There are various forms of investments. Investors now have various options to invest their funds in. These are broadly categorized into:
- Preferred stock
- Derivatives (Options and futures)
- Mutual Funds
- Real Estate
Out of these categories commodities are the most unique type of investment that investor can invest in. Commodity investment means investing in the real commodity like natural gas, precious metals, grains, livestock, steel, copper, iron etc.
Commodity brokers are the brokers that execute the trade that is requested by the commodity investor at the best price possible. Commodity investing also includes dealing in future and options. High Leverage Commodity brokers provide MIS (Margin Intraday Squareoff). Commodity investing is subject to various kinds of risk like credit risk, margin risk. There are various commodity brokers in India. But which one to select depends on certain factors. These are:
- How much leverage the broker is ready to give? Some brokers give up to 20 times leverage while some up to 60 times.
- How much brokerage the broker charges for commodity trading? Choose the one that offers lower brokerage.
- Don’t only depend upon the brokerage but also check out the technical efficiency of the broker. The more efficient the broker is the more reasonable price the investor will get.
Why to invest in commodities? This question is usually asked by the investor. The answer is that commodities offer various advantages to the investor:
- Diversification: Usually the market of commodities is different than equities. So if there is a temporary downturn in equities that downturn can be offset by investing in commodities.
- Effect of inflation: Due to inflation there is a negative effect on the stocks and bonds but commodity prices increases during inflation.
- Less Correlation: As said earlier commodities have lower correlation with other asset classes so it is easy to compensate the losses.
- Reduces the overall Portfolio risk; since commodities have less correlation with other asset classes the overall risk of the portfolio gets reduced due to diversification of the portfolio.
Commodity traders place the order of the investor to invest in futures and options. There are various future contracts that happen in the commodity market. Futures contract means that the investor locks in a price today for a commodity and promises it to purchase after the timeline of the contract passes. If the investor thinks that the price of the commodity will increase in future than he/ she will enter into the futures contract to buy that particular commodity and lock in a price today. For example the price of the commodity locked in today is Rs.1000 and the investor expects the price will increase to Rs.1500 after two months. So he/ she enter into the contract to buy that commodity at the locked in price. If the investor prediction turns right then he can buy the commodity after two months whose market price is Rs.1500 but the investor can buy that for Rs.1000 only. Ultimately he earns profit.
Commodity investing is really good for having an alternative option and can help you earn great amount of money if your prediction is right. So choose the right alternatives for your portfolio management.