At further detailed level, more subclasses can be identified. Metals can be
split into precious and non-precious metals.
Indirect investments
Nowadays,
the ownership of shares, bonds or currencies is registered
digitally.
Consequently, the transfer of title takes place without physical hassle. The
physical process, however, is unavoidable with commodities. As they are
consumed physically they also have to be transported materially.
Analogously, storage of commodities requires physical storage capacity.
Nevertheless, investors and financial traders who would like to be exposed
to commodity prices typically dislike to purchase commodities physically,
because then they must store the actual products. However, most of these
market participants do not hold tangible storage capacity. Moreover, most
of them do not want to be involved with the relevant concrete matters at all.
This is why investments are made indirectly.
Luckily for them, exposures
can be created in many ways.
Indirect investments in commodities can be made by placing capital in
equity.
One could, for instance, buy shares of mining firms, oil and gas companies
or corporates which produce or process agricultural products. However, this
brings risk beyond commodity prices. After all,
a stock price is not just
influenced by the relevant commodity price. Moreover, a corporate share
price is impacted by numerous drivers, amongst which are the management,
logistical success or failures
and operational performance, but also the
management and possibly even accounting scandals. This often leads to a
discrepancy between the stock price development and the underlying
commodity price development. This
basis risk could work two ways,
namely in favour or adversely. One could profit from leverage but, on the
other side, one may want to avoid underperformance. Therefore, investors
often seek an alternative indirect investment opportunity, with a more direct
relationship. Commodity derivatives provide such an alternative. A
commodity derivatives contract is an agreement whereby the underlying
value typically concerns a commodity or commodity index. Examples of
commodity derivatives
are commodity futures, commodity options and
commodity swaps.
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