Commodities versus Stocks versus Real Estate

Yesterday, I described the difference between equity investments and debt instruments. Today, I will break down three main types of equity investments. First of all, commodities are products that are in demand, but they are supplied by many sources without qualitative differentiation across the market. In other words, they are the same quality throughout the market, so price is determined by the market as a whole. For example, there are standards in what makes a barrel of light sweet crude oil. Regardless of where it comes from or the company that delivers it for refining, the price will be uniform across the world on any given day or time.

There are many types of commodities. They are natural resources such as oil, natural gas, coal, and iron ore. There are agricultural products such as cotton, sugar, coffee beans, soy beans, rice, wheat, corn, and oranges. There are livestock such as pork bellies, cattle, and hogs. There are precious metals such as gold, silver, platinum, copper, palladium, and aluminum. There are also foreign currencies such as the US dollar, Canadian dollar, Australian dollar, Euro, Swiss franc, Great British pound, and Japanese yen. All are traded on a daily basis from commodity exchanges in world financial districts.

Most commodities are traded in futures contracts. This means that the underlying instrument or product is bought or sold at a certain date in the future at a specified price. A futures contract carries the obligation to buy or sell at a specified price and date, which differs from options contracts where it gives the right to buy or sell at a specified price and a set time frame. The spot price is the given price quoted on the market for immediate settlement of payment and delivery. Spot settlement is usually one or two business days from the trade date.

Since commodities will fluctuate with the market on a daily basis, investments can be risky if the market moves against you. So it is always important to identify the trend. Stocks are also similar in the way that they fluctuate daily with the market. Most people are familiar with stocks, or shares of ownership of a company. Because of the volatility of the markets, both are risky investments unless you have extensive trading experience in the given market.

With real estate, the market fluctuates far less. Mortgage rates and interest rates are the key variables that determine fluctuations. This is why many investors prefer real estate to commodities or stocks. They are much more conservative investments. However, as you get more conservative, the returns are usually lower as well.

So again, the question is - what type of investor do you want to be? What experience do you have in the particular market? Are the returns you get going to help you meet your financial goals?

There will be more correlations among the relationships of asset classes. Stay tuned ...

Hear this, you who trample the needy, to do away with the humble of the land, saying,
"When will the new moon be over,
So that we may sell grain,
And the sabbath, that we may open the wheat market,
To make the bushel smaller and the shekel bigger,
And to cheat with dishonest scales,
So as to buy the helpless for money
And the needy for a pair of sandals,
And that we may sell the refuse of the wheat?"
The LORD has sworn by the pride of Jacob,
"Indeed, I will never forget any of their deeds." Amos 8:4-7 (NASB)

If you have comments or questions, please feel free to contact me at the address below.
Email: DeltaInspire@panama-vo.com