Consumers Guide by Ebele Kemery to Commodity Trading
Not everyone in commodities trading is attempting to make a profit. Some folks with money will buy a commodity out of the expectation that prices will not depreciate. Many investors are currently buying oil futures as a safe place for their money.
The cost of oil is very stable, even in a bad economy, and is expected to rise in the long term future. It may not rise rapidly enough to create a profit, but the traders doing this are more interested in avoiding losses. This practice is one of the major reasons why the price of oil is so high at the moment. As the global market improves, investors will move back to stock trading.
Commodities differ from stock in that it is very difficult for a commodity to be useless.
Things such as oil and gold are valuable and have been valuable through human history. Price may fluctuate, but shares will always have some value. There are unique risks, such as that the shares one owns might spoil. This is true such as buying grain in advance or any other commodity that can be destroyed. Investing in property is risky because homes and land can be ruined by natural disasters.
While commodities always retain some value, it is still possible to lose much money if a person is not careful to observe market trends. A lot of speculators lost a lot of money in the housing market simply because there are now more homes than interested buyers. These properties will eventually be sold and may one day regain the value they were bought for, but this might take a decade or more. In the meantime, the speculator has already sold at a net loss.
suggests that any person who buys into any market should be extremely cautious. Commodity prices very seldom rise only, and typically go through ups and downs. Unlike stock, the value does not consistently rise over time. Many commodities become cheaper because developing economies become manufacturers.
Two commodities that are expected to rise consistently are steel and oil, but others will go through ups and downs. Most commodity buying involves short term exchanges, taking advantage of a low price and then selling in a few months to a few years when the market suddenly improves.
One commodity that is notorious for price fluctuation is gold. It can be valued at hundreds of dollars an ounce in one instance and then drop to ten percent of the price in a few days. This is the result of the inelastic supply of gold, and the fact that much of the world's gold is held exclusively as a security.