The Top Ways to Invest in Commodities

As this guide has rather exhaustively demonstrated, commodities are as complex as the people who trade in them. Because of this, the top ways to invest in commodities are as follows:

1. Pick a commodity or commodities that are interesting.
No successful commodity trader gets there purely because of his understanding of abstract mathematical formulas. Commodities are impacted by real life events. Even the steadiest commodities will experience fluctuations. The only way to have some notion of what is around the bend is to be a full participant in the process. By choosing a commodity that is interesting, a trader or investor will be able to stay motivated to keep track of developments that are affecting that particular commodity.

2. Register with a licensed and affiliated broker.
No matter how well informed any trader is, no one will be able to interact meaningfully unless that trader is registered with a licensed broker. Each exchange house requires that all traders are members, or are affiliated with members of the Commodity Futures Trading Commission.

3. Be prepared to lose initial investments.
For those who are attempting to trade and invest in commodities for the first time, being prepared to lose money while learning how quickly the market can change and shift will save potential heartbreak and help individual investors avoid a personal financial crisis. Using trailing stop losses can help lock in gains and protect investors from some of the downside risks. It is far more important to be profitable than it is to be right all the time.

4. After experience has been gained, invest in indexes.
After an individual investor or trader has learned the ropes of commodities trading, investing in larger financial institutions, such as indexes, can yield surprisingly profitable results. However, this should only be attempted after significant experience has been gained by the individual investor.

Important Market Indicators

Commodity bull and bear cycles usually occur over long periods of time. However, some key commodities can frequently provide clues as to what may lie ahead in terms of the direction of the market. The price of gold and silver is usually taken to be an indicator of the overall health of the commodities market. Additionally, oil prices have a heavy impact on how the commodities market is perceived.

If any of these main commodities suddenly experiences a price hike or price drop, investors and traders should take note that the market is probably going to experience a fairly significant change. Because these are tied into industry and general economic perceptions of fiscal reality, they are considered to be extremely important market indicators.

Additional Recommended Resources

Each year, innumerable books, blogs, and magazine articles are devoted to the intricacies of trading in the futures market. The internet has played a particularly vital role in the development of the commodities market, and continues to generate enormous amounts of constantly updated information on potential futures positions.

Individuals who wish to seek out additional information and resources about commodities trading are encouraged to explore the resources offered by the Commodity Futures Trading Commission, which regularly publishes texts detailing their studies of trends in energy stocks. Websites such as Bloomberg.com frequently have intelligent, highly informed web articles that can help investors seek out the information they need to make crucial decisions.

Several major exchanges maintain websites that provide up to the minute information on trades and other financial transactions. Keeping up on changing regulations in terms of how trades are managed is also vital to any investor or trader. These websites post their new rules as they change.

The best resources are frequently the people who have experienced the market first hand. By contacting brokerage firms either through the phone or via an online software platform, an interested individual can schedule an interview with a learned broker to truly understand how this incredibly complex and versatile system works. The key to any informational quest is to enjoy the experience of discovery and be unafraid to ask questions. Most people, when asked an intelligent and informed question, will be happy to give an interesting and fully rounded answer.

How do you trade the News in forex trading?

How do you trade the news in forex trading?

A lot of people have been asking on how to trade the news. Although i strongly do not recommend just trading based on news only, but here’s some pointer.

1. News are categorised into the level of impact. low, medium, high just like the word high, high impact news can change the trend of the market. Changing a downtrend into an uptrend and vice versa.some medium impact news do have such capability too.

2. Watch out for the upcoming important news weekly and daily. And note which pair will the news affect.

3. If you are in a position and there will be an upcoming high impact news in 2hrs time.
Take either half your profits first as the market will start going frenzy usually 2hrs before the news. Shift your stoploss to breakeven. This way, if you are going long and the news impact reversed the market, you still got half your profits and broke even on the other half.

4. if you are not already in position before the news. wait for 10 mins after the news is out before entering. as in the first 10 mins, you will see price go spiking around and it happens alot of time when once the news is out, price goes spiking up real fast. you will be there thinking if you don’t catch the boat now, you are going to miss a hell lots of pips. and when you got in at the high, price went spiking even faster downwards. what the..?!

Did this happen before to you? Don’t worry,it happens to every one.
This is how the market works.

One reason is that when the news is out, major players throw in a sum of money enough to move the market up. when people sees the market moving up, they jump in to push it even higher as they went in with the ‘fake’ movement. The major players then wait for price to go up high enough and then they step in to throw in large influx of money to short it. gaining great amount of pips in a short period of time. I know this happens, and it happens a lot of times.

The other reason is that, the market is based on sentiments. Even though the news is positive, and people start buying it long. making the market move up. But if the general market feel that the news is not as good as expected or for some other reason. The big players and professional traders will start shorting it. Leaving the losses to those who just traded on positive news.

Therefore, one way to go around it is to wait for 10 mins after the news is out to evaluate the REAL market movement before entering.but as always, i highly recommend adding price action confirmation to it. Then you have a high probability winner.

Fundamental analysis of stocks: overview

There are a number of ways that a company can be evaluated when an investor or trader is deciding whether to buy or sell its shares.

Much of the information needed to make such a judgement can be found in a company's financial statement, which contains a vast amount of information pertaining to its performance.

This blog will give you an introduction to what is contained within a financial statement. The subsequent lessons will show you how to use it to analyse a company and decide if its shares are worth buying or selling.

A financial statement contains performance indicators

A financial statement allows you to examine a company's financial health, revealing how able it is to cover its debts and other obligations.

You can also look at its financial performance, which shows how efficient management is at turning assets into profit.

And you can look at how high or low its current share price is compared to its historical average and the company's "real" or fundamental value.

What is a financial statement?

A financial statement is a bit like a company's report card. It shows investors how it has performed over the past year or financial quarter, what levels of debt or assets it has on its books and how much profit or loss it has generated.

The main components of a financial statement are the:

• Balance sheet
• Profit and loss statement

They are usually filed in January, April, July and October.

As well as giving a detailed breakdown of the company's profit, sales, debt and other important figures like its price to earnings ratio and any dividends it plans to pay, a financial statement will compare these with those of previous periods (usually a year earlier) and provide a prediction for the coming quarter and year.

Reports include comments from a company's management on why its results were as good or bad as they were and what the company plans to do to rectify or further improve its performance.

They also discuss market risks that the company is currently facing and any legal proceedings it may be involved in.

The balance sheet

A balance sheet provides a snapshot of a company at a specific point in time, detailing everything that it owns (its assets), everything that it owes (its liabilities) and how much shareholders have invested in it (its shareholder equity).

Company assets

Assets include physical property like equipment, inventory and production facilities. They also include intangible assets like trademarks and a company's brand. Also included as assets are any investments the company has made as well as any cash it is holding.

Assets are usually listed according to how quickly they could be converted into cash.

The term current assets is used to refer to assets that the company expects to sell and convert into cash within one year.

Non-current assets are those that would take longer than a year to convert to cash – these include fixed assets like office fittings that the company needs to run its business and does not intend to sell.

Company liabilities

Liabilities include any money that the company owes to banks, landlords, suppliers and employees. They also include tax owed to the government and future obligations to provide goods or services to customers.

Liabilities are usually listed according to their due dates. Current liabilities are those that a company expects to pay off within one year. Long-term liabilities are those that it expects to pay off more than one year later.

Shareholder equity is the money that could be returned to shareholders if the company sold all of its assets and paid off all its liabilities.

Profit and loss statement

The profit and loss statement (called the income statement in the US) details the revenues, costs and expenses that a company has generated.

Subtracting expenses from revenues shows how much profit or loss it has generated – the "bottom line".

Unlike the balance sheet, which zooms in on one point in time, the profit and loss statement provides figures for a period of time – usually a financial quarter or a year.

The statement includes any money that the company has received from selling its products or services to customers. Revenue is sometimes referred to as "net sales" or "operating revenue".

The statement includes within expenses its selling, general and administrative costs, any taxes it must pay and any depreciation of the value of its assets.

If the company's earnings exceed its expenses it has made a profit. If its expenses exceed its earnings it has made a loss.

The profit and loss statement also tells you how many of a company's shares are outstanding and presents useful measurements like the company's earnings per share and its diluted earnings per share.

The profit and loss statement gives shares investors useful information on how well the company is managing its costs and converting sales into income that it can invest in future growth.

Ratios

There are different ways of interpreting a company's health and performance but one common way is by calculating a variety of ratios.

Ratios show the relationship between two different pieces of information in a company's financial statement – for example what proportion of debt and equity the company relies on for funding – and give you a rule-of-thumb way of measuring everything from how efficiently it uses its assets to how well it can cope with its current debt load.

Ratios are particularly useful in that they give you a concrete figure that you can use to compare different companies when you are deciding which to invest in.

Beginner's Corner

What is a Market Maker?

You probably take for granted that you can buy or sell a stock at a moment's notice. Place an order with your broker, and within seconds, it is executed. Have you ever stopped to wonder how this is possible? Whenever an investment is bought or sold, there must be someone on the other end of the transaction. 

A market maker is a bank or brokerage company that stands ready every second of the trading day with a firm ask and bid price. This is good for you, because when you place an order to sell your thousand shares of Disney, the market maker will actually purchase the stock from you, even if he doesn't have a seller lined up. In doing so, they are literally "making a market" for the stock.If you wanted to buy 1,000 shares of Disney, you must find a willing seller, and visa versa. It's very unlikely you are always going to find someone who is interested in buying or selling the exact number of shares of the same company at the exact same time. This begs the question, how is it that you can buy or sell anytime? This is where a market maker comes in.

How do Market Makers make their Money?

Market Makers must be compensated for the risk they take; what if he buys your shares in IBM then IBM's stock price begins to fall before a willing buyer has purchased the shares? To prevent this, the market maker maintains a spread on each stock he covers. Using our previous example, the market maker may purchase your shares of IBM from you for $100 each (the ask price) and then offer to sell them to a buyer at $100.05 (bid). The difference between the ask and bid price is only $.05, but by trading millions of shares a day, he's managed to pocket a significant chunk of change to offset his risk.

How to Measure Investment Risk

When you're talking about investment risk, what do terms like "low risk" "medium risk" or "high risk" really mean? The question you need to answer is, "Can I lose my money?"

To answer this I classify investment risk on a scale of one to five, with one representing a low risk, safe, guaranteed investment, and five entailing the highest risk; the risk that you can lose all of your money.

You take on higher levels of investment risk for the opportunity to earn a higher rate of return than what you can receive using only low risk investments. This makes sense. Yet, if you don't understand the risks your money is exposed to, it can catch you off guard and instead of making more, you'll end up losing. Understanding the categories below, and the investment returns you might expect from each category, will help you avoid unnecessary investment risk.

1. Low Risk Investments, Safe & Guaranteed

When you have no risk that you could lose principal, you have a low risk investment. This is accomplished with safe investments; investments that often have a guarantee backed by the U.S. Government.

2. Low to Minimal Risk Investments Like Short or Intermediate Term Bond Funds

There are numerous types of bonds (government, corporate, municipal), each with its own degree of investment risk. Risk varies depending on the type of bond, and the term of the bond.

The term of a bond refers to the length of time until the bond matures, which is when the principal must be repaid. With a long-term bond your money may be tied up for ten, fifteen or even twenty years; with a short term bond, it may be only one to two years until your principal is safely back in your hands. The longer the amount of time before your principal will be returned to you, the greater the risk.

3. Moderate Risk Investments, A Blend Of Stock and Bond Funds

You can find some middle ground; a moderate level of investment risk that falls between the safety of risk level one and the extremes of risk level four. You find this moderate level of risk by blending together higher risk investments, like stock index funds, with lower risk investments, like short and intermediate term bond funds. A balanced fund will do all of this for you.

4. High Risk Investments, Diversified Stock Funds

High risk investments like stock index funds are best understood by looking at a specific example.

An index is like a ruler. It measures the performance of a basket of stocks. One widely followed index is the Standard and Poor's 500 Index (S&P 500), which tracks the performance of five hundred of the largest publicly traded companies in America. These are companies like Proctor & Gamble, Microsoft, WalMart, Johnson & Johnson, GE, Pfizer and Exxon Mobil, just to name a few.

When you buy an S&P 500 Index fund, the fund owns a little bit of all five hundred stocks. If one of those companies gets in trouble, it has a minimal affect on your overall investment.

What about the odds of all five hundred of the largest companies in America going under, all at once? If that happens, we've got bigger problems on our hands than how to invest our money. For the sake of this discussion about risk, I'm comfortable saying you cannot lose all your money in a stock index fund. Yet you can experience times where your investment value will go down by 50%. For this reason, this type of investment is considered high risk, yet if you're in it for the long term, you've protected yourself from the risk of losing it all.

5. Extreme Risk Investments, Individual Stocks

Anytime you buy an individual stock or bond (unless it is a government bond), you take on a high degree of investment risk, as big companies can and do go bankrupt, and their securities become worthless. You have a tremendous amount of control over this type of risk.

Avoiding extremely high levels of investment risk is accomplished by spreading your money across several stocks and bonds. Picking your own securities and monitoring them on an ongoing basis is a lot of work, and requires a good deal of expertise, so instead of picking and choosing your own stocks and bonds consider using mutual funds, which do the work for you.

Most Common Mistake in Measuring Investment Risk

Most investors can tell the difference between a safe, low risk investment and one that's more aggressive. However, the biggest mistake I see investors make is they don't know the difference between a high risk investment, yet one where they could not actually lose all their money, and an extremely high risk investment, where there is the possibility of losing all one's money. That is the difference between item 4 and 5 above.

The limitations of financial ratios

Applying mathematical ratios to the figures in a company's financial statement can help you build a picture of how a company works, as well as alerting you to potential trading and investing opportunities.

Companies do not exist in a vacuum, however, and a number of external elements will make certain ratios more or less useful depending on the economic climate, government actions and market sentiment.

Even within a company, there may be events – such as the appointment of a new CEO or the launch of a new product – that are difficult for investors to foresee. Things like this can blow out of the water any trading decisions you have made based on analysis of old financial statements.

It is important therefore that you apply financial ratios with caution, remaining aware of their limitations and of other factors that could override them.

No two companies are the same

No two companies are exactly alike, and that is especially so when they are operating in different industries.

As discussed in the previous lessons, capital-intensive companies like airplane manufacturers rely more heavily on debt, have less liquid assets and tend to grow more slowly than, for example, software companies.

These factors will affect how ratios such as debt to equity or return on capital should be interpreted when you are deciding whether to buy or sell their shares.

Companies that carry a lot of inventory, which they can in theory sell quickly for cash, (retailers, for example) similarly require a different approach when interpreting things like the current ratio than when you are looking at a construction company.

Size matters

Companies also require a different approach depending on their size.

Small-cap companies often pay more for their debt than large-caps, and this will affect the way formulas like interest coverage ratios need to be interpreted. They also tend to have faster growth prospects, and this will change the way things like the discounted cash flow model are calculated.

A change in destiny

A company’s destiny can change with just one key event, making analysis of its historical performance virtually redundant.

When apple launched the iPod, for example, everything from its price to earnings ratio to the fair value that analysts assigned it changed dramatically.

A new CEO can also introduce dramatic changes at a company that will have been difficult for investors to factor in to their analysis ahead of the event.

New leadership at a company can trigger big restructurings, including whether it borrows more heavily or pays off debt and how it approaches other costs. Therefore, financial performance ratios in particular could undergo rapid change while other ratios such price to book may now become misleading.

Market sentiment and macro factors

Market sentiment can change very quickly and the risk appetite of other traders can have a big impact on the price of shares you have invested in, regardless of the fundamental factors you have studied when making your analysis.

Tolerance for risk can increase

There are times when investors have a stronger than usual appetite for risk – for example when an economy is expanding, interest rates are low and stock markets in general are climbing.

At these times they will be more prepared to take a gamble on companies that investors might normally ignore. This could include high-risk small-caps, or firms whose financial performance or health ratios are shaky.

This can quickly push up the share price of companies that based on your fundamental analysis you had decided to avoid investing in or, if you are a CFD trader, to short for a profit.

Risk appetite can decline

Conversely, if other traders become risk averse, a stock that you have analysed in detail and decided is fundamentally strong may be punished along with its peers as investors exit stock markets.

Economic cycles can change

Similarly, a change in the economic cycle, in taxation, in government legislation or even the weather can affect individual sectors disproportionately and drive share prices in directions that may seem irrational if you focus exclusively on companies' financial statements.

The impact of the outside world

A company's share price is affected by much more than the business performance of the company itself.

The price of a share is driven by whether traders want to buy it or sell it, and in what volumes.

If traders like the look of a company's profit, leadership or future growth prospects and they think these factors will push up demand for its shares, they will be more likely to buy those shares in the hope of selling them for a profit later on.

If they are unimpressed with a company's health and prospects and think this will push down demand for its shares, they will be more likely to sell them.

The bigger picture

However, this is only one part of a much broader picture. A huge variety of factors affect a company's share price, many of them beyond the company's control.

Government actions can change the business environment a company operates in, making it easier or harder for the company to compete with rivals and earn a profit.

The general health of the economy can stimulate or decrease demand for a company's products and services, as well as affecting traders' appetite for investing in risky assets like stocks.

Demand for shares in general can rise or fall depending on what time of the year, month or even week it is, especially as traders rely more and more on historical price charts to predict price moves.

Meanwhile, market hype driven by rumours, fashion trends, press coverage or a well-publicised IPO can push a company’s share price up or down, regardless of whether the attention is deserved.

Changes in the price of other assets can also impact share prices. Higher prices for a commodity like oil, for example, can push a company's share price up or down depending on whether it produces or consumes the resource.

Currency exchange rate fluctuations meanwhile, may make it more, or less, expensive for a company to import the goods it needs and more, or less, lucrative to export its end product.

As the world economy becomes more interconnected, geopolitical factors such as a change of government, a war or even the weather can also push around share prices – regardless of how far from a trader's home country these events occur.

Traders need to keep their eye on the wider horizon, factoring in all of the above when they are trying to determine which direction a share price will take next.