Why investing in commodities is the smart choice

The whole idea behind including commodities in your portfolio is trying to diversify it. Unlike stocks or bonds, commodities do not rely mainly on Wall Street dynamics. What influences the way they work is the simple supply and demand mechanism, since every commodity has its own producers and consumers. Also unlike stocks, commodities are a tangible asset. The responsibility increases if you choose to actually own one, since it involves storage costs and regular maintenance.

You can either choose to own the actual commodity, or one of its derivatives: commodity stock, futures or ETFs.

  • Company stock may often be affected by exterior factors: let’s take crops, for instance. Major floods or droughts can cut off supply, therefore increasing stock prices. When supply decreases, price automatically inflates.
  • Commodity futures, on the other hand, involve your agreement to either buy or sell the commodity at a specific time in the future. This way, sellers make money from price decreases, while buyers profit from prices going up. The downside of this type of investment is that it usually required a large sum to begin with and that some stockbrokers choose not to get involved in future trading.
  • What about ETFs? These are actually exchange-traded funds, like SPDR Gold and iShares Silver. They give you a greater exposure over the entire commodities market, but tend to be more volatile than regular stock. This, however, can be used to your advantage, ensuring you get a bigger portion of the profits, on condition you speculate the market accordingly.

Trading, the smart way

The most popular way of making money off commodities is by speculating on price and stock volatility: when demand exceeds supply, it’s obvious that is an open opportunity for profits. Major tradeable commodities include metals, energy, livestock and meat as well as the agricultural type (corn, soybeans, wheat rice etc.). Precious metals are often used as a hedge that protects against high inflation or times of currency devaluation, and gold in particular is seen as a reliable metal with added value.

How to get started

The first step towards actually trading in commodities is creating a brokerage account. For every commodity there is a specific initial deposit amount, and the value of the contract will actually either increase or decrease the value of your account. When the contract declines in value, you might be subject to a margin call, asking you to fuel your account with a certain amount of money, to keep the position open.

Among the disadvantages, we mention the high volatility factor and the subsequent risks, especially if you are a trading beginner. Leverage can increase both loss and profit, so pay attention to high numbers. If you haven’t closed your position before market conditions shift, you are at risk of losing your initial deposit as well.

To sum up

All in all, commodities, much like every other market asset, entail risks and potential gains. It is up to you to carefully study market conditions and trade accordingly, but we hope our brief overview offered some insight into how commodities can be a potential source of profits.

Metals

SYMBOLDESCRIPTIONTRADING HOURS
(MT4 TIMES)
CONTRACT SIZELEVERAGEMINIMUM TRADE
(SIZE IN LOTS)
AVERAGE SPREAD
XAGUSDSILVER - US00:00-22:00, 23:00-24:005000 onces1,2000,100,10
XAUUSDGOLD - US00:00-22:00, 23:00-24:00100 onces1,2000,100,50

Energy Futures

SYMBOLDESCRIPTIONTRADING HOURS
(MT4 TIMES)
CONTRACT SIZELEVERAGEMINIMUM TRADE
(SIZE IN LOTS)
AVERAGE SPREAD
CLCrude Oil Futures (WTI)00:00-22:00, 23:00-24:001,0001,2000,100,08
NGASFuture Natural gas00:00-22:00, 23:00-24:001,0001,2000,100,02
BRNTBrent Crude Oil Future01:00-23:001,0001,2000,100,08

Soft Commodities

SYMBOLDESCRIPTIONTRADING HOURS
(MT4 TIMES)
CONTRACT SIZELEVERAGEMINIMUM TRADE
(SIZE IN LOTS)
AVERAGE SPREAD
COCOACocoa08:45-16:3010 Metric Tones1,500,1010,50
CORNFuture Corn01:00-13:45 14:30-19:1550 bushels1,500,101,25
SBEANSoybean Future01:00-13:45 14:30-19:1550 bushels1,500,101,25
WHEATWheat01:00-13:45 14:30-19:1550 bushels1,500,101,25
COFFEEFuture Coffee09:45-17:30375 lbs1,500,101,10
SUGAR
#11
Futures Sugar 1108:30-17:001120 lbs1,500,101,10