Investing in commodities: positive and negative sides By investing in commodities you buy (part) of a batch of commodities.
These can be all kinds of raw materials, such as coffee, sugar, rice, gold and oil.
Gold has a special position in this.
With gold you actually buy an amount of gold, which you can also receive physically or have it physically stored.
For all other commodities you buy futures, or the obligation to buy or sell at a certain time for a certain price.
We will discuss this in more detail at a later time. The structure of investing in commodities creates various specific advantages and disadvantages.
The 3 main benefits of investing in commodities Obviously there are advantages to investing in commodities.
These are the following: A variety of factors can lead to scarcity of raw materials.
As a result, the price of raw materials can rise quickly and therefore a relatively high return can be achieved; Because commodities are not financial products, investing in commodities is a good way to spread risk by investing some outside of financial markets;
Because commodities (such as gold) often have an intrinsic / actual price or value, they are less sensitive to inflation. This makes them a 'safe haven' for many investors if inflation threatens to rise.
Against these advantages, there are also a number of disadvantages.
The 3 biggest disadvantages of investing in commodities The main drawbacks of investing in stocks are:
High volatility: because various uncontrollable factors influence the price, the price can move a lot.
In jargon it is then said that there is a high volatility.
To give an impression; research shows that commodities are twice as volatile than stocks and four times as volatile as bonds. high price / risk ratio.
An analysis over the period 1991 to 2017 shows that the volatility, as mentioned above, is high (14.68%), but the return was a modest 2.18% per year.
On the other hand, if we look at the index of the S&P 500 stocks, we see that the volatility is slightly lower (14.17%), while the return is much higher. On the other hand, we see that 1-month government bonds recorded a volatility of 0.62% over that period, while the annual yield is higher at 2.61%.The last objection lies in the large leverage risk. The low margins can be a temptation to take greater risks.
Investing in (crypto) coins:
popular but volatile With an option you do not buy or sell a share, goods or (crypto) currency, but the right to buy or sell a certain share or a certain crypto coin at a predetermined price on a certain date.
This form of investment also has a number of advantages and a number of disadvantages.