If you wish to diversify from traditional investment products like bonds, shares and mutual funds, trading in commodities is an interesting idea. But where should you start and how should you invest?
Here are some things to keep in mind when you invest in commodities
1) How to start investing in commodities
There are a lot of different products you can choose. Gold, silver, crude oil, natural gas and agricultural products are some of the popular options. But where should you start? Well, it is always good to begin trading in a commodity you know. For example, if you work in the mining industry, you may have sufficient knowledge about metals. Similarly, if you work in the confectionery industry, you may be updated with regular changes in the price of sugar. Having a basic idea of a commodity can be a good starting point.
2) How to trade
In commodity trading, an investor decides to buy or sell a commodity at a pre-determined price on a specified date in the future. There are different ways to trade in commodities. You can purchase Exchange Traded Funds (ETFs). Some funds invest in a commodity or a specific sector. Others diversify and invest in many different sectors. If you are a novice investor, it is best to allocate your capital into different assets so that you can minimize your risk. You can also invest in stocks of companies related to commodities.
3) Manage risk
Metals, agricultural products and petroleum products are all clubbed under the title commodities. However, this does not mean they are all the same. Different commodities have different risks. Some of them have small price movements during a day while others show great volatility. Identify your risk appetite and invest accordingly. You don’t want to find out any unwanted surprises after investing.
4) Create a stop loss
Losing money in the financial markets is nothing new. Most investors make wrong investments from time to time. But those who create a stop loss can rebound from these losses. For example, would you rather lose Rs 10 or Rs 100? The answer is obvious, right. Trading in commodities can be a bit risky, especially if the commodity is volatile. By creating a stop loss, you can manage the risk and minimize your losses.
5) Be prepared
To gain success in the commodities market, you need to be prepared. Be updated on the latest events (nationally and globally) that influence commodity prices. Identify the factors which influence the change in prices of a commodity and take appropriate investment decisions based on these factors. Also, don’t forget to improve your trading strategies through research and analysis. This is very important in a commodities futures market.
The commodities market is influenced by many factors. Government policies, macroeconomic factors and global events are some of the key influencing factors. As an investor, it may not be possible to control all these different factors. However, you can control your own emotions. And this is a very important trait in commodities trading. In addition to the above points, remember not to let fear or greed influence your investment decisions. Do your research and invest confidently and over time, you can enjoy the fruits of your investments.
Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.