How to Invest in High-End Products and Commodities
Commodities are tangible goods used in buying and selling that are interchangeable with similar goods. In addition, commodities can serve as inputs into the manufacturing supply chain to produce other products and services. The fundamental idea is that commodities are manufactured to meet specified quality standards, regardless of the producer. Some commodities include oil, natural gas, gold, grains, financial products, coffee, and timber.
As an investor, you can trade in the commodities market via derivatives (options, swaps, and futures) for hedging or speculating purposes. Learn how to include high-end commodities and products in your investment portfolio below.
1. Direct Investment
Like stocks, bonds and commodities remain popular investment vehicles. If you’re a commodity-hungry investor, you certainly have many choices. For one, you can practice direct investment in commodities of your choice. Direct investment requires you to purchase and store a commodity.
For example, if you want to invest in a product like Buffalo Jackson leather, the most straightforward approach will be purchasing the product and holding it until the prices rise. Then, if the price of the Buffalo Jackson item rises, you can sell your leather jacket or leather bag and make a substantial profit. Even though this method seems straightforward, there are still some technicalities to it. For starters, you need to determine which commodities are investment-worthy. In addition, you need to understand the selling process to use when the commodity appreciates.
2. Commodity ETFs
Many people don’t have direct exposure to essential commodities in a risk-free and cost-effective manner. Fortunately, commodity ETFs allow investors affordable access to the commodities markets. ETF is an acronym for Exchange Traded Funds, and these hedge funds are listed on stock exchanges.
Ideally, a commodity ETF focuses on either a single commodity or investments in futures contracts. However, commodity ETFs track the performance of a specific commodity index that comprises numerous single commodities through derivatives positions and physical storage.
The types of commodity ETFs include exchange-traded notes (ETNs), equity, physically-backed funds, and futures-based funds. With the help of commodity ETFs, investors have access to commodities like oil and natural gas, agricultural products, and precious metals. The good thing is that you can design your ideal commodity exposure to impact your risks and returns positively.
Alternatively, if you’d rather not invest directly in commodities like gold, you can invest in companies that work on that front. Alamos Gold in Turkey is just one example of a company that deals in valuable commodities. Their gold mining projects are instituted by Alamos Gold Inc. and they have a track record of delivering long term value to customers. You don’t have to buy ounces of gold to invest in Alamos, you can buy Alamos stock and still add the value of the company to your investment strategy.
3. Alternative Financing Solutions
If you have a little cash flow problem and can’t secure a traditional loan, you can opt for a private loan from a private lender. Alternative financing is a viable choice if you’d rather avoid traditional financing from a traditional bank. Investing in high-end commodities requires lots of capital, which is no easy feat due to the enormous financial implications. Fortunately, there are private money lenders with the means to bankroll your business venture.
For example, a real estate investor doesn’t need a great credit score to seek a private money loan from a private money lender, as their specified interest rate and loan term will be based on a physical asset (usually a real estate property) that they already own. The borrower can also approach a hard money lender to obtain a hard money loan. Beyond loans, these lenders can offer assistance in almost all aspects of the real estate investing business.
Before you decide to approach a private money lender, make sure you study the inner workings of the loan critically. You see, financing terms can be somewhat confusing, especially for someone starting new. However, the bottom line is that alternative funding is an effective method of financing investments.
4. Portfolio Diversification
Investing in commodities can serve as a hedge against inflation and is a great way to diversify your investments. Besides, commodities are negatively correlated with asset classes like stocks and bonds, making them a viable means of diversification. Any savvy investor knows that diversification is key to decreasing risk and maximizing returns.
Commodity prices are affected by supply, demand, interest rates, and exchange rates. In addition, bear in mind that investing in a single commodity tends to be more volatile and requires a large amount of capital. Therefore, market analysts encourage investors to buy a wide range of commodities and hold a proportion of their commodity portfolio as a hedge against inflation.
5. Understanding the Risks
Like all kinds of investments, commodity trading comes with risks and uncertainties. For one, producers in the mining and mineral, agricultural, and energy sectors are subject to price falls. Also, consumers of essential commodities like food and clothing are susceptible to rising prices due to increased production costs. Investors in the commodity market are open to price, quantity, cost, and regulatory risks. Therefore, you need to develop risk management strategies to mitigate and manage the risks that accompany commodity trading.
Before making any investment decision, be sure to conduct your market analysis and feasibility studies to understand the risks involved. For instance, to manage commodity price risk, you have the option of entering a forward or futures contract with the producer. Better still, you can consult an experienced broker to lay out the options for you.