Have you ever wondered how people make money from the rise and fall of Foreign Exchange, the Price of Gold or Oil? For many, the investment landscape is dominated by the stock market. You buy your shares and, if they are the right ones, they go up, you sell, and make a profit. However, as we all know, it is not always as simple as that!!
Falling markets, leverage accelerated corrections and company specific variables may impact on your outcome, even though your view may have been correct.
The Oil Sector
An example of this may be in the Oil sector. Let’s say you are bullish on oil and buy your oil company shares – for example in BP. Oil prices move up (things are looking good) but then, as was the case with BP. One of their production platforms catches fire and explodes in the Gulf of Mexico and the share price is shredded and an environmental disaster is on the cards.
A double whammy as in all likelihood you have lost money, yet your view on Oil was correct! Ouch.
Investing at the cause
Being able to sidestep these kinds of things and get paid on your view, may require you to step outside of the stock specific space and, instead, look at trading the commodity instead (assuming that your view is on the commodity).
How about Gold?
Perhaps your view is that Gold prices will rise, as many are predicting. Your traditional investor would look to invest in gold producing companies – nothing wrong with this, but what if your “go to” stock is Newcrest Mining?? Hmmmm not so clear cut, given the internal problems at the company, which extend beyond simply the Gold price.
Same with Starbucks – perhaps, as is the case with my own view. The demand for coffee drinking is higher, plenty of new store openings in China and India (gargantuan new markets) the company is being run on a more efficient footing and so on. However, with a drought in Brazil, as is the case right now. As well as stronger global demand. Rising coffee prices may squeeze Starbucks profitability – not so good for the share price. So how about trading the commodity itself, Coffee?
Share investing is pretty straightforward and most people are reasonably comfortable with this. However, commodities are often perceived as less accessible and not for Mum and Dad. While I don’t personally believe this to be true, the other side of the coin for this argument is that trading the commodity itself is a purer, cleaner and direct way of literally investing at the cause or source of your view. You think oil is going up – buy oil – $10/1cent move and 100% correlation between the price and your outcome.
That said, getting some new skills in this space is probably a great idea – afterall, like any endeavor, if you want to succeed you need to have the right skills.
Where to find specialist help?
Well if it is coffee you want help with, my head of futures owns a coffee plantation. However, for a broader education and game plan for gaining specialist knowledge in this area of trading and investing – FX, Commodities, Indices and Futures, you may wish to grab this while you can.
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