Learning to trade commodities

Learning to trade commodities

how to benefit from the mega trend in the commodities markets

The recent turmoil in the worlds equities markets (caused by the the subprime crisis) has prompted many investors to withdraw their funds from their regular equity stock positions. With interest rates (and subsequently bond coupons) at relatively low levels many investors have been left wondering where to put there money in order to firstly have it somewhere relatively safe, but also somewhere where it might gain value rather than losing value.

The commodities boom may not be over just yet

There seems little debate that the recent boom in the commodities markets has been caused by the huge growth in the Indian aand Chinese markets in recent years. Despite the prospects of a global slowdown happening these developing economies are likely to be far less affected than mature economies such as the US. As a result then it may be a fair assumption that the commodities boom may continue. The booming world population (especially in China and India) and inreasing scarecity of many of these non-renewable resources only backs up this assumption.

Indirect exposure through equities in commoditiy related companies

One approach to gaining commodities exposure is simply to just invest in stocks with a natura involvment in the commodities market such as an oil or mining company. It should be noted that this route means that any investment is more correlated to the regular equities markets than other methods as the company value will still be highly dependendat on factors affecting all non-commodities equities such as management styles, political factors, macro economic factors such as labour supply. In order to get an exposure less correlated to the equities markets investment in the underlying commodity is required.

Commodities related funds

A slightly more focussed approach and one easier for the less experianced investor is to get exposure to commodities through specialist funds such as Merrill Lynch's Gold and General or JP Morgans Natural Resources funds. These type of funds purely in commodity-related stocks such as mining firms or exploration companies. The benefit for the investor is that they are un by specialist managers with good knowledge of these fields.

More focussed exposure: Exchange Traded Funds (ETFs)

Commodities ETFs are one of the easiest ways for investors to gain exposures to the various commodities markets. The advantage of investing in ETFs is that you do not need to research individual commodities and are not restricted to buying or selling certain minimum contract sizes. Instead you just buy exposure to to an index in much the same way that a tracker funds attempts to replicate the performance of an index such as the FTSE or Dow Jones. ETFs can either track a basket of commodities or individual commodities. ETFs are traded in a way similar to equities however liquidity is often slightly lower so prices may be avalable from exchanges at the end of each day. ETFs provide investors with a commoditiy investment less correlated to the regular equities markets.

As with any investment, don't invest any of your hard earned money until you have fully researched the market, fund, equity or commoditiy you are going to invest in. Set your stop loss prices and continue to assess your investment over time.