In the previous step we looked at how investing in Real Estate can be an interesting addition to your portfolio in order to spread your risk more and generate another new income field. In this step we will look at another way to diversify your investment portfolio which is through commodities and gold.
Investing in commodities
Commodities (or natural resources) are important for the stock market in two ways: firstly many companies rely on commodities. If you have any Coca Cola shares then of course sugar prices at some point affect Coca Cola profit and therefore share and dividend prices. For any shares you might have in big retail or fashion stores wool prices will affect these share prices at some point in the chain and many other companies might rely on such commodities as oil, copper, grains and aluminum.
Apart from their importance to the companies that trade on the market, commodities play another part on the market as they too can be invested in directly, just like shares and bonds!
There are generally two commodity classes:
- Soft commodities – cocoa, wool, cotton, wheat, rice, coffee etc. These prices can fluctuate a lot, especially when a shortage exists (think about a bad harvest for grains, rice, potatoes or coffee for example and how this can drive up prices). Apart from the weather, also a growing population as well as people’s eating patterns effect these prices.
- Metals – zinc, aluminum, copper. Prices are less volatile as their time takes much longer: a new mine takes much longer to open and operate. It’s easier to predict how prices are affected, also if new technologies such as microchips are developed that require more or different metals.