Why are commodities futures the best investments for high net worth people
l looked at the forbes list today, and the ones that werent internet boom
people, in some shape or form traded commodities. Looks like they are a
great financial instrument to make big gains, and l guess to also lose
big.
You can get rich or poor because of the margin; it leverage ur
investment.
Example: let say the margin requirement for the December delivery of 5,000
bushels of wheat is $700. The price of the commodity is $1.00 a bushel. You
bought $5,000 worth of wheat for $700. In a week, the price of wheat goes
up to $1.25. You decide to sell & make $1,250 in profit (1.25-1.00 x 5,000). If you decide that you want to receive the wheat in December & make cereal, you pay $5000 minus the $700 that you already paid.
They can make big gains, but historically they underperform
stocks. Their allure is that they are not correlated with stocks, meaning
that they maintain their value when stocks go down, and may even go up when
stocks go down, as people sell stocks and buy commodities for inflation
protection. Their value is in their diversification benefits, not in
their total return.
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