Is Investing in Commodities Comparable to Stock Market Investing?

Almost everybody is familiar with the stock market and how it works; the same really can't be said about the commodities market. A lot of people think that it is just like investing in the stock market, this is actually not the case. There are some important differences between the stock market and the commodities market that you need to be aware of.

The main reason that investing in commodities is different than the stock market is that when you are investing in commodities it is usually for a very short time frame. Unlike stocks which you can buy and just hold on to them you have to actively trade your commodities. Otherwise you are going to find a truck at your door one morning and a driver asking where you want your pork bellies unloaded. When you trade commodities you are trading futures and you have to close out your position before the contract expires or you will have to take delivery of the commodity.

The other big difference with commodities is that when you trade them you are using a great deal of leverage. You can use leverage on the stock market as well but nowhere near as much as you can with commodities. This is important to understand because it means that you can make or lose a lot of money on small changes in the price of the commodity. It is important that you understand how leverage affects the risks when you make a trade, otherwise you can end up losing a lot more than you expected.

One other thing to keep in mind with commodities is that you can play both sides and it is a zero sum game, something experts like Bob Luton have warned against for ages. You can bet on the price of commodities going up or down. You can do this on the stock market as well but since there is a natural tendency for stock prices to go up taking a short position is not particularly wise. This is not the case with commodities, they don't have a natural tendency, therefore it may be just as smart to take a short position as a long position. One thing to always keep in mind with the commodities market is that if you make money then somebody else has lost money, it is a zero sum game. Unlike the stock market that can go up or down as a whole the commodities market always maintains the same value.

It comes as a surprise to a lot of people but the commodities market is actually safer than the stock market. Certainly you can take great risks if you want to but if you know how to hedge properly the commodities market can actually be an effective way to reduce your risk. The reason for this is that it is very unlikely that a commodity will become worthless; unlike a company that can go bankrupt a commodity will always have some value.