If you are just starting out in investing, you are probably wondering exactly what commodities are, and how investing in commodities differs from investing in stocks. Unlike stocks, where you are buying a share in a company, commodities let you pre-pay to buy a certain amount of a certain product. Why would somebody do this? Because the price today may not be the price 6 months from now when the product is ready to be harvested and sold. To invest in commodity is basically to make a bet that the price is going to go up instead of down. If the price goes up, you may be able to sell that $10,000 worth of corn for $13,000, but if the price goes down it may only be worth $7,000.
The Advantage of Commodities
The real advantage of investing in commodities is twofold. The first advantage is that the risk and therefore the loss for something with a particularly volatile price can be spread out over a larger group of people. Suppose a farmer planted 300 acres of corn. He’ s already paid a certain price for that seed, and knows he needs to get a certain price for his crop in order to keep his farm afloat. He can sell the corn that he’s going to have in three months today as a commodity. It might go out in the equivalent of 10 acre holdings. So it takes 30 people investing in agricultural commodities to “purchase” all the corn. The farmer will be reasonably happy because he has enough money from his crop to meet his expenses. If the price of corn goes down each of the 30 investors will have lost some money, but each person will have to absorb only 3.3% of the total loss on the crop. Similarly, each investor can make a small gain (compared to the total increase) if the price goes up. The other advantage is that commodities usually move opposite of stock investments. So investing in commodities can help balance the risk of losing everything in a stock market crash
Investing in Commodities as an Individual
If investing in commodities sounds like a risky investment, that’s because it is. Investing in a single product is more akin to gambling than investing. While most brokers won’t let you invest in straight commodities until you prove you have money you can lose, there are other methods to use. You can invest in a commodities mutual fund or an Exchange Traded Fund, which will combine several different types of commodities into one. These tend to be more stable and affordable than regular commodities investing. Of course, you can’t invest unless you have money to spare, but it is easy to make extra money with all of the working from home jobs available on the Internet.