Minimize the Risk of Commodities Investing with Knowledge and Binary Options

If you watch the financial channels often, you’ll hear a lot of discussion about topics like Apple’s upcoming new iPhone release, or how Amazon did on Cyber Monday sales.

As these news stories unfold, crawls traverse the bottom of the screen with the latest numbers on the Dow, NASDAQ, and S&P 500, along with the latest stock prices of well-known companies.

Of course all this information relates to the stock market, and while its importance to the economy is undeniable, it’s not the only market out there for investors.

There is an entirely different market that has just as much impact on our lives economically, and offers numerous opportunities to make money, but doesn’t get near the hype that stocks do. That market is the commodities market.

Investing in Common, Everyday Items

They may not be as sexy as the latest iPhone, but commodities are so much a part of life that it is hard to avoid them. Grains, livestock, precious metals, and energy products are some of the many commodities traders can invest in. These items come in highly leveraged contracts that allow investors to make a lot of money quickly.

The downside is that you can also lose money quickly. In fact you can lose more than your initial investment if a commodities price falls low enough. For investors that don’t want to take such risks, binary options may be better and are pretty straightforward.

Mitigating Risk with Binary Options

With a binary option, the risk is never more than the principal invested. Suppose an investor purchases a binary option on wheat with a strike price of $4 per bushel that pays $500. Let’s also assume the option is a call option where the investor expects the price of wheat to be higher. When this option expires, one of three outcomes is possible:

If wheat is more than $4 per bushel, the investor gets $500. In the unlikely event wheat is exactly $4, the investor gets their principal back, like a ‘push’ from gambling. Otherwise the investor loses their principal. The good news is that (not counting any fees) the loss won’t exceed that amount. There are many great sources on the Internet for more information about binary options.

Enjoying Benefits of Volatility While Limiting the Risks

Although volatility has many risks and containing it is important to minimizing loss, it’s not something that should be avoided altogether. If there was little or no volatility in the market, there would be no incentive to invest in it. The last thing any commodities investor wants to see is a market going sideways.

As anyone who drives a car should know, one of the most volatile commodities markets is petroleum. Even in a timespan as short as a week, prices can make significant movements. Fortunately, binary options with this product allow investors to have their cake and eat it too, enjoying the benefits of volatility without suffering from its liabilities. They also offer some degree against sideways markets since the option pays if the strike price at expiration is above the initial strike price.

One of biggest advantages of oil commodities is that they give the investor diversity. Petroleum products are used to make not just gasoline, but also plastics, building materials, and fertilizers which should continue to be in demand for the foreseeable future, even if fuel consumption drops.

Educate Yourself before Investing

Investing will always have risk, so it’s important for investors to know as much as they can about binary options and the underlying commodities that they are linked to. Such education would not only include general knowledge about how these markets work, but also things like brokerage fees and market regulations that affect transactions.

It is also important to understand seasonal quirks, especially when investing in something like grains. Prices of these commodities can change a lot once harvest time nears.

Many commodities investors also like to ‘paper trade’, pretending to invest in commodities at a given price while tracking market fluctuations. It allows them to simulate real trading and learn from the experience without risking real money.

Commodity trading brings excitement to a market based on items that by themselves are not very exciting. The potential to both make and lose a lot of money in these markets is very real. This is why it is important that investors not only consider investments that mitigate the potential for loss, but also educate themselves as much as possible about these investments before risking their heard-earned money in them.

 


Categories: Stock Market

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January 10, 2016 Minimize the Risk of Commodities Investing with Knowledge and Binary Options