An investment is an asset or item that is purchased with the hope that it will generate income or will appreciate in the future. In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or will be sold at a higher price for a profit.
Why invest in commodities
Commodities, whether they are related to food, energy or metals, are an important part of everyday life. Anyone who drives a car can become significantly impacted by high crude oil prices. Anyone who eats might feel the impact of a drought on the soybean supply. Similarly, commodities can be an important way to diversify a portfolio beyond traditional securities – either for the long term, or as a place to park cash during unusually volatile or bearish stock markets. (Commodities traditionally move in opposition to stocks.)
It used to be that the average investor did not invest in commodities because doing so required significant amounts of time, money and expertise. Today, though, there are a number of different routes to the commodity markets, and some of these routes make it easy for even non-professional traders to participate.
Basic economic principles of supply and demand typically drive the commodities markets: lower supply drives up demand, which equals higher prices, and vice versa. Major disruptions in supply, such as a widespread health scare among cattle, might lead to a spike in the generally stable and predictable demand for livestock, for example. On the demand side, global economic development and technological advances often have a less dramatic, but important effect on prices, too. Case in point: The emergence of China and India as significant manufacturing players has contributed to the declining availability of industrial metals, such as steel, for the rest of the world.
Types of Commodities
Today, tradable commodities fall into the following categories:
- Metals (including gold, silver, platinum, palladium and copper)
- Energy (including crude oil, heating oil, natural gas and gasoline)
- Agricultural (including corn, soybeans, wheat, rice, cocoa, coffee, cotton and sugar)
Benefits of investing in commodities
- Diversified Investment Portfolio
- Transparency in the process
- Profitable Returns
- Protection against Inflation
- Trading on lower margin
Volatile or bearish stock markets typically find scared investors scrambling to transfer money to precious metals such as gold, which has historically been viewed as a reliable, dependable metal with conveyable value. Precious metals can also be used as a hedge against high inflation or periods of currency devaluation.