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Commodities: A Switch from Stocks

Commodities: A Switch from Stocks

Everyone loves the thrill of a roller coaster ride. The slow climb to the top. The uncontrolled screaming and the rumble in your stomach as you zoom down to the bottom, only to start the slow ascent once again. There is a tickling sensation that travels up and down your spine as your body moves in a rhythm of its own as the roller coaster car slides along the metal railings. And then before you can even catch your breath, it’s all over.

Don’t you feel this way every time you purchase a stock on the NYSE? You’ve done your research, watched the company grow at a steady pace and finally took the plunge. The shares do well, start to climb. Oh my God. It’s so high. Should I sell it and get out? Will it keep going up? And then before you can make a decision, the price turns the other way. It starts to plunge. It’s too late to sell or recoup. The ride is over. Do you stick around for the next trip up to the top?

So you have given up stocks as a bad way to make your money grow. What’s next out there? Let’s talk about commodities. There’s nothing new in investing in commodities. Farmers and agriculturists have been ‘trading’ in commodities for centuries. Each time a bunch of corn husks were bartered for a bag of barley, those guys were trading commodities.

Corn and barley are still pretty popular commodities and investors make a nice profit on the fluctuations of these items. But for the novice commodity trader, beans and barley are not considered very sexy. It’s gold that rings the bell for many traders. Gold, silver, and other metals have taken first place in the commodities market.  Energy and foods are also popular.  In fact, the commodities markets are booming all over the world.

Today, you don’t even have to go directly to a commodities broker.  Commodities are sold as companies and are also packaged as part of a broader mutual fund or a commodity index fund, which reflects commodity indices. A commodity index is not at all like a stock index. It’s moderately easy to construct an index for a basket of stocks (focusing on multi-dollar companies, tech companies and so on); but experts disagree on how to represent the commodity universe, which includes everything from tea to crude oil.

Since prices of commodities are determined by supply and demand, as demand rises businesses look for ways to increase supply.  Because commodities are tangible, their prices will increase at a rate not much greater than inflation over the long term. The recent increase in the prices of many commodities may simply be a function of short-term speculation – similar to what took place in housing (another highly leveraged asset) before the roof caved in a few years back.

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One good reason to invest in commodities is that they are not linked with stocks and bonds. In fact, they often move in the opposite direction. When asset prices move in an unsynchronized manner, the returns for your total portfolio are more balanced. Commodities are a good alternative to stocks so check them out.

By Cina Coren

Cina Coren is a contributing editor to Daily Forex and a freelance writer for several financial publications.

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