Commodity futures Investing : A Complete Guide for Beginners

It is essential to try different financial instruments, besides the traditional ones. You can achieve portfolio diversification by investing in different instruments. Currencies, shares, bonds, derivatives, and many other financial instruments are available in different markets.

Commodities are one such instrument in the market, mainly used for hedging. Continue reading to understand the commodity futures investing scenario in detail.

Topics Covered:

• What are Commodity Futures?
• How to Invest in Commodities?
• In a Nutshell

What are Commodity Futures?

Commodity futures are contracts that obligate the buyer to purchase and the seller to deliver a specific quantity and quality of a commodity at a predetermined price on a future date.

These can be agricultural like coffee, sugar, and grains. Similarly, you can invest in metals or energy commodities. Commodities like uranium, iron ore, and bauxite are categorised as minerals. These can be sold or bought in physical markets or through financial contracts. Commodity futures investing involves buying or selling raw materials or goods on a future date at a predetermined price. Besides hedging, investing in commodity futures can help with portfolio diversification, price speculation, and multifold returns.

How to Invest in Commodities?

Now that you have understood the meaning of commodity, let us discuss how to start investing. The first and basic method of investing is to have physical ownership. You can visit a physical market where they are being sold. You can also connect with a dealer for the supply. You can purchase and ensure physical delivery. After that, investors try to find buyers. They sell at a better rate to obtain profits. However, issues might arise when there is a shortage of buyers for any particular one.

Physical ownership comes with many other challenges. The biggest challenge is to store and ensure safety. For instance, grains can be destroyed by rodents and insects. For the same rationale, investors must incur costs for the safe storage. These hassles can be removed with the help of investing practices. It is where you leverage the power of online trading to benefit from the price movements.

Another way is by trading commodities . Futures are financial contracts whose value is based on underlying assets, including them. These financial contracts can remove the need for physical ownership. You can only place your money in the price movement with a futures contract. A futures contract allows you to purchase or sell on a future date at a predetermined price. Also, the quantity is predetermined for a futures contract. Since these futures contracts are settled in cash, it removes the need for physical ownership.

It is crucial to note that investing, especially in commodity futures investing, comes with a risk of obligation. When a futures contract expires, you are obligated to buy or sell at the strike price. The obligation might be a hassle when the returns are not as expected. Investors can choose option contracts to solve the issue of obligation. Options contracts based on them are similar to futures, except for the obligation part. You aren’t obligated to buy or sell at the strike price on the expiration date with an options contract.

Additionally Read: Understanding Demat Account

You can find futures and options based on them in open markets. Stock exchanges can also offer you access to futures and options based on different ones. You can open a new trading account with the help of a reputed stockbroker to start investing. You don’t have to indulge in physical delivery or ownership with the help of a trading account. A trading or brokerage account will help browse financial contracts based on different ones.

Besides investing in F&O,  there is an alternate way. You can invest with the help of associated individual securities or instruments. For instance, you can directly invest in shares of companies involved in the procurement, production, or supply. You can also invest in shares of companies that use particular for their operations. For instance, investors interested in lithium often invest in companies producing electric cars or batteries. These companies might offer much-needed exposure to investors interested in the growth. Get complete information about the Futures and options in the stock market

Several collective investment schemes include different schemes in their portfolios. For instance, you can find mutual fund schemes that invest in different assets like gold, silver, grains, and coffee. You can purchase units of a mutual fund scheme that invests a part of its money in the assets you like. Similarly, Exchange Traded Funds (ETFs) can offer access to diverse assets. It is crucial to note that you invest indirectly through collective investment schemes and derivatives. Since some might not be interested in the physical delivery, these indirect investments are perfect. You can invest in the price movement without worrying about storage or physical safety. Ready to explore these investment opportunities? Open demat account to begin your journey into collective investment schemes and derivatives trading seamlessly.

Get all information about How to Choose Mutual Fund with High Returns

In a Nutshell

Commodity futures investing is crucial for investors to hedge their portfolios against rising prices. Investors can rely on futures and options to speculate on the price movement of different commodities. 

Beginners in the market must be aware of commodities, derivatives, and other financial instruments. It can allow them to invest in different instruments and achieve portfolio diversification goals. Start investing in commodities now!