Commodity Investing – Flaws of purchasing Shares in Commodity-Related Firms
Under today’s harsh economic conditions, individuals have searched for other ways to take a position their cash to live. With lots of investors today thinking about commodity markets, In my opinion it might be important to allow them to understand how to avoid wrong methods for commodity investments.
Although riding the commodity bull today will work for investors to reap profits, buying shares in commodity-producing and repair companies is not a great way for unskilled investors due to many latent risks involved. Thus, this information will address why it is not better to buy shares in commodity-related firms.
Today, a primary reason why buying shares in commodity-related firms isn’t beneficial for that average investor happens because shares come from the stock exchange, a business that is usually directed by feelings and analysts. This affects the responsiveness of those stocks towards the fundamentals of supply and demand.
As supply and demand are figures that may be reported quarterly, investors may have a quarter’s time for you to prepare themselves from alternation in trends of those fundamentals. However, when they purchase stocks of commodity-related firms, the scenario will change because reaction to alterations in fundamentals could be excessively negative or positive.
For instance, when China’s economy was growing quickly from 2001 to 2005, its stock exchange declined throughout the period since the public overreacted towards the negative news present, speeding up the popularity of decline despite strong economic fundamentals.
As Paul Samuelson once stated, the stock exchange has indeed anticipated 9 of history 5 recessions. With your irrational reactions to news, would you still trust that the profits from stocks in commodity-related firms could be foreseeable and consistent with alterations in supply and demand? I believe not.
To include on, commodity-related firms sometimes cannot profit when government policies can increase commodity prices. An example could be ecological rules in drilling oil.
Within this situation, the rules rather increase production costs of these companies. This could decrease internet earnings and create a loss of stock values. However, way to obtain goods will get reduced, causing commodity prices to increase. With this particular, buying stocks in commodity-related firms lead you to miss out rather of benefiting from the expected increase in commodity prices.
Besides each one of these, scandals of these companies may cause stock values to plummet while commodity prices rise. For instance, the current BP oil spill caused stock values of BP to fall despite no fundamental alterations in supply and demand of oil.
To worsen, the negative impact of these scandals can help to eliminate earnings of commodity-related companies, causing stock values to fall further while allowing other of these firms to capture more share of the market. In this manner, when the problem of these scandals doesn’t get solved correctly, holding stocks of commodity-related firms may cause investors to suffer while commodity prices still rise.
In addition, commodity-related firms can fake their balance sheets and report greater earnings to raise their stock values. If the investor be careless and find out this as optimism for the organization, it might spell disaster for him when such lies get uncovered. This could make the investor to bleed money while other investors bring in profits in the rising commodity prices.