Commodity trading is a popular alternative to trading stocks and forex. It provides many huge benefits for those who dare try it and trade properly. However, there are also huge risks that come with the benefits. Check them out below.
The Ups
Serves as a Safe Haven
Even if many investors do not feel super confident about investing in commodities, assets and precious metals like gold, silver, and platinum remain one of the most popular safe haven assets in the financial markets.
They can offer solid protection especially during times of high inflation and periods of economic turbulence. Investing in them allows you to have some room for adjustments when tough times come.
Helps a lot with Diversification
To implement a good asset allocation plan, you have to have a well-diversified portfolio. And when it comes to diversification, commodities are a major component.
Investing in stocks and bonds is only the first step; you should also invest in raw materials. Doing so means you’re not going to lose all that you have if ever the capital markets crash.
In addition, having stocks, bonds, and commodities in a portfolio ensures better risk-adjusted returns and lower portfolio volatility, since the slumps in commodities would be offset by a rise in stocks or bonds.
Transparency
Commodity trading is a highly transparent process. The steps of the transactions result to fair price discovery, which is handled by large-scale participation. The massive size of participation also reflects different views and outlook of a wider section of people who are dealing with that commodity.
Highly Profitable Returns
It is a known fact that commodities are somewhat riskier than other investments, since it sports larger price swings, making them more highly volatile. Companies may hit the jackpot on a resource or totally lose it. You can take advantage of this and make profits as long as you have a solid plan for your investments.
Protects you Against Inflation
When the economy is slumping, the money weakens and becomes less valuable. And inflation occurs. The prices of commodities typically go up when inflation is high and prices of raw materials go high. Adding some commodities in your portfolio will help you get something out of this upswing.
The Downs
Trading Speed
There was a time when commodities were traded in pits. That means if you wanted your order to be executed, you needed to ask your broker to transmit your order to the pit trader. After executing, the pit trader will inform your broker who will then inform you. Because of this tedious process, risk of slippage is high.
Leverage
There are times when poor margin requirements encourage careless money management. That means you’d be taking more unnecessary risks. Bear in mind that leverage multiplies your chances of losses as well as your chances of winning.
High Risks
As mentioned, trading commodities is a highly risky business. And that’s a bit of an understatement. Most traders regard commodities trading as a game for experts.
When trading commodities, you will have to decide how much risks you want to take on. You can choose to trade carefully and risk only a couple hundred bucks for each trade. But that would also mean lower profits.
Comments are closed.