- Opportunities for Higher Returns
The main difference of commodities from other trading options (e.g. stocks or bonds) is that they are tangible assets, which means a different response to changing global markets. In general, commodities are usually negatively correlated with returns of stocks and bonds, and positively correlated with inflation rates.
An important benchmark for the commodity futures market is the Dow Jones AIG Commodity Index, which is composed of futures contracts on 19 different commodities. Interestingly, from the beginning of 2001 to the end of 2011 the AIG Index considerably outperformed the S&P 500 by returning 6.38% compared to 1.71%.
- Diversification Possibilities
An old saying says: „Don’t put all your eggs in one basket”. In the world of finances it is called diversification, a thought-out way to limit the percentage of your investments into any related group of assets. As the inflationary pressure increases and dollar becomes less and less reliable, the principle of diversification makes more sense than ever before.The good thing about commodity markets is that they are not directly interrelated with real estate, stocks or bonds. Crude oil, copper, corn, soybeans, cattle and many other raw materials are used around the globe by practically everyone, so it would be a shame not profit on the changes in their prices. Commodities are especially good when combined with more traditional financial assets - stocks, bonds, etc.
- Inflation Protection
Historically commodities have been one of the few asset classes that actually benefit from rising inflation. That’s because in the times of economic instability commodity prices tend to rise.Opt for commodities, and you’ll have a safe tool to make money on inflation!
- Focused Product Offering
There are around 55 major commodity markets which makes them relatively easy (if compared with thousands of stocks or mutual funds!). With commodities you simply invest in the „end product”, without having to know much about company management or stock shares.
Thanks to the futures and options markets, commodity traders can maximize the trading power of their investments. Leverage in commodities can be an expedient tool for control a larger contract position for merely a fraction of the face value of the underlying commodity.
Attention: to avoid substantial losses, carefully consider whether commodity futures leverage is suitable for you. The high degree of leverage can be dangerous for your finances.