Key factors to consider before investing in commodities

Key factors to consider before investing in commodities

Can you imagine life without food, clothes or furniture? It’s a big no-no, right? Yes, we feel you. Commodities consist of all the items that we buy or sell in the market in order to survive. It is not the money that we require but the commodities that we need to lead our lives. That’s why investing in commodities is one of the major sectors of finance due to its limitless opportunities. Though this economic market can be a bit complex and less liquid than other trading markets, it is still popular due to increasing global demand.

But before we explore the investment sector, here are some basic characteristics of the commodity market for you to ponder.

  • The market is basically sorted into four major sectors i.e. agriculture, livestock, metal and energy.
  • It can often be considered as a risky investment due to several natural and man-made factors.
  • Commodity trading can be done through a number of options like future contracts, EFTs etc.

Commodity trading is the oldest form of investment that has traversed a long road of evolution over the centuries. In ancient times, way before money was introduced, people used to trade their produced commodity with other commodities they needed. For example, a farmer used to trade paddy for clothes from a weaver. 

With the passage of time and due to the rise of several business ethics, the complex trading system of commodities has been established.

Commodity trading facilitates its investors with a lot of options to choose from. But that doesn’t mean you will be swayed by seeing these many options. You have to be tactful to choose the right commodity to put your investment. You first need to take into account your asset and the condition of the local market where you live before investing in commodities in this market. Also, analyze the demand for the commodity you are willing to invest upon. Investing in winter clothes in Middle Eastern countries is definitely not a good idea, right?

Here are some things that you should take into account before investing in commodities.

1.Supply and demand

One thing you should always keep in mind that the commodity market is always volatile. The value of a commodity fluctuates based on its supply and demand. It is nearly impossible to predict the commodity market as fluctuations may occur at any moment. Go to the site go to url and learn more about the support and resistance lines or zones at Saxo.

2. Sensitive to natural factors

The main reason behind the value going up and down can be both natural and man-made. For example, natural disasters, population, economy etc. since the commodities are mainly used in day-to-day life, their demand also changes based on the amount of supply. If there’s a shortage of any commodity, there may be a worldwide rise in demand for that product, making the price shoot up.

3. The leverage is high

This investment sector is also controlled by brokers similarly to other markets and many investors take leverage provided by the brokers for their investments. The leverage capital is many times higher than the investor’s owned capital. Since the market is very volatile and unpredictable, it is not rare to lose. So, investors may end up owing more money to the brokers than they can repay, without having once made a single profit. So, it is wise to invest only an amount you can afford to lose.

4. Do your ‘paperwork’

You don’t get to invest in this sector with the minimum amount. Before you start investing, you need to sign up with a broker who will ask for information like your trading experience, assets, whether you are eligible or not etc. the broker is basically trying to find out if it’s profitable to work with you and if they are satisfied with your submitted paperwork, they will give you the green light to open an investment account with them.

When you start investing in this market, you might face lots of ups and downs. But never be discouraged by them because if you enjoy investing and understand how it works, you will definitely make some money in the end.