodity market, there are 2 types of buyers: hedgers and speculators. Hedgers are individual or firms which purchase future contracts to insure against price rise. Speculators buy the future commodity contract in anticipation to make profit. Another way to gain exposure to commodities is through mutual funds that invest in commodity-related businesses.
There are various advantages of commodity investing. It can be a good tool to diversify the risk if someone investing in regular stock markets. Even a small rise in price will give very high returns or huge losses depending on the position of investor in the market.. Small price movements mean huge returns or losses.
Commodity trading is very risky and should only be attempted if you know what you are doing. General investors are advised to allocate only about 5 % of their portfolio to some profit making commodity such as gold. Commodities investing is very tempting due to its high return but at the same time, it is highly volatile form of investing with big losses and big gains.