Understanding the Pros & Cons for Commodity Trading

Pros

  • Exposure to a variety of opportunities for advancement. A rising demand for a commodity can cause its price to rise significantly over time. For example, iron ore prices more than tripled between 2008 and 2010, owing to massive demand in China and its supercharged economic growth.

  • Benefits of diversification. Historically, commodities have had a low or negative correlation with stocks and bonds. Investing in commodities may be of interest if you want to hedge your stock and bond investments.

  • Inflationary protection. While inflation reduces the value of your stock and bond investments, commodities typically benefit from inflation. Because when the price of goods and services rises, so do the prices of the commodities used to produce those goods and services.

Cons

  • Extremely volatile. Commodities are one of the most volatile asset classes on the market. Commodities are twice as volatile as stocks and nearly four times as volatile as bonds, according to one study. Commodities are risky for some investors due to their extreme volatility.

  • No outstanding performance. Commodities, unlike other asset classes, do not provide exceptional returns to investors.

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