Questions to Ask before Investing in Commodity Companies - dummies

Questions to Ask before Investing in Commodity Companies

By Amine Bouchentouf

You cannot completely eliminate risk in commodities markets, but you can sure take steps to help you reduce it. One way to minimize risk is to research all aspects of the investment you’re about to undertake — before you undertake it. Too often, investors don’t start doing research until after they invest in commodities companies.

Although investing in companies that process commodities is an indirect way to access raw materials, it’s a good approach for investors who are comfortable in the equity environment.

Ask a few questions before you buy the company’s stock:

  • What are the company’s assets and liabilities?

  • How effective is the management with the firm’s capital?

  • Where will the firm generate future growth?

  • Where does the company generate its revenue?

  • Has the company run into any regulatory problems in the past?

  • What is the company’s structure? (Some commodity companies are corporations, whereas others act as limited partnerships.)

  • How does the company compare with competitors?

  • Does the company operate in regions of the world that are politically unstable?

  • What is the company’s performance across business cycles?

Of course, this list gives only a few questions to ask before making an equity investment.

You can get the answers to these questions by looking through the company’s annual report (Form 10K) and quarterly reports (Form 8K).