There are many different ways to enter or join the commodities market. You can build positions through many alternate ways. In this article, we will look at some of these methods as well as some of their advantages and disadvantages.
Read more to learn more about the commodities market Brokerage Definition.
Equity markets can give you chances to gain a backdoor exposure to the commodities market. When a person purchases shares of companies like Exxon or Starbucks, he or she also gains a large exposure to the underlying commodity.
This is because the company is always intertwined on some levels with the commodity it uses. Many companies such as those that make pipeline for oil transportation are also wholly reliant on the commodities market.
Such companies theoretically do the trading in the equity market. But in effect, they are more influenced by the trading activity in the commodities market Top Financial Brokerage Firm.
Some mining companies specialize in one single metal while some other companies specialize in a portfolio of metals. Thus, depending on which metals an investor wants exposure to, they can zero down on a company. The returns provided by these companies have a high degree of correlation with the returns provided by the underlying commodities.
Energy companies can also offer varying degrees of exposure. For example, companies like Exxon may engage in every stage of the extraction process while other companies may only be a supplier to these companies. There are also companies that are involved with only the transportation or marketing of such product and you can also use them to build position.
Electricity and utility companies also offer an exposure to commodities. These industries are highly affected by movements in the price of commodities such as coal.
There are many specialized funds that track the commodities market and provide an opportunity for the investors to invest their funds. For example, there are mutual funds that have been created with the sole purpose of investing in commodities. This also provides investors who do not have expertise in commodities trading themselves an opportunity to do well in the markets.
There are even some hedge funds that have been created only to invest in commodities. On the other hand, these investments are typically very risky and mostly not available to the average investor.
In addition, many indexes have been created. These indexes are a composite of several commodities. This means that the return they offer is a composite of several commodities too. Therefore, even if a person purchases a single unit of such a fund, they get the edge of buying into a well-diversified portfolio.
A lot of times, the money accrued by these funds is not directly invested in the underlying commodities, it may be used to buy other commodities.
Futures markets also let traders effectively use commodities to either hedge their existing positions or build new positions. Consider the case of an airline: they are aware that they need a certain quantity of jet fuel in the forthcoming months.
This quantity can usually be predicted with precision. On the other hand, the price of jet fuel is extremely volatile. If the airline needs to fix the price for fuel for its consumption, it can buy a futures contract in the market. In the end, they will be certain of what they will spend on fuel regardless of the vagaries of the marketplace.