Posted on 12 February 2012.
Exchange traded commodities (ETC) have a lot in common with exchange traded funds (ETF). A typical ETF is similar to a mutual fund because it tracks an assortment of assets. By following an index, an ETF gives the trader an opportunity to invest in a wide variety of instruments while avoiding great risk through diversification.
The underlying assets of exchange traded commodities are usually as diverse as those in ETFs. However, they are all commodities. In this way, an ETC is invested a little more narrowly. Some exchange traded commodities follow a single commodity, such as wheat or iron, through investments in various producers of such goods. Others track a selection of related commodities, such as energy or metals.
Exchange traded commodities, much like other financial instruments, have their advantages and disadvantages. They are fairly new to the market and not everyone is familiar with their characteristics and their financial possibilities. You can invest in ETCs in two ways. Each form of investment has its advantages and disadvantages.
• You can invest in exchange traded commodities in the form of futures. Some people prefer this format because it allows them to invest directly in the underlying asset. They also prefer to take advantage of the opportunity to buy ETCs on margin. However, futures contracts in exchange traded commodities are only available in certain markets and are not available to the average trader.
• You can also invest in ETCs by purchasing shares in the companies, which produce or manage the goods. Instead of buying actual quantities of oil or metal, you invest in oil drillers and miners. Accessibility is the main advantage of this type of trading in ETCs. You can buy them through a broker on nearly any major stock market. However, the value of your shares will be affected by factors other than the accepted value of the exchange traded commodities.
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