When it comes to investing, Nigerians and most Africans have zero knowledge or tolerance towards it. There are different ways where one can invest in the financial market apart from Stocks, Bonds and ETFs. In this article, I will explain 4 ways on how everyone can invest in commodities.
In our previous article, I explained what commodities are and every other basic knowledge one needs to know about commodities, I encourage you read it up before continuing read it here What Are Commodities And How Do They Work In The Financial Market.
Commodities are usually broken down by investors into two categories and they are:
- Hard Commodities
- Soft Commodities
Hard Commodities are those that are drilled or mine or that requires any of those methods in order to be discovered. Example are Energy commodities such as Natural Gas, Crude Oil, Metal commodities such as Gold, Silver and Platinum etc.
Soft Commodities are those that are grown or reared. Example is Agriculture Commodities such as Corn, Wheat, Cattle and Sugar etc.
Things to Consider Before Investing In Commodities
Similar to other financial market, there are pros and the cons about investing in commodities and I decided to make these things known before you test the river of investing in commodities with both feet and as such I believe you should consider and understand these things first.
Demand and Supply
A wide range of commodities are affected by demand and supply as it determine how the price move. Demand and supply determine whether it will go up or down or just simply range.
Take for example Natural Gas, in times of winter in most cold countries the global price of Natural Gas will increasing these are used to heat up homes and use as fuel in factories
Gold tend to increase in price in period of financial uncertainty as many people consider Gold as a reserve asset.
It is true that commodity are very volatile but this shouldn’t be a reason to stop you from investing. Even stocks, Bonds and other financial instruments fluctuate a lot especially in certain periods like during political election.
Gold tends to be extremely volatile in times of financial crisis and Crude oil in times of geo-political tension but on normal days commodities range in a good pattern.
High Capital Requirements
Unlike forex where you can start with a couple of hundred dollars, many believe that one need hundreds of thousands of dollar to be able to trade commodities. In reality, with a good knowledge of commodities and understanding of what moves the commodity market one can start with almost the same capital with forex.
Too Much Losses
Same with other markets and keep this at the back of your head that there are people who makes good and consistent income from commodities, but won’t go about showing it off the faces of other traders or going online and posting it on every online forum. Unlike losers who won’t apply a good money management rule and when they make a loss, they either go online to complain about their broker or there trading platform or about something else to complain about.
Note, there are other reasons that stop people from trading the commodity market apart from the ones I have just mentioned and if you find yourself inclined to any of the above reasons and many not mentioned it is time to break free from that chain and hop on to the moving train.
How do you invest in Commodities?
Unlike other markets, the commodity markets deals on goods that are tangible despite we are not going to take delivery of the goods.
Investing the Commodities Directly
This involves setting an account with a broker who render services related to commodities. Most brokers now offer commodities such as Gold, Oil to their clients but I would suggest you find a reputable broker that is regulated specialized in commodities.
You can find a good commodity such as Oil to either buy or sell (please make sure you do your analysis first before buying or selling) the motive here is for the commodity to either gain in value in case you are buying or loose in value in case you are selling and when you are comfortable with your profit you can close your open position.
Usually such broker might offer you other instruments or assets like stocks or currencies to trade, I wouldn’t encourage you should stick to just commodities and you would become better while improving your trading skills.
Remember you are investing, so just find a good entry and let it run, do not bother yourself with watching your trades as this can cause the desire to over trading which will spoil your plan of investing and your trading results.
Investing in Commodities Futures
Unlike the tradition mode of how commodity future works, investing in commodities futures has now been made easier as you can just speculate with the big players in the future market without physically owning the commodity.
Trading futures requires knowledge on how futures generally work and also a bit of capital requirements. The way they (commodity futures) are traded remain similar to that of trading through a broker.
Investing Commodities through Stocks
Just like the traditional method of trading various stocks with a trading plan, trading specific companies that deals directly on commodities is almost equivalent of investing in commodities as the profit, decision and day to day activities of the company will be based on the outcome of how the commodities react to price change.
Investing In Commodities through ETFs
Exchange Trade Funds are one of the ways to invest in commodities, you can read about Exchange Trade Funds in my article here. ETFs are becoming quite popular and are specializing in various financial markets.
There are ETFs such as SPDR Gold where you could buy units or shares and it looks similar to investing in the commodity itself.
Not everyone will have direct access to buy commodities stocks or commodities ETFs but at least a wide range of people reading this article can have access to brokers who either offer commodities as part of the services they offer or are able to trade it as futures, but do not forget trading futures requires one thing which is knowledge –you need to know when and how to trade.
I would not advise you to go into commodities because a member of your family is doing it or because your friend is making it big from commodities but rather to understand what influences the price and movement of each commodity you wish to invest in.
Remember, you are investing in it hoping to see profit in the future and not just trading it like most people do expecting to become a millionaire overnight.
Do not forget that losses are part of the plan and game and don’t get frustrated when one or two losses comes into your trading history, look at a higher time frame and you will be good to you.