Investment in commodities excites many investors because of the common belief that commodities being tangible, the risk factor here is less. However, the real situation is different from this. Commodity market has its unique set of risks. Let us discuss how.

Most of investors trading commoditiesare not trading them in the spot market. This spot market trading is done by the actual producer of the commodity and the consumer who purchases the commodity directly from the producer. When this transaction is done, the producer either profits or sells it at the target price. The new owner of the commodity now puts the product in the futures market for trading.

The other investors now come into the picture and the trading done by them is futures trading. Here they do not buy the product directly. The actual product has already been sold and the commodity producer has received his money. This investor makes profit only when the price of this commodity increases from the price at which he purchased it. Otherwise, he loses.

Commodity investment is more risky than the investment in conventional stock and bond. The basic reason for this is that the commodity price varies a lot and it depends on various external circumstances. Factors such as global supply, political movement and financial changes affect the prices of the commodities heavily. Commodity ETFs have also hit the market recently and people are investing in it. However, please remember that these investments are based on futures and so they are risky. Invest in them if you are adventurous and strong enough to withstand losses, in case it happens.