Why Commodities

Why Commodities?

First, there is the broad reason to own commodities, which is to reduce risk. Because the prices of commodities tend to be uncorrelated with the prices of other assets such as stocks and bonds, the overall volatility of a portfolio tends to be lower. And because most investors define risk as volatility, when it is lower there is less risk.

A good investor always allocates at least 5 to 10% of his/her portfolio into commodities (gold for example) as a means of diversification and also to hedge against currency and market risks. Investors who are underweight in commodities should start topping it up slowly. Even those without a position in commodities should act without haste.

Some examples of commonly traded commodities are energy products like oil and natural gas, metals like gold, copper and nickel, and agricultural products like sugar, coffee, and soybean.

Benefits of Trading in Commodities

Hedging

Whenever the rupee becomes less valuable, you need more money to buy commodity goods from different parts of the world. Especially during inflation, the prices of commodity goods go up as other investors sell off their stocks and bonds to invest in commodities. Therefore, you can be benefit from some commodities in your portfolio that act as a potential hedge against risks.

Diversification

Commodity prices are influenced by supply-demand dynamics, weather conditions, geopolitical tensions and natural disasters. Accordingly, commodities are an independent asset class, and can prove to be an effective means of diversification in one’s investment portfolio.

Protection against Inflation

When the economy is dipping, money becomes less valuable as inflation occurs. The prices for commodities usually go up during high inflation. Accordingly the price of raw materials also sees an upward trend. Therefore, a few commodities in your portfolio will help you benefit from this upswing.

Profitable Returns

Commodities are riskier form of investments with huge swings in prices. Companies either hit it right on a resource discovery or experience heavy losses. This opens up opportunities for you to make profits in the commodity market provided you plan your investments right.

No manipulation

Commodity markets are fully regulated by Forward Markets Commission (FMC) and are governed by international price movements which leaves little to no room for any rigging or price manipulation. Thus, proving as a safe bet for the everyday retail investor.

Trading on low margin

As a trader, you need to deposit a little amount of margin of the total value of contract, which is much lower considering other asset classes. Such a low margin allows you to take larger positions at a lesser capital.

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