Currency and Commodities 21 December 2020 1:11:PM

Hello Readers, apart from equity trading we have heard of Currency and commodity trading too. But have you ever wonder how Currency and Commodity can enhance your portfolio? Commodities are often a significant way for investors like you to diversify your portfolio beyond conventional securities. Since commodity prices appear to shift in opposition to stocks, during times of market uncertainty, some investors often rely on commodities.

What is a portfolio?

A portfolio is a collection of financial investments like stocks, bonds, commodities, cash, and cash equivalents, as well as their fund counterparts. Stocks and bonds are generally considered a portfolio's core building blocks, though you may grow a portfolio with many different types of assets including real estate, gold, paintings, and other art collectibles. Diversification is a key concept in portfolio management. A person's tolerance for risk, investment objectives, and time horizon are all critical factors when assembling and adjusting an investment portfolio.

What Are Commodities?

Commodities are physical goods, such as livestock or precious metals, that can be used as-is or to make other goods. They have become a more mainstream investment since the turn of the century, and it can make sense to allocate part of your long-term investment portfolio to them if you know what to expect.

Commodities are broadly classified as

• Soft commodities: -  Commodities that are naturally grown and have a limited shelf life like agricultural products such as grains, tea, coffee, and livestock.

• Hard commodities: -  Commodities that are obtained by drilling mining and other activities metals like gold, copper, and aluminum, crude oil, natural gas, etc.

Commodities as a part of your portfolio.

When you invest in commodities, you generally include them as one asset in a long-term portfolio you intend to use for a goal, such as future income. Through this approach, you would allocate a certain percentage of your overall portfolio to commodities. An investor can, for example, choose to allocate 5% to 15% of his investment portfolio in commodities. An investor should prefer HARD COMMODITIES as they have a long shelf life.

Benefits of adding commodities to your portfolio.

1. Diversification

Commodity prices are influenced largely by supply and demand, which means they will not necessarily move in tandem with the stock market. In addition, goods can't go bankrupt like companies. Commodities tend to have a low to negative correlation with stocks and bonds. A correlation coefficient is a number between -1 and 1 that measures the degree to which two variables are linearly related. Having a portion of your portfolio in commodities versus entirely in stocks and bonds allows you to hedge against sharp declines in the stock market.

2. Inflation hedge

Commodities have in the past performed well during inflationary periods even as stocks and bonds have lost value. While commodities have shown strong performance in periods of high inflation, investors should note that commodities can be much more volatile than other types of investments.

3. Growth Perspective

Individual commodity prices can fluctuate due to factors such as supply and demand, exchange rates, inflation, and the overall health of the economy. Depending on market conditions, a commodities portfolio may reward you with higher returns than you could have achieved through a traditional asset allocation of stocks and bonds.

What is Currency trading?

Currency trading is a 24-hour market that is only closed from Friday evening to Sunday evening, but the 24-hour trading sessions are misleading. There are three sessions that include the European, Asian, and United States trading sessions.

Why should you add currencies to your portfolio?

The value of investments is impacted by changes in global currency exchange rates.

1. Hedging:

 Investors, as owners of companies and assets, have currency exposure through exchange rate fluctuations. Three correlations exist between stock price performance and exchange rate fluctuations: zero correlation, negative correlation, and positive correlation.

2.Speculation:

The pair prices are affected by news and the actions of the governments and the authorities all over the world.  One can benefit from the intraday moves and fluctuations that take place because of the news flow.

To sum it up the major focus of a portfolio is to diversify the risk and get better returns. Hence it is always a smart decision to invest in avenues that are not closely related or have a negative correlation. Investing in commodities acts as an inflation hedge and investing in commodities like Gold reduces the deviation of your portfolio. Currency favors investors who are exposed to currency risk and might end up with a loss due to currency depreciation.

As a one-stop investment avenue along with Equity trading, we also provide commodities and currency trading too. To invest in currency and commodity you can easily open a Trading account with GEPL capital and take your first step towards investment and financial success. to invest Click here.