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Growing Money And Managing Risk With Indirect Commodity Exposure

By: Ricky Weber

If you talk to your financial advisor about whether or not you should become a trader in the commodity market, chances are that they will steer you away from this idea and instead recommend that you maybe put your money into stocks or bonds in order to achieve decent growth. Is this because you cannot achieve decent growth on your money by buying commodities? No, rather this is because of the inherent risk and volatility when trading in the commodity market, as well as the fact that smaller investors do not have as much direct access to commodities as they do to stocks and bonds.

However if you have decided that you would like to commit at least some of your money to the commodity market, the vehicle that most people would be familiar with is a futures contract. This type of commodity trading is called direct exposure, and it is risky because most futures contracts are traded on margin as well as the fact that betting on any one single commodity can be risky due to the volatile nature of how rapid price changes can occur.

Minimizing Risk With Indirect Commodity Exposure

While there is nothing inherently wrong with trading commodity futures contracts, and indeed if you really know what you are doing you can reap great rewards from trading on margin in this fashion, for a large percentage of people they are looking for a way to get consistent returns without the risk of losing their initial investment. The answer to this is to enter into the commodity market with indirect exposure using mutual funds, which can be a smarter and safer way to access the gains associated with these markets while minimizing as much risk as possible.

There are dozens of mutual funds that buy and sell futures contracts linked to individual commodities, and very often these funds will trade across a basket of different related commodities which is much safer than trading a single individual commodity. Putting your money into these funds instead of directly into the futures contract can help to give you consistent growth without any sharp decline in value. Another even more indirect way to trade is to find the mutual funds that buy and sell the shares of different companies that are directly involved with the production of certain commodities. While this is the least risky approach, it is also true that you will not benefit from the full upswing in value if the market moves favorably in your direction.

Gold, Silver and Precious Metals: Betting Against The Economy

Gold and other precious metals are unique commodities because they fly in the face of traditional logic when it comes to deciding which commodities to buy. If you consider the example of corn, timber, or steel, you would buy each of these commodities when the economy is in full gear and all of these commodities are being used heavily, so the price will stay high or go higher. However gold and silver are the commodities you would buy when you think that the economy is going to slow down, because these are where there are the biggest price increases during economic downturn, which means that when you purchase these commodities you are literally betting against the economy.

Article Source: http://www.bigfreearticles.com

While there is nothing inherently wrong with trading commodity futures contracts, a large percentage of people are looking for a way to get consistent returns without the risk of losing their initial investment. The answer to this is to enter into the commodity market with indirect exposure using mutual funds.

About the Author:
Ricky Weber frequently posts new articles about how to make money online at his personal blog http://RickyWeber.com

Tags: finance, commodities, commodity market, gold, mutual funds, silver, day trading

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