Natural-Resource Investment Vehicles - dummies

Natural-Resource Investment Vehicles

By Ann C. Logue

As an emerging-market investor, you can gain exposure to natural resources in a variety of ways: trade securities on the stock market, work with derivatives on the commodities exchanges, or even buy and store resources yourself.

Buying stock in resource companies

One of the simplest and most direct ways to get exposure to natural resources is to invest in companies that produce and market the resources, many of which are based in the markets where they operate. Buying stock in a natural-resources company is easy, and it lets you participate in both changes in commodity prices and improvements in market share and operating efficiency. Because they have buyers who need their products and will pay for added value, many of these companies can make money even when commodities prices are low; they give the kind of value to their customers that a person with a stockpile of tin in the garage can’t match.

Many emerging-market nations operate huge oil companies, both private and government owned.

Trading derivatives

Prices for most natural resources are set in the world’s commodities exchanges based mostly in major cities in developed countries (Chicago, Frankfurt, London, and New York). Commodity derivatives come in two forms:

  • An option gives you the right, but not the obligation, to buy or sell a specified amount of a commodity at a specified price at a specified date in the future.

  • A future gives you the obligation to buy or sell a commodity at a specified price and date.

Most commodity derivatives settle for cash, not for the physical item. You won’t have to produce any barrels of Saudi light crude when the contract expires.

Most full-service brokerage firms are able to handle commodities trading, but some online brokers are not. If you’re interested in buying and selling derivatives, you may need to find a brokerage firm that specializes in these contracts.

The best way to find out more about the different commodities contracts is to go to the Web sites of the commodities exchanges where they list the contracts they offer and extensive educational material to help you with your trading:

  • CME Group is the holding company for the Chicago Board of Trade (CBOT), the Chicago Mercantile Exchange (CME or Merc), the Commodity Exchange (COMEX), and the New York Mercantile Exchange (NYMEX). Among these four exchanges, most of the world’s agricultural products, energy, and metals are traded.

  • Eurex based in Frankfurt, Germany, handles agricultural and metals contracts, among others.

  • London Metal Exchange is a primary center for trade in nonferrous industrial and specialty metals. If you want to trade molybdenum, this is the exchange.

One way to invest in natural-resources derivatives without trading them yourself is through a commodities exchange-traded fund. These funds can be bought and sold like stocks; they invest money into derivatives and natural-resources companies so that you can pick up exposure to those markets.

Amassing your own inventory

You can buy some natural resources outright if you’re so interested, known as trading the physical. It’s possible but rarely practical; storing the materials alone can be a big challenge. It’s probably not practical to store barrels of oil in your garage, but you can buy gold and other precious metals in the form of coins or jewelry.