Investing in commodities is an easy business and within reach of all savers. Some of them allow investing in physical assets. However, it is not convenient to purchase them since it’s difficult to safeguard the asset. There are four investing methods in commodities.
Buying shares from specialized companies
The first option to invest in commodities is the purchase of shares in companies that specialize in the sector. These are oil companies, steel companies, and mining companies. The problem is that the quality of the management, the reserves, etc. dilute the commodity price variations.
It is not difficult to see an oil company fall with the price of crude rising. It is also possible for an oil company to derive most of its profits from refining or distributing petroleum products rather than exploring or extracting them.
The second option is the futures market, but the problem here is that not all commodities have a futures market. They hinder their entry to retail investors with very high barriers. For example, the futures contract on a mini barrel of crude requires a minimum of $10,000 on account to trade. Besides, it is not a market accessible to an inexperienced investor due to its technical characteristics. Futures contracts expire every month so that operations always have an expiration date. For all this, it is not advisable to invest in commodities through listed companies or sector indices of listed companies.
Contracts for difference
The next means for investing in commodities are contracts for difference or CFDs. With them, you invest in the futures market indirectly, which is more accessible. However, they are leveraged products, which implies that they carry a very high risk. The term leveraged signifies that with a capital of x, your operation is 4x, which means that a single error can take away all your invested capital, even what is not invested, like the house’s mortgage, reaching exaggerated extremes.
A final option is ETFs or exchange-traded funds. They allow the purchase of commodities through various options. The participant buys a share of a product that replicates the evolution of Brent oil prices in the futures market.
Their liquidity is as high, making them the best option for retail investors who want to test in a market as large and challenging as the commodity market.