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How to invest in commodities
When you mention trading commodities, most people will get a picture of chaotic trading floors with hundreds of people yelling and giving signals to buy and sell. This picture actually may not be far off. The trading floor is one way that, an ever growing list of, commodities are traded. Many people think that commodities markets are too complicated for the average, or small time, trader. There reminded of the story of that one guy who struck it big, and the other ten who lost their shirts. This isn’t really a true picture however.
Commodities offer a hedge of sorts against inflation. When inflation unexpectedly rises commodities, such as food, oil, or energy tend to follow. With a properly diversified investment portfolio, commodity futures should make up at least a portion of that portfolio. What other investment vehicle can boast actually taking advantage of inflation?
Step 1
Understand Commodities
Although the idea of trading floors and frantic hand signals is true at least in part; most often commodities are traded as futures or options. There are a number of ways that the average investor can take advantage of futures trading. Like most investments there is a level of risk involved, but as much as there is risk there is also ways to limit that risk.
Step 2 (option #1)
Using a Managed account
One of the easiest ways to trade commodities is through a managed account. When you trade with a managed account you really don’t trade at all. Instead you sign authority over to a professional who trades your money for you. With a little research about the broker’s history with their managed account, this can be a very good way to invest in commodities. You will find some managed accounts take bigger risks than others, but for the most part a well managed account can provide big profits in the longer term.
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Step 3 (option #2)
Other types of trading
Other lower risk types of trading include commodity pools, or mutual funds that trade in commodity markets. Using these types of trading accounts limit your risk, but also limit your reward.
Step 4 (option #3)
Self Trading
If you’re more of a risk taker, self trading may be the way to go. Trading in futures your self can be very rewarding, and if you take your time you can still limit your risk to a degree. To trade yourself you need to open an individual trading account through a futures commission merchant, or through an introducing broker. Today most trades are actually placed online with software provided to you by your broker.
Trading on your own is usually done with a margin account; that is, with the use of leverage. Leverage allows a small amount of your money to control a large amount of product. This is how you can get rich trading commodities (it’s also how you can lose your money quickly)
Step 5
Learn before Trading
If commodities’ trading is something you are interested in, it can be a very rewarding endeavour. Many people have quit their day jobs after getting good at trading commodities, and make better livings with less time invested. The difference between the few that make money, and those that don’t, isn’t luck as some would suggest. The people who make it big in commodities markets – as with most investment vehicles actually – are the ones who take the time to learn before trading. Take the time to learn everything you can about futures trading. Learn how to read the charts, learn what moves the markets, and don’t rush in to real trades until you have a solid education in what you are doing with your money. Many brokers offer online practice accounts so that you can try you hand at trading before putting you money on the line. If you take advantage of tools, and take the time to learn, your future in trading could be an extremely profitable one.
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