Commodity Investing-is It Risky?

Commodity Investing-is It Risky?

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Commodity investing has the reputation for being risky. Many investors are simply scared of investing in commodities. Now, statistically speaking there is no more risk investing in commodities than there is investing in stocks. For whatever reason, investors have shunned commodities as investments for what they think are the more prudent investments such as stocks.

Let's do some comparison as this is quite baffling as the performance of commodities has been much superior to that of stocks over the years. Dow Jones Industrial Average (DJIA) tracks the performance of 30 blue chip stock listed on NYSE. It is a price weighted average. On the other hand Dow Jones-AIG Commodity Index tracks the performance of a basket of commodities.

In 2002 alone, DJIA had a negative return of -7% as compared to the Dow Jones-AIG Commodity Index return of 26%. Between 2002 and 2005, DJIA had an average of 7% return. However, Dow Jones-AIG Commodity Index had a return of 21%. This is something psychological.

Humans are simply afraid of what they don't know. Investors are also human so they also feel afraid of something that they don't know. We keep on listening about stocks from an early age. This makes us quite familiar with stocks. So we are willing to invest in stocks even when they don't perform well. Just take the case of the recent stock market crash that happened in 2008. Investors lost something like 70% of their investments but still they are waiting for the stock prices to recover. In 2000, when the technology bubble burst, investors lost something like $3 trillion. On the other hand, commdoties are something unknown to many investors. They don't know how to trade them. They don't have any idea of what instruments are used to trade them. So they become afraid when someone suggest commodities are a great opportunity right now!

When you trade stocks, you have to have 50% of the capital in your trading account before you can enter a position on margin. In other words, a leverage of 2:1 is maximum permissible. Now margin requirements for commodity futures may vary. There are dozens of commodity futures contracts that you can trade.

There are dozens of commodity futures contracts that you can trade. Suppose, we want to trade the Soybean Futures Contract. This contract gets traded on the Chicago Board Of Trade (CBOT). The margin requirement for the Soybean futures contract is only 4%. What this means is that with only $400 in your trading account, you can trade a Soybean futures contracts worth $10,000. Now, be careful because this involves trading with leverage. Leverage is a profit multiplier if everything goes your way and the market cooperates with you. If it does, you can make a big profit with this small amount in your trading account.

But hey, leverage is a double edged sword that cuts both ways. If the market goes the wrong way, you can lose a lot more than your principle. Anything you do in life is risky. Even your marriage! Love can turn sour and end up in a messy divorce. But that doesn't mean you shouldn't love.

Commodities are going to see a many decade long boom in the first part of the 21st century. This boom is being fueled by the increasing population and it's demand for a better living in all parts of the world. Countries in Asia, Africa and other parts of the world are developing. They need resources for their development. Commodities are the most important resource that are going to face high demand in the coming decades. Take the example of oil. Without oil, the global economy cannot run. With it's supply dwindling and demand going up, you should expect to see crude oil reaching the $200 per barrel in this decade! So get ready for trading commodities and making a fortune in 2010 decade!

About the Author:
Mr. Ahmad Hassam has done Masters from Harvard. Learn Commodity Trading. Read the story of Richard Samuels, a post office mailman with a head injury and how he made a fortune with these Forex Signals.



Article Originally Published On: http://www.articlesnatch.com


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