Do you want to explore the commodities market for potential investment opportunities? Now is an excellent time to do so because inflation is at all-time highs, many asset classes cannot keep up with rising prices, and commodities represent one of the best ways to earn a potential profit in a down economy. The main rule to tackling the market is to stick with subjects you already are familiar with or are ready to do some deep research into.
It’s also wise to avoid owning any commodity directly. That way, you won’t have to worry about taking possession or paying for storage and security fees. Seeking returns as a commodity investor means you’ll have to learn the all-important spike principle, figure out how to diversify your portfolio, and study oil and gold markets to acquire the basic skill for trading a commodity successfully. Here are the key points to keep in mind as you get involved in this potentially lucrative field.
Stick With What You Know
Many investors already have a solid understanding of how to organize finances and one or another of how the commodity markets operate. In those cases, it’s wise for people to stick with what they know because it can take time to start research on a particular area from scratch. If you have spent a year or more buying and selling energy stocks, you likely have a decent insight in to how prices in oil and natural gas behave within seasonal and daily cycles. Understanding cycles, supply, demand, and other factors that affect commodity prices is at the heart of earning a profit in the field of hard assets. That principle holds true even if you choose to buy stocks, ETFs (exchange traded funds), or futures based on commodities.
Avoid Direct Ownership
Holding contracts on oil, corn, natural gas, or pork bellies can be exciting. When you are in the game and price trends are performing favorably, you realize why many trade for a living or on a part-time basis. But, it’s essential to avoid taking physical possession of goods. If you do, there can be high storage and maintenance fees from vendors who do the holding. Instead, avoid ever taking direct ownership on a commodities contract by trading with CFDs (contracts for difference), futures, or other vehicles. If you use a reputable global broker like easyMarkets, you can leverage the power of CFDs to start trading the commodity of your choice without ever being exposed to taking possession of physical assets.
Know the Spike Principle
The spike principle, also called the spike rule, is a fundamental way to make educated guesses about the direction of assets like petroleum, gold, oil, and corn. Even when gold prices are surging, traders watch long-term price charts and look for upward or downward spikes. The general assumption is that prices in hard asset markets like gold and oil tend to return to smooth patterns. Spikes are often caused by unique events outside the control of producers and sellers. So, watching the spike can sometimes give a clue about the future direction of prices, assuming they will revert back to pre-spike levels.
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