The term commodity is not common, and some people may never have heard of it. However, understanding commodity investing can be a straightforward and robust addition to a trader’s investment portfolio.
Let us discuss how to invest in commodities.
Understanding Commodity Trading
Commodity trading has been in existence since the ancient times before the inception of bonds and stocks. In the past, it was a crucial business connecting different people and cultures. Today, commodities remain a popular investment instrument. Investors interested in venturing into the commodity market can do so in various ways. Let us discuss these methods below.
Investing in Commodities
Commodity investing differs from trading other investment options. One of the biggest challenges traders in Singapore face is that commodities are physical goods. There are four main ways through which traders can invest in commodities, as seen below.
- Directly investing in the commodity
- Purchasing shares of stock from companies that generate commodities
- Investing through commodity futures contracts
- Purchasing exchange-traded funds shares that deal with commodities
To invest directly in an actual commodity, you should establish where to find and store it. When you want to dispose of the commodity, you should search for a buyer and handle the delivery logistics. When it comes to commodities like precious metals, finding an online or local-based dealer can be easy.
With barrels of crude oil or bags of corn, making a direct investment in the goods can be challenging. Further, it requires more effort than some investors are ready to offer. Commodity futures contracts provide direct exposure to fluctuations in commodity prices.
Some exchange-traded funds trigger commodity exposure. As a result, traders in Singapore interested in remaining in the stock market can focus on the producers of a specific commodity.
When should you Invest in Commodities Directly?
Having a physical commodity saves you from intermediaries. Some of the best commodities that traders in Singapore can directly invest in are those that feature complex logistics. Gold can be a proper example since Singapore traders can make a significant gold investment without struggling to store or transport it.
Dealers sell gold bars or coins to investors, and they also purchase the goods back once the investor is ready to dispose of them. If you are looking for local dealers, you can do so through internet searches or word of mouth.
Remember, some local dealers are rated by regulatory bodies in Singapore for trustworthiness and reliability. To find online only dealers, search through the internet. Often, you will find testimonials and reviews on a dealer’s platform that will help you establish whether they are reliable and trustworthy.
What is the Downside of Owning a Commodity Directly?
In this case, transaction costs are usually high. For example, a dealer may charge a 2% or more markup in selling but offer a buying price that is below the market value. As a result, direct ownership is ideal for commodities that you look forward to holding for longer than a few days or even months. This way, you can lower total transaction costs by creating fewer trades.
How do Commodity Futures Contracts Operate?
Futures contracts give traders in Singapore another option to direct commodity ownership. These contracts trade on unique futures exchanges. They are contracts to purchase or sell a specific amount of a certain commodity at a particular time and price in the future.
Before you can trade commodity futures contracts, you should establish whether your Singapore stockbroker has futures trading options. In futures contracts, when commodity prices increase, the potential buyer receives an equivalent rise in the contract value. The seller, on the other hand, suffers a loss.
Again, if the prices reduce, the seller makes profits while the buyer makes a loss. Futures contracts are not ideal for many investors. However, they are perfect for bigger firms in that deal in various commodities.
You do not have to own a big warehouse before investing in commodities. Apart from giving you high returns, commodities can protect traders in Singapore against high inflation periods.
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