Commodity Stocks: The Potential, Perks And Profit

Even as commodity prices gain, investors are beginning to get clueless as to how to benefit from such a jump. Buying commodity futures is often not the optimal way to profit from the price movement as it may involve taking exposure via futures (derivatives). Buying futures of the underlying commodity is betting on the future price of the underlying commodity, which is a risky proposition for most investors. Instead, taking exposure to commodity stocks may be a good idea. Karan Bhojwani explores the benefits of investing in commodity stocks and explains the correlation between commodity prices and the key benchmark equity index

- Karan Bhojwani

The stellar rally in equity markets has managed to surprise even the best of seasoned investors with Sensex gaining almost 30 per cent from its lows made in March. What this amazing rally has done is captured investors’ imagination, so much so that the impressive performance of other asset classes is almost forgotten. Commodities, for instance, have also managed to stage a strong recovery in the past few months with copper gaining 25 per cent since March 23 and zinc up by almost 20 per cent since March 23. Crude oil staged a solid recovery to gain 63 per cent from its March lows. When it comes to precious metals, silver is up by almost 26 per cent even as gold is up by 13 per cent since March 23.

One of the most logical ways to benefit from the rise in commodity prices is to buy the underlying commodity. To take exposure in the underlying commodity, the only way for investors is to take exposure via the futures market. But a majority of investors are averse to risks and may not prefer to take exposure via this route. In such cases, commodity stocks emerge as a lucrative option for investors. Commodity stocks are stocks of those companies which are directly or indirectly related in the manufacturing process of the commodity and hence have a positive correlation with the commodity.

Commodity Investing and Diversification