Understanding commodities

Commodities such as agricultural products, precious metal and natural resources can also be used for investment purposes.

You can buy the physical commodity itself, but a more likely approach is to invest in futures contracts or Exchange Traded Commodities (ETCs), which can give you access to a range of commodities more cost effectively. The commodities market is truly global and this provides an extra dimension to investing, but creates additional risks to consider.

Before you choose an investment, you should be aware of the possible rewards and be comfortable with the level of risk involved.

Rewards

Commodities are a good way of diversifying a portfolio of investments because, historically, prices have been closely linked with inflation, which cannot be said for many investment types. Although there is a risk of considerable short-term loss, there is also the potential for very good returns. You will pay lower fees for trading in commodities than those for trading equities but this type of investment needs to be carefully managed.

Risks

Commodity prices can be affected by many factors including supply issues, and economic and political influences, so there are a number of possible risks. You should consider the risks carefully, avoid investing too heavily and make any investments as part of a diversified portfolio. ETCs give some protection from the severe ups and downs in commodity prices as they act like a unit trust by spreading the investment, but there is still a strong risk of financial loss. Despite commodities historically providing protection against inflation, this is not guaranteed and price movements can be extreme.

Important information

The value of investments and the income from them may fall as well as rise and cannot be guaranteed. Investors may not receive back the full amount originally invested. Past performance is not an indication of future performance.

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