What is the commodity market?
Commodity investment is the buying and selling of different types of commodities like agricultural products and livestock (soft commodities), and metals and energy products (hard commodities). These products can be bought and sold in bulk.
The commodity market has been around for a very long time, the number of investors is still limited. However, this has changed over the past few years. This money market has become wildly popular and is often used by manufacturers and wholesale traders. Just like the stock market, there are several online platforms available that deal with investments in the commodity market.
How is the commodity market related to the stock market?
The prices in the commodity market often fluctuate depending on the demand and supply of the product and services. If the supply is in abundance, the price goes down, if the supply is less and demand is more, the price automatically increases.
The commodity market and the financial market have a negative correlation. For example, the rising prices in oil and gas have often been linked to lower prices in the stock market and high prices in the stock market would mean that oil prices have decreased. Similarly, during high inflation, the prices of commodities remain high and when inflation is lower, stocks and bonds tend to perform better.
Non-fuel commodity prices were 38% higher in April 2021 than the same month in 2020. That is the highest rate of growth since 1970. This shows that the world has entered into the mode of “supercycle” where there are going to be a lot of economic changes globally and commodities are going to increase.
Why should you consider investing in the commodity market?
The commodity market is considered a safe investment. Also, this money market holds great value under the economy of the country as well as those who make a living out of it. Here’s why you should consider investing in the commodity market –
- Better quality – The market is very strict about the quality of the commodity during the trade. This benefits the buyer and the seller.
- Price discovery – The market guarantees transparent ways to identify the original prices of the commodities. This ensures that the commodities are not sold at cheaper rates to middlemen.
- Risk management – The sellers of the commodities have various tools like futures and options for risk management and to deal with their losses.
- Safety – Trading in commodities can be considered a great way to diversify their portfolios. Investing in commodities can safeguard their capital if the stock market falls.
- Margin trading – There is always a leveraged margin when trading in commodities. Large transactions can be done with a little amount of cash in hand.
Stock markets give speedy returns while the commodity market is gradual. There are high returns possible in the latter as well but the investor should have an expert insight. One cannot predict the prices in this market that changes rapidly.
An individual must be well-versed with the economy of the country as well as international trade before they choose to invest in the commodity market because although it is safe, there may be some risks involved. To understand how to manage those risks, there are risk management courses available online, which will guide you thoroughly.