Commodity funds are funds which basically invest in commodities, such as gold, oil or livestock. Commodity trading brings miscellaneous options for investment away from the conventional ways of equity and bonds. Commodity futures markets allow producers and consumers to counterbalance the risk of unfavorable future price movements in the commodities that they are selling or buying.
Benefits of Commodities
Involvement of investors signifies that succeeding or upcoming contracts are reasonably liquid. Liquidity depends on the real contract being traded. Electronically traded contracts tend to be the most liquid. Commodities like corn, orange juice, coffee etc are not so promptly available to the retailers and are more costly to trade in terms of commission and spread.
Commodities are considered risky investments due to swing in prices. Commodity companies either get a big hit on resource discovery or they get hit with a loss. As a result this creates the opportunity for very high returns in the commodity market, on the condition that you time your investments rightly.
Diversification is when you invest across a wide range of industries that react differently to changes in the market. This keeps your annual return steady and avoids big losses. Commodity investments tend to move in the opposite direction as regular stocks and bonds.
Commodity futures function on margin, which means that to take a position only a part of the total cost needs to be readily available in cash in the trading account.
One can buy and sell one’s future contracts at an economical cost compared to the buying and selling of the underlying instrument.