All investments has its benefits, as well as its risks. If you are looking for a way to diversify your portfolio, you might look into investing in some successful areas of the market you may be unfamiliar with.

Many of us invest in commodities, or raw materials, because they are essential to our everyday lives. But what are the benefits and risks of investing in commodities? Is it a worthwhile investment? Below are some pros and cons of investing in commodities.

PROS

Opportunities for Growth

Though most investments have slow or steady growth, it is quite possible to see a commodity price grow extremely quickly. An example of this is when one purchases a particular commodity in bulk as its price is rising, and then sell it when the demand for the good is high. This is what happened to many investors of iron in the iron ore rush in 2008-2010, when iron-ore was particularly in demand in China.

Diversification

Investing in the right commodity can help diversify your portfolio and decrease chances of loss, especially if you are investing in stocks. This is because commodities tend to do the opposite of stocks; if stocks falls, commodities tend to rise, and vice versa. This creates a good balance in a portfolio.

Protection against Inflation

Inflation affects all aspects of the economy. This is especially true for those who buy and sell stocks, as inflation can impact profits and returns on the investments of these stocks. Different areas of the market react to inflation differently; though usually you will see a loss in profit. Commodities, however, can benefit from inflation. This is because as the price of goods and/or services rise, the commodity price rises along with it; as a result, investors can make a profit due to demand for the product.

Securities

If you want to invest through a broker, you can sleep soundly knowing you will be protected by the National Commodities Association as well as the United States Commodity Futures Trading Commission against fraud, manipulation, and abusive trading practices. That being said, it is also important to research your broker before investing — a quick Google search can usually tell you whether a broker has committed violations before and/or if they have license to practice.

CONS

Volatile

While particular commodities can remain steady for some years, commodities are one of the most unstable assets. Experts have suggested that commodities can be twice as volatile as stocks. While volatility may not always be a negative in investing, it can make it a risky investment for some people.

Some Strict Rules and Regulations

While it is in place for a reason, some argue that the rules and regulations that exists in commodities markets deprive buyers and suppliers the power of choice. The commodities markets has some of the most strict rules and regulations out of all markets; for example, all brokers need to be registered with the National Commodities Association, and all goods must attain a certain quality in order to trade in the market at a later date.

Investing Long-term

In order to really gain profits from investing in commodities, you will need to commit to your investments. It is usually suggested that investors keep their commodities for 10 or more years — thus investments must be kept through all the rises and falls of the market in hopes that profit can be gained when the time comes.

Thorough Research

Unlike mutual funds where investors can easily understand how they are investing, lots of thorough research is needed before an investor can really invest in commodities. There are all kinds of different commodities, from agriculture to all kinds of metals, and the benefits and disadvantages as well as the supply and demand of each will vary. The returns and/or profits of some goods are based on speculation, while some goods such as agriculture are more steady in its growth and profit. When investing in commodities, you need to know if investing in that certain good will benefit you or not.

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