In a world of financial uncertainty, it’s good to have
someone we can trust for reliable (if somewhat irreverent) advice. Once more we
turn to our resident agony aunt for help with our investment woes.
My friend says I should invest in oil because, according to
him, it’s the perfect time. What’s best, olive or vegetable?
Your friend is a wise man; you are not. As it happens, this
could be a great time to invest in oil (although, not the sort you drizzle on a
salad) but it could also be a terrible time. The crude oil market is very
volatile right now and in the last year or so its value has fallen by close to
50%. Investors have been getting on board throughout this time, taking
advantage of the low price and expecting it to climb, but it has continued to
fall. Whether or not its current price is the “rock-bottom” one is anyone’s
guess, but it could be expensive to speculate. One way to go about it could be to
start taking small positions in relevant energy stocks and add over time.
Should I care about what’s happening with the stock markets
in China? I mean, I live in and invest in the United States, so why would it
affect me?
Think of it this way. The recent cluster-f**k in Greece was
enough to send the markets into a free-fall not only in Europe, but also around
the world. Well, we’re getting carried away. It was not really a free-fall, was
it? Nonetheless, stock markets were impacted worldwide. Greece may be the
cradle of civilization and the home of incredibly original soccer, but it’s
still a tiny country with a GDP that is lower than several US states. China, on
the other hand, is a global superpower, the second biggest in the world – well,
by some measures, the first. If we draw an apocalyptic comparison (which seems
apt) Greece is a serious case of the sniffles, one that made several people
feel ill and then (hopefully) disappeared, whilst China is the Black Death.
How do the commodity markets work? I want to invest in
several kilos of grain but have nowhere to store the mess.
This is tricky, but interesting nonetheless. The commodity
markets allow you to invest in a number of commodities, such as grain. These
markets began as a way for farmers to sell their harvest to investors and in
the early days they would actually deliver a bag of grain to the trading floor
so that buyers could sample it. This was a slow process, but the buyers soon realized
that certain global events affected the price of the grain they had just
bought, giving them an opportunity to sell it on for a profit or loss. From
this, an entire market was established whereby trades were a form of
speculation, as opposed to an actual purchase.
If you invest in a commodity you are sinking your money into
the hope that it will retain its value or increase it, at which point you can
sell it. You have no physical investment, but you are taking a position on a
virtual market that has been around for more than 100 years, and in a product
that is a big part of the economy and human civilization. It’s not like
investing in stocks, though. The shares investors own may appreciate over time
as their enterprises conquer markets and grow earnings. Betting the price of
grain, chocolate, wheat, gold or oil will go up (or down) is mere speculation,
not an investment in a wealth-creating venture. It’s a trade, period. Care to
flip a coin instead?
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