Do you want to make investments for your future? When you’re introduced to commodity buying for the first time, you will be faced with two options – hard or soft commodities. The former includes energy products and metals, whereas the latter includes those commodities that can be grown, such as wheat or rice.
Now, the best way to invest in the commodity market is to purchase commodities. In Australia, there are many commodity dealers from whom you can purchase. Eventually, it is up to you whether you’d want to sell the commodity back to the original seller or someone else.
Now, how do you go about purchasing these commodities? There are four different ways, and this guide will discuss each.
1. Futures Contracts
Future contracts are mainly used in cases where you agree to pay at a specified future time. It is a lot like making reservations at a restaurant. This commodity buying mainly works with crops such as wheat or corn.
You can make a deal with the farmer selling these when they plant the seeds, thereby managing financial risk. The common mode of purchasing physical commodities in Australia is the Contract for Differences or CFDs.
When you use CFDs, you’re actually betting on the commodity volatility instead of trading it.
2. Commodity Exchange Traded Funds (ETFs)
Using this mode of commodity buying, you can invest in several firms and companies. This helps in diversifying your portfolio, thereby reducing the risk involved.
If you’re new to commodity trading, then ETFs are the best option because they are a more accessible and simpler way to trade in the stock market. Plus, plenty of ETF options are available in Australia to choose from.
Remember that since an ETF works much like a stock, you must have a Demat account. Then, transfer funds into that account to buy the number of ETF units.
Note – Investing in commodities through ETFs does not give you ownership over that commodity.
3. Stocks and Shares
No, these are not your typical shares and stocks. A third way to purchase commodities is to purchase the stocks and shares of companies producing commodities.
Under this method of purchase, you can invest in a specific commodity that you wish to purchase. The process is simple – conduct thorough research on the type of commodity you wish to purchase. Then, shortlist different companies producing those commodities, assess their performance, and invest in your chosen company’s stocks or shares.
To buy commodities in this manner, you should be conversant with the Australian Stock market.
Are There Risks Involved in Buying Commodities?
Every form of investment carries with it some element of risk. But, the degree of that risk will vary depending on the commodity type. For instance – oil and natural gas are highly volatile commodities (so the risk involved will be higher).
On the other hand, commodities like food items can be considered comparatively stable because people still need to eat even during a recession. By and large, investing in commodities is a good idea because they account for two-thirds of Australia’s exports.
To excel in commodity buying, you must consider your trading goals and compare them with the current market condition. Ensure you choose a reliable broker for their trading guidance.
Create a diversified portfolio to make sufficient profits while minimising the risk involved. Knowledge is power, and nowhere is this truer than in the case of commodity trading!