Investology

Benefits And Risks Of Commodities Investing

Investing in commodities is one of the many ways to diversify an investment portfolio. Commodities serve to balance the risk of having to invest in stocks since price movements in commodities tend to have a reverse effect on stocks. There are also a number of other benefits investors get to enjoy when dealing with commodities. But there are risks as well.

Hedge Against Inflation

One of the benefits of investing in commodities is that it can be used as a hedge against inflation. When inflation runs high, stocks usually suffer as a consequence. But in the case of commodities, demand goes high since more investors try to put their money in hard assets. That is because even with inflation, commodities will hold some level of value as compared to stocks. It represents as a safer investment when inflation goes high.

Minimal Risk Of Obsolescence

Another benefit that investing in commodities can provide is that they stand to offer minimum risk of obsolescence. Companies and businesses come and go depending on their perceived usefulness and popularity in the current society. Some companies can be quite hot and popular today and can go bust the next. The same will happen to their stocks. Such investments always carry a higher risk of becoming obsolete when changes come.

Commodities on the other hand are less likely to suffer the risk of becoming obsolete. What impact they may experience usually is connected to certain advancements in technology. Commodities will generally have a steady market despite certain dramatic changes in demand now and then. But there is very little risk that commodities may become completely obsolete. Hence, there is little chance that they might become totally worthless unlike some stocks of obsolete businesses.

Risks Factors

Despite the benefits, commodities investing also come with some underlying risks that might greatly affect it. Cases of political instability can cause disruptions in the production of certain commodities that might greatly affect its pricing. The inability to increase production at a faster rate to cope up with the demand may also reduce the rates. Politics may also play a role in commodities investing, especially those that might affect the commodity producing countries. Policies and instability can have an effect on commodities in so many ways.
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Tags: Benefits, Commodities, Investing, Risks