Introduction to commodities – MoneyWeek Investment Tutorials


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Introduction to commodities - MoneyWeek Investment Tutorials



#Introduction #commodities #MoneyWeek #Investment #Tutorials

Right in this video we’re going to take a look at a very important market the commodities market this is an introductory video so we’ll just look at what’s traded in the commodity markets as far as investors are concerned and some of the key jargon we’ll also look at some of the differences between

Commodities and say shares or olds many of them are obvious but they’re worth bearing in mind if you’re all going to invest in this market and thirdly we’ll take a quick look at the way that commodities are traded and the way that an investor can access commodities so

What are commodities well we see them all around us the commodities markets influence the price of a gallon of petrol every time you fill up your car the cost of a cup of coffee whether bought from Starbucks or made at home the price of the electricity flowing into your house and into the

Office so commodities markets matter they have a big bearing on our day-to-day lives but they’re also an interesting opportunity for investors first of all some jargon what types of commodity do we have most people could list plenty of commodities but in the markets they’re generally broken down

Into several types first of all you’ve got the the metals so you have the the non precious metals you have the LEDs the copper the nickel the aluminium or aluminum if you prefer and those metals are commonly used by manufacturers and so on so there’s a market for trading

Large quantities of those non precious metals then you have the precious metals and precious metals can be broken down not by what you think is valuable but actually by the market jargon and convention so the precious metals are gold which we talk about a lot at money

Weak silver platinum and the metal that you could make another wedding ring out of bead also put into a catalytic converter palladium so those are the so-called for precious metals and the metals are also known quite often as the hard commodities for obvious reasons um so that’s one whole group and

Actually in London there’s an exchange that specializes largely in trading some of these metals okay we also have what some people would call agricultural commodities and many people would call loosely speaking the softs so there’s a big market for buying and selling the likes of cocoa sugar coffee and so on

Soya beans and so on so those are the agricultural or soft commodities broadly speaking kick one of those it hurts kick one of those in a sack and it probably doesn’t hence the language and then over here you’ve got what I’m gonna call energy um

So over there you’ve got oil gas and so on so commodities these aren’t prescriptive definitions but these labels are used quite often to describe groups of particular commodities and each of them have slightly different characteristics slightly different markets in terms of where they’re traded and obviously slightly different users

In terms of buyers and sellers so that’s the first thing a little bit of jargon on the type of market we’re looking at now before you dive into commodities and a lot of people do like to try and play commodities it’s it looks like an exciting place and it certainly is you

Need to know a little bit about what makes a commodity different now some of this is intuitive but buying and selling commodities is not the same as buying and selling say shares or bonds or simply opening up a bank account so worth very much in mind you know what

Are some of the key sort of features we need to look out for in the commodities market that maybe we wouldn’t worry about so much if I was just buying Tesco shares and some of these features explain in a nutshell why the commodities market isn’t for what I’d

Call widows northerns it’s quite a high risk place prices can be volatile and that’s because into the mixture with commodities things that affect price we’ve got a lot of different components for example features of commodities that you wouldn’t worry about if you’re buying shares armed they can be stolen and they perish

So you’ve got storage issues yeah some commodities you can stick in a warehouse take them out two years later they look much the same gold for example except the warehouse is probably not a good idea maybe a bank vault but the same can’t be said of corn some commodities

Are perishable and that means there is an aspect to commodity management you don’t get with unsay shares and bonds warehouses around the world specialize in storing commodities making sure that if someone arrives with a warrant to buy X many tons of a particular commodity the commodity is there in the right

Quantity and it hasn’t all rotted so that’s one factor secondly you’ve got delivery security ships sink lorries crash scenes blow up not a problem when you’re talking about the gilts market let’s say for government bonds but definitely a problem with commodities so as a buyer and a seller you’ve got to

Think about what you’re going to pay to store a commodity potentially or what someone’s got to pay on what you’ve got to pay to ensure it you wouldn’t only have to ensure a savings account or a Tesco share in quite the same way but you do have to think about that in the

Commodities market next of course we’ve got politics commodities are volatile one of the reasons is this if you look at what’s happening on the Ivory Coast at the moment the Ivory Coast is responsible for around 40% of chocolate exports worldwide so what happens there matters because it affects the supply of cocoa

That goes into chocolate and therefore yeah apartment the weather being an obvious factor politics is a problem too and the cocoa price has shot up around 12 percent this year already because of political problems over in the Ivory Coast so it’s going to be in a commodities market and you want to

Understand what’s going on you need to start reading the news you need to start getting interested in where these things are grown and produced again not normally a problem with say footsie 100 shares or gilt and then of course you’ve got one other feature there’s no income

If you buy a share you might get a dividend if you buy a gilt you might get some interest stick your money in the bank you’ll probably also get some interest sadly buy gold and you don’t so as an investor you need to think about that most commodities are not going to

Be a source of regular income if that’s what you want from a safe investment this is not the place to be so common sense in a way but we’re just saying there are a number of factors that affect commodities that actually an investor in other markets wouldn’t particularly lose sleep over what’s my

Point the point is it makes the commodities market unpredictable quite a volatile and really a market you need to kind of do some homework on if you’re going to go down to the level of actually getting involved in trying to trade cocoa or silver or whatever it

Happens to be okay so that might sound a bit scary so I mean in practice how are these things traded and helping a retail investor get some access to this market well let’s have a look at trading first of all we’ve got the professionals as I might call it so around the world

There are some huge exchanges that specialize in trading commodities the sort of people use these exchanges are big buyers and sellers represented in New York for example or Chicago at the mercantile exchanges as they’re called or in London at the metals exchange so there are people interested in physically buying and selling large

Quantities of metals or wheat or pork bellies but there are also a lot of speculators so trading in the professional if you like the wholesale market is done through the likes of the London methods exchange the New York Mercantile Exchange or nymex and the Chicago Board of Trade and the Chicago

Mercantile Exchange this is not a full list but around the world you’ve got exchanges based in most of the major cities and financial centers that just do commodities and a lot of them still do the kind of waving around you used to see more often in London on stock

Exchanges so if you want to go and see active trading people in colourful jackets people shouting and using hand signals in pits these are quite good places to go looking the london metal exchange for example is about the only exchange in london where the so-called open outcry method of trading still

Holds it hasn’t all been made electronic how does that help you though as a retail investor you’re not about to go and become a member of the london metals exchange or join sea bolt that all sounds a bit inappropriate so for the retail market there are two basic

Choices you could go for the commodity itself you could do physical trades or more likely you’re going to buy some sort of fund people do buy gold for example I mean you can buy gold coins and store them the problem is you probably don’t want to leave them at

Home you want to store them somewhere more secure than that but for most people physically buying and selling isn’t practicable I mean yeah by all means have half-a-dozen gold coins at home but not a ton of copper so in reality most retail investors will go for some sort of fund and there are

Funds around where either a fund manager specializes in going out and buying individual shares perhaps linked to the commodities market or you can get an exchange-traded fund and that money week we quite like exchange-traded funds these are simply shares listed on exchange that track the price of a

Commodity or a group of commodities so for example you can get neeti F that tracks the gold price or the silver price or individual soft commodities or even baskets of them and these tend to be fairly simple and fairly cheap so for a retail investor the most likely route

Is the exchange-traded fund route let’s say but here just be a little bit careful I won’t go into this in a lot of detail in this video but with exchange-traded funds make sure that the ETF in the in the documents that describe it or the fact sheet is actually tracking the

Physical commodity and isn’t simply backed by a handful of dodgy sounding derivatives such as futures and swaps so if you’re going to pick up an ETF the track gold for example we quite like the ones that track physical gold and are backed by a holding of gold in a vault

Rather than anything that sounds like it might be backed with a derivative so in summary the commodities market offers quite a lot of opportunity there are lots of different assets to trade grouped into the metals are soft and the energy markets there are a number of

Factors you need to be aware of to trade commodities it’s not a place for a novice you need to do a bit of homework first and there are in practice many many ways to trade commodities a lot of which are not really open to a retail investor so we’re recommending normally

That you go down the fund route and when it’s a fund that you’re looking at the best bet is to go for something very simple and relatively cheap in this case the exchange-traded fund you


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