Stock Trading Vs Commodity Trading-Where You Can Get A Better Return?

Published: 05th February 2010
Views: N/A

Many investors feel afraid of investing in commodities. Commodities investing over the years has been seen as a risky asset class. Now, if we make a statistical comparison of commodities as an asset class with the other asset classes especially with stocks, we find them to be no more risky. There risk is at par with the other asset classes. But investors have shunned commodities over the years as an investment for whatever reasons. Stocks have always been the most preferred method of investment.

Let's do some comparison as this is quite baffling as the performance of commodities has been much superior to that of stocks over the years. Dow Jones Industrial Average (DJIA) tracks the performance of 30 blue chip stock listed on NYSE. It is a price weighted average. On the other hand Dow Jones-AIG Commodity Index tracks the performance of a basket of commodities.

Let's make a ten year comparison. DJIA had a negative return of -7% in 2002. While the Dow Jones-AIG Commodity Index had a return of 26% in 2002 alone. So what was better? Investing in commodities or investing in stocks? Now, DJIA had an average return of 7% over a period of 2002 to 2005. In the same period of 2002 to 2005, the Dow Jones-AIG Commodity Index had a return of 21%. You can now clearly see that commodities as an asset class had outperformed stocks in the last decade. But still investors feel shy of investing in commodities. This has something to do with human psychology.

Investors are afraid of what they don't know. Many investors tend to stick with an investment that they know even if that investment doesn't perform well for them. For example, in the recent stock market crash of 2008, investors lost trillions of dollars. In 2000, when the dot.com bubble burst, investing public lost something like $3 Trillion. Yet, no one warns of stocks! Many investors are afraid of commodities because they don't know much about them.

In stocks, you are only allowed a leverage of 2:1. What this means is that you need to have 50% of the capital in your trading account with the broker if you want to trade stocks on margin. On the other hand, most commodities get traded in the futures market. Futures trading allows leverage as high as 10-15:1 as compared to 2:1 for stocks. The margin requirement for different futures contracts may vary.

Suppose, you decide to trade Soybean Futures on CBOT (Chicago Board of Trade). The margin requirement is only 4%. What this means is that with only 4% in your trading account, you can buy $10,000 worth of Soybeans Futures Contracts. Now if the trade goes your way, you make a hefty profit on a very small amount.

But hey, leverage is a double edged sword that cuts both ways. If the market goes the wrong way, you can lose a lot more than your principle. Anything you do in life is risky. Even your marriage! Love can turn sour and end up in a messy divorce. But that doesn't mean you shouldn't love.

Commodities are going to see a many decade long boom in the first part of the 21st century. This boom is being fueled by the increasing population and it's demand for a better living in all parts of the world. Countries in Asia, Africa and other parts of the world are developing. They need resources for their development. Commodities are the most important resource that are going to face high demand in the coming decades. Take the example of oil. Without oil, the global economy cannot run. With it's supply dwindling and demand going up, you should expect to see crude oil reaching the $200 per barrel in this decade! So get ready for trading commodities and making a fortune in 2010 decade!


------

Mr. Ahmad Hassam has done Masters from Harvard. Learn Commodity Trading. Read the story of Richard Samuels, a post office mailman with a head injury and how he made a fortune with these Forex Signals.

Report this article Ask About This Article


Loading...
More to Explore