Commodity trading is a form of investment that is high-risk and high-reward. If done correctly, this type of investment can help protect your portfolio against inflation and bear markets. The key to success in this type of trading is to understand the supply and demand dynamics of the market, as well as current and historical price trends. If you can limit your risk by purchasing contracts at low prices, you can reduce your exposure to the risk of loss.
Commodity markets are open most of the week, which makes it possible for you to set your own trading schedule. Additionally, commodities typically have little to no correlation with other traditional assets. In fact, commodity prices often go up during times when stock market and bond prices are declining. Ultimately, you can lower your portfolio risks by investing in commodities rather than stocks or bonds.
In addition to investing in commodities, you can also invest in firms related to the commodity you are interested in. For example, you can invest in stocks of companies that produce or process that commodity. For example, if oil prices rise, the value of oil firm shares will increase. Another option is commodity exchange-traded funds (ETFs), which pool the funds of many small investors. These funds purchase futures contracts and stock in many commodity firms. Commodity ETFs are inexpensive, liquid, and accessible.
Commodity futures contracts are legal contracts that require one party to purchase a specific quantity of commodities at a specified price in the future. These contracts can last several weeks, months, or even years. The futures prices are determined through a price discovery process. The contracts also specify quantities and delivery locations.