While everything is a gamble in investment, it helps if we are guided by good analysis and understanding of the risks involved so we can make informed decisions. Commodity trading offers a lot of benefits not offered by conventional fund management, principally the possibility of large profits in a short time, but it pays to have the proper research and knowledge to succeed. We have seen a continual rise in the goods that commodity investment has to offer for trading, but there are also risks that we should take into consideration.
Since commodities futures are highly leveraged investments small price changes can cause the loss of your entire investment and even create “Margin Calls” where you are required to add additional funds. When we are able to manage the risks, we can be assured of generating satisfactory returns. Below are some risks that we need to be careful of when investing in commodities.
Natural risks (Risks involving nature)
Since commodities are usually goods of the earth, such as wheat and corn, geographical risks will definitely affect the commodities that we are trading. Any hurricane or bad weather changes can easily affect the supply of wheat and corn, consequently affecting its prices. Droughts can cause major changes but also plenty of rain which produces a bumper crop and lowers prices because of the larger supply.
Political Risks
One of the best examples of how political risks can make commodities fluctuate greatly is oil. Large supply of oil is found in the middle east and oil companies would need to handle the laws of the middle east countries that have jurisdiction over this natural resource. Many conflicts happen in oil producing nations which can send prices rapidly higher.
Speculation Risks
Commodities markets are not any different in some ways from stock markets, the market can also be populated with traders whose interests lie on speculation whether the prices will go up or down or longer term investors who have a stake in the products traded. It is important to distinguish whether the market participants are truly commercial users or just plain speculators.
Fraud Risks
As with any other business transaction, there is the possibility of fraud. There are institutions that are regulating the market to prevent or minimize fraud in commodities investment however there are still deceptive practices to be careful of and some of these may lay within legally accepted statutes. To prevent fraud, it is important to research thoroughly on the company you are transacting with. It helps to have more than enough information about the firm before you release your funds. While you may never be assured that everything will be fraud-free, it pays to do your homework and maintain careful and complete documentation on all your trades and positions.
Tags: Commodities, Commodity Trading, Investing
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