Investing in Commodities For Dummies book cover

Investing in Commodities For Dummies

By: Amine Bouchentouf Published: 10-26-2015

Add another dimension to your portfolio with commodities

Do you know how commodities stack up against other investment options? Investing In Commodities For Dummies is a straightforward resource that provides an in-depth look at what commodities are and how they might prove beneficial to your portfolio. This approachable reference covers the basics on breaking into the commodities market while dispelling myths and sharing a wide range of trading and investing strategies. Simply put, it spotlights the opportunities on the commodities market while leading you away from the mistakes that have plagued other investors. Use this text to understand how to diversify your portfolio, measure risk, and apply market analysis techniques that guide your decision-making.

Commodities, including oil, silver, gold, and more, play an important role in everyday life. Because they hold such a steady role in today's world, many investors have found them to be a reliable component of a well-rounded portfolio. Depending upon your current investment portfolio and your financial goals, it might be a great idea to add commodities to your strategy.

  • Understand how to break into the commodities market and start trading immediately
  • Diversify your portfolio to protect your assets to meet your financial goals
  • Minimize the risk associated with your investment strategy while maximizing profits
  • Track commodities indexes and use this knowledge to make informed investment decisions

Whether you're an amateur investor or you're simply looking to expand your investments, Investing In Commodities For Dummies is a fantastic guide to adding commodities to your investment strategy!

Articles From Investing in Commodities For Dummies

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29 results
29 results
Investing in Commodities For Dummies Cheat Sheet

Cheat Sheet / Updated 03-27-2016

If you're considering investing in commodities or commodities-backed instruments, you'll want to find out as much as you can about what you're investing in. Companies have to file quarterly and annual financial reports, and they provide a wealth of information that is very valuable to the investor. The premiere location for the trade of agricultural commodities is the New York Board of Trade (NYBOT), and you'll want to become familiar with it. When you do invest, you'll want to practice the magic word — diversification — and manage the risk/reward ratio for not just your individual securities, but for your overall portfolio.

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Introducing Two Major Commodities Exchanges: Chicago Board of Trade and Chicago Mercantile Exchange

Article / Updated 03-26-2016

Established in 1848, the Chicago Board of Trade (CBOT) used to be the oldest commodity exchange in the world. The CBOT was the go-to exchange for grains and other agricultural products, such as oats, ethanol, and rice. The exchange also offered several metals contracts targeted at individual investors, including the mini gold and mini silver contracts. In 2007, the Chicago Mercantile Exchange (CME) acquired the CBOT as part of a great consolidation wave (the CME also acquired NYMEX/COMEX). CME rolled up the CBOT's popular grain contracts and now offers them on its electronic platform. Many traders still refer to some of these contracts as CBOT grains. CME is the largest and most liquid futures exchange in the world. The CME has the heaviest trading activity — and open interest — of any exchange, partly because of the depth of its products offerings. Besides agricultural commodities, it trades economic derivatives (contracts that track economic data such as U.S. quarterly GDP and nonfarm payrolls), foreign currencies (it offers a broad currency selection, ranging from the Hungarian forint to the South Korean won), interest rates (including the London Inter Bank Offered Rate, the LIBOR), and even weather derivatives (contracts that track weather patterns in various regions of the world). Because of its broad products listing, the CME is perhaps the most versatile of the commodity exchanges. In addition, the CME was one of the first exchanges to launch an electronic trading platform, the CME Globex, which became an instant hit with traders. It now accounts for more than 60 percent of the exchange's total volume. In 2006, the New York Mercantile Exchange (NYMEX) entered into an agreement with the CME to trade its marquee energy and metals contracts on the CME electronic platform. In 2008, the CME went on a series of acquisitions and purchased the NYMEX, COMEX, and Chicago Board of Trade (CBOT). The CME is also the first exchange to go public. Investors greeted the initial public offering with enthusiasm, raising the stock from $40 in 2003 to more than $500 in 2006. For more on the CME, check out its website, which also includes helpful tutorials on all its products.

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Introducing the New York Board of Trade

Article / Updated 03-26-2016

The New York Board of Trade (NYBOT) is one of the oldest exchanges in the United States and is the premier location for the trade of agricultural commodities. The NYBOT also offers futures contracts that track cotton, ethanol, and wood pulp (pulp is used to make paper), as well as products that track several financial futures, such as the euro (the currency), the New York Stock Exchange Composite Index, and the Reuters/Jefferies CRB Index. (The NYBOT is also where the movie Trading Places, with Eddie Murphy and Dan Aykroyd, was shot. In the final scene of the movie, Murphy and Aykroyd corner the orange juice market and, in the process, wipe out Randolph and Mortimer Duke.) As a sign of the times and the advent of electronic trading, in 2007, the ICE, an all-electronic trading platform, acquired the NYBOT. Although the ICE has integrated many of the commodities offered on the NYBOT with its electronic platform, many traders still refer to the original NYBOT commodities as ICE/NYBOT.

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Top 6 Things in an Oil Company's Fleet

Article / Updated 03-26-2016

You can get information on an offshore drilling company's fleet in its annual report. Companies usually lease these vessels to customers, which may include independent oil and gas companies, national oil companies, and the major integrated oil companies, for a premium. A company also includes this type of financial information regarding its fleet in the annual report. Here are the names of some of these vessels you can expect to come across as you start investing in offshore drilling companies: Drilling barge: The drilling barge is one of the most nimble vessels in the market. It's a floating device usually towed by tugboat to target drilling locations. The drilling barge is primarily used inland, in still, shallow waters such as rivers, lakes, and swamps. Jack-up rig: The jack-up rig is a hybrid vessel that's part floating barge, part drilling platform. The jack-up rig is towed to the desired location, usually in open, shallow waters where its three "legs" are lowered and "jacked" down to the seafloor. When the legs are secured, the drilling platform is elevated to the desired levels to enable safe drilling. Submersible rig: The submersible rig is similar to the jack-up rig, in that it's primarily used for shallow-water drilling activity and is secured to the seabed. Semi-submersible rig: Sometimes referred to as a semi, this structure is a feat of modern technological development. It's similar to a submersible, except that it has the capacity to drill in deep waters under harsh and unforgiving weather conditions. The drilling platform is elevated and sits atop a floating structure that's semi-submerged in the water (hence the name) and secured by large anchors that can weigh up to 10 tons each. Drill ship: The drill ship is essentially a ship with a drilling platform. It's perhaps the most versatile drilling vessel because it can be easily dispatched to remote offshore locations, including drilling in very deep waters. Offshore oil platform: When one of the previous vessels discovers a commercially viable offshore oil field, a company may decide to build a permanent platform to exploit this discovery. Enter the offshore oil platform. These structures are a sight to behold and are truly man-made floating cities. They house personnel, include living quarters, and are often even equipped with heliports. They're ideally suited to harsh, deepwater conditions.

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Making Money Using an Index

Article / Updated 03-26-2016

If you're investing in commodities, you want to make money. One way to do that is by using a commodity index. Consider the following few ways you can invest through a commodity index: Own the futures contracts. One of the most direct ways of tracking the performance of an index is to own the contracts the index tracks. To do this, you must have a futures account. Invest with a third-party manager. Many money managers use commodity indexes as the basis of their investment strategy. Some of these vehicles include mutual funds, commodity pools, and commodity trading advisors. Own futures contracts of the index. A few commodity indexes have futures contracts that track their performance. When you buy the futures contract of the index, it's similar to buying all the commodity futures contracts the index trades! Make use of exchange-traded funds. ETFs, as they're known on Wall Street, are a fairly new breed of investment that tracks the performance of a fund through the convenience of trading a stock. ETFs are a popular alternative for folks who don't want to trade futures. As commodities become more popular with the investing community, expect to see more ways to get access to indexes. Keep track of all the new developments in index investing.

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Looking at a Company's Public Disclosure Forms

Article / Updated 03-26-2016

The Securities and Exchange Commission (SEC) requires publicly traded companies in the United States to file annual and quarterly reports. The quarterly report, known as Form 10Q, contains information about the company's financial operations during each of the first three fiscal quarters in a given year. (A company doesn't need to file a quarterly report at the end of the fiscal year, because that's when the annual report is released.) Form 10K, which is the annual report, contains a much more comprehensive overview of a company's financial operations. It's released at the end of the fourth quarter of the fiscal year and includes information on the company's structure, shareholders, business activities, assets, and liabilities. An additional disclosure form you may want to look at is Form 8K. A company is required to file Form 8K with the SEC if it undertakes structural changes, such as a merger or acquisition, bankruptcy, or election of new board members. Form 8K may contain important information regarding the company's future plans. So, where can you check out a company's annual report or Form 8K? Perhaps the best resource for this type of information is EDGAR. It includes comprehensive SEC filings. You may need a subscription to access it.

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What's the Deal with Peak Oil?

Article / Updated 03-26-2016

Is the world really running out of oil? The concept of peak oil has generated much attention in recent years. A plethora of books have been written about whether the world is running out of oil, and proponents (and opponents) of this theory have hit the airwaves en masse. This topic is a serious one, but unfortunately, folks tend to get carried away and start spinning tales of global gloom and doom. It's important to remain level-headed when talking about this issue. Basically, two schools of thought have arisen. The first school argues that the world has already reached peak production and that demand is going to quickly suck out what's remaining of crude oil in the world. The other side argues that the world still has abundant crude oil supplies and that, through technological developments and other means, crude oil that wasn't previously extractable will be brought to market. Both arguments have some merit. First, crude oil is a finite resource and, by definition, is available only in limited quantities. However, people have been saying that the world is going to run out of oil since the first commercially viable oil well was discovered in Titusville, Pennsylvania, back in 1859. One hundred and fifty years later, the world still hasn't run out of oil. Does this mean that the world will never run out of oil? Of course not. But it does indicate that these calls have been made before and are likely to continue well into the future. Many experts agree that completely running out of oil in the near future is an unlikely event. The world isn't about to run out of oil — the world is about to run out of cheap, high-quality, and readily available oil. The light, sweet crude oil that refiners prefer because of its high products yield is running low. However, the world still has plenty of crude that's of a heavier quality. Just look at Canada's oil sands. This heavy crude isn't preferred because of its low quality, but there's plenty of it to go around for a long time. In addition, technological advances (such as horizontal drilling) are enabling previously unextractable oil to now be extracted. Therefore, the oil fields are yielding more crude than ever, both in terms of percentage and on an absolute basis. As an investor, you need to focus on the fundamentals of the market. Whether the world is running out of oil is a hot debate that garners a lot of attention, but panic isn't an investment strategy. Even if the world truly is running out of oil, you still need to look at the market fundamentals and develop an investment strategy that's going to take advantage of these fundamentals. If history is a guide, humans can be extremely resourceful in sustaining themselves. If crude does run out, alternative sources of energy will be found. Because energy is necessary to human life, you can be sure that people will develop alternatives. A move is already underway toward investing in alternative energy sources, such as wind and solar energy, as well as other, more abundant fossil fuels such as coal. This trend likely will continue in the coming years. As an investor, you need to go where the value is.

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Modern Portfolio Theory and the Benefits of Diversification

Article / Updated 03-26-2016

The idea that diversification is a good strategy in portfolio allocation is the cornerstone of Modern Portfolio Theory (MPT). MPT is the brainchild of Nobel Prize–winning economist Harry Markowitz. In a paper he wrote in 1952 for his doctoral thesis, Markowitz argued that investors must look at a portfolio's overall risk/reward ratio. Although this sounds like common sense today, it was a groundbreaking idea at the time. Before Markowitz's paper, most investors constructed their portfolios based on a risk/reward ratio analysis of individual securities. Investors chose a security based on its individual risk profile and ignored how that risk profile fit within a broader portfolio. Markowitz argued (successfully) that investors could construct more profitable portfolios if they looked at the overall risk/reward ratio of their portfolios. Therefore, when considering an individual security, you need to not only assess its individual risk profile, but also take into account how that risk profile fits within your general investment strategy. Markowitz's idea that holding a group of different securities reduces a portfolio's overall volatility is one of the most important ideas in portfolio allocation.

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Who Trades Futures?

Article / Updated 03-26-2016

Essentially, two types of folks trade futures contracts. The first are commercial producers and consumers of commodities who use the futures markets to stabilize either their costs (in the case of consumers) or their revenues (in the case of producers). The second group consists of individual traders, investment banks, and other financial institutions who are interested in using the futures markets as a way of generating trading profits. Both groups take advantage of the futures markets' liquidity and leverage to implement their trading strategies. If you ever get involved in the futures markets, it's important to know who you're up against. I examine the role of these hedgers and speculators in the following sections so you're ready to deal with the competition. Getting over the hedge Hedgers are the actual producers and consumers of commodities. Both producers and consumers enter the futures markets with the aim of reducing price volatility in the commodities they buy or sell. Hedging gives these commercial enterprises the opportunity to reduce the risk associated with daily price fluctuations by establishing fixed prices of primary commodities for months, sometimes even years, in advance. Hedgers can be on either side of a transaction in the futures market, the buy side or the sell side. Consider a few examples of entities that use the futures markets for hedging purposes: Farmers who want to establish steady prices for their products use futures contracts to sell their products to consumers at a fixed price for a fixed period of time, thus guaranteeing a fixed stream of revenues. Electric utility companies that supply power to residential customers can buy electricity on the futures markets, to keep their costs fixed and protect their bottom line. Transportation companies whose business depends on the price of fuel get involved in the futures markets to maintain fixed costs of fuel over specific periods of time. The truth about speculators For some reason, the term speculator carries some negative connotation, as if speculating is a sinful or immoral act. In reality, speculators play an important and necessary role in the global financial system. In fact, whenever you buy a stock or a bond, you're speculating. When you think prices are going up, you buy. When they're going down, you sell. The process of figuring out where prices are heading and how to profit from this is the essence of speculation. In the futures markets, speculators provide much-needed liquidity that allows the many market players to match their buy and sell orders. Speculators, often simply known as traders, buy and sell futures contracts, options, and other exchange-traded products through an electronic platform or a broker, to profit from price fluctuations. A trader who thinks that the price of crude oil is going up will buy a crude oil futures contract to try to profit from his hunch. This action adds liquidity to the markets, which is valuable because liquidity is a prerequisite for the smooth and efficient functioning of the futures markets. When markets are liquid, you know that you'll be able to find a buyer or a seller for your contracts. You also know that you'll get a reasonable price because liquidity offers you a large pool of market participants competing for your contracts. Finally, liquidity means that when a number of participants are transacting in the marketplace, prices aren't going to be subject to extremely wild and unpredictable price fluctuations. This doesn't mean that liquidity eliminates volatility, but it certainly helps reduce it. At the end of the day, having a large number of market participants is positive, and speculators play an important role with the liquidity they add to the futures markets.

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What Are Commodities and Their Investment Characteristics?

Article / Updated 03-26-2016

Just what, exactly, are commodities? Put simply, commodities are the raw materials humans use to create a livable world. Humans have been exploiting earth's natural resources since the beginning of time. They use agricultural products to feed themselves, metals to build weapons and tools, and energy to sustain themselves. Energy, metals, and agricultural products are the three classes of commodities, and they are the essential building blocks of the global economy. Commodities have to meet the following criteria: Tradability: The commodity has to be tradable, meaning that there needs to be a viable investment vehicle to help you trade it. For example, if a commodity has a futures contract assigned to it on one of the major exchanges, if a company processes it, or if an ETF tracks it. Uranium, which is an important energy commodity, isn't tracked by a futures contract, but several companies specialize in mining and processing this mineral. By investing in these companies, you get exposure to uranium. Deliverability: All the commodities have to be physically deliverable. Crude oil can be delivered in barrels, and wheat can be delivered by the bushel. However, currencies, interest rates, and other financial futures contracts are not physical commodities. Liquidity: Every commodity has an active market, with buyers and sellers constantly transacting with each other. Liquidity is critical because it gives you the option of getting in and out of an investment without having to face the difficulty of trying to find a buyer or seller for your securities.

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