Posted on 13 June 2012.
Soft commodities provide some of the most lucrative investment opportunities for those who know what they are doing. Unlike hard commodities, however, more than just the market determines their value. In order to predict how a soft commodity will perform, you must first understand what this type of stock is and what makes it unique. Investors who do not take the time to do the proper research often end up losing money on their investments. Investors who know what to look for and take the time to find it, however, can make huge returns.
The first step to understanding soft commodities is understanding commodities in general. By definition, a commodity is any product that is mined, gown or produced to meet a want or need. A hard commodity is any one of these products that does not perish when it is stored. Precious metals and oil are both hard commodities. A soft commodity, such as corn, coffee or wheat, however, does perish when stored for long periods of time. While the definition seems relatively simple, it does present some difficulties for investors. Most perishable products must be grown, hunted or harvested. Their quality and quantity is dependent on climate and weather and can be difficult to predict.
While the unpredictable nature of the soft commodity market can be troublesome to investors, it has also allowed the futures market to flourish. Most soft commodity stocks are sold in the form of futures contracts. They are sold by farmers who hope to solidify the value of a future crop and are bought by investors who hope to make a premium based on the risk they are taking. If you want to make money on the soft commodity market, however, it is imperative that you do your research. Growing conditions, supply and demand must all be understood if you are going to accurately predict how much soft commodities will be worth.
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