Before we delve into the details of commodity futures, let’s first define a commodity. A commodity in economics is a basic good that is considered the same regardless of who produced it. With grain, for example, would you really be able to tell the difference between two different brands while blindfolded? Our guess is no!
Commodity futures take advantage of this interchangeability. If you purchase a commodity futures contract, you are making an agreement to buy or sell a certain amount of a commodity on a particular date at a particular price.
Using commodity futures can make sense for both buyers and sellers of commodities.
For sellers, purchasing a futures contract allows them to lock in a sell price that guarantees a profit, since it’s impossible to predict exactly what the future price of a commodity could be. If it went down too much, they could stand to lose money. Similarly, buyers use future contracts to lock in a purchase price.
But what if you’re not actually buying or selling raw goods? What do commodity futures mean for you? Well, some people try to use fluctuating commodity prices to their advantage by purchasing futures as an investment vehicle – basically, by making bets that a commodity price will go up or down. However, commodity futures are extremely risky investments and probably shouldn’t be part of your investment portfolio unless you’ve consulted with a financial advisor.
An annuity is a type of investment vehicle that you can purchase from a bank, typically to supplement your income in retirement. The premise is relatively simple – you set aside a certain amount of money in your annuity and the money grows over a set period of time called the accumulation phase. Typically, you are unable to withdraw any money during this phase without incurring significant fees. At the end of this set period, you receive regular payments from the annuity, which is called the annuitization phase. Hopefully, your investment has done well and the money you originally set aside has grown to a larger sum.
While the general concept of an annuity is simple, there are many different variables to consider if you are thinking of purchasing an annuity, like how long the accumulation phase should be, how long you want to receive payments and whether you prefer a fixed or variable annuity. A fixed annuity means you’ll receive equal payments during your annuitization phase, whereas a variable annuity means your payments will be dependent on how much your investment grew. If your investment does well, you could receive higher annuity payments. If your investment does poorly, your payments will be lower.
Annuities can be a great option if you’re looking to secure another stream of income in retirement. However, the different features we discussed above are just a small fraction of the many details to consider when reviewing your options for an annuity. Check in with your financial advisor and don’t be shy about asking lots of questions before making your decision.
An ETF is an exchange-traded fund. Depending on which ETF you invest in, the fund could be made up of any number of assets, from bonds to commodities to stocks. When you buy shares of an ETF you are buying a portion of the included assets. If the value of the assets goes up, your share value goes up but if the value of the assets goes down, your share value goes down – just like if you were purchasing shares of a stock on the stock exchange.
ETFs have become extremely popular for individual investors lately, and for good reason. ETFs give investors who don’t have a lot of money access to a highly diversified and low-cost investment option. You can also buy and sell ETFs whenever. This last point is what truly differentiates an ETF from a mutual fund. While similar, a mutual fund does not trade like stocks on a stock exchange.
If you’re new to investing, ETFs can be a great option, especially if you only have a modest investment to get started. As always, check in with a financial advisor to learn more.
Mutual funds allow you to your pool money with thousands of other investors and together invest it in various types of securities, like stocks and bonds. Mutual funds are managed by a team of professionals who are responsible for figuring out the best way to invest the pool of money.
There are many benefits to investing in mutual funds for individual investors. First and foremost, mutual funds allow you to diversify your investments easily, without having to purchase many different individual securities. That’s because the team of investment professionals will select a wide variety of stocks and bonds to invest in on your behalf. You also get the benefit of a professionally managed account for relatively low cost.
If you would describe yourself as an inexperienced investor or as someone who prefers a more passive approach to investing, a mutual fund may be the right fit for you.
However, before investing in a mutual fund, it’s important to review how the fund has performed recently as well as examine its fee structure. Even low percentage fees that don’t sound like a lot, can add up to thousands of dollars lost over the years.
Bonds are issued by corporations or governments when they need to raise cash. Sounds similar to stocks, right? Well, the big difference between bonds and stocks is that bonds represent debt. Rather than owning a portion of a company like you would by owning shares of stock, when you purchase a bond you are providing a loan in exchange for regular interest payments. Once your bond reaches its maturity date, the original amount you invested (the principal) is returned to you. The only scenario in which you wouldn’t receive the principal is if the bond defaults.
Bond defaults are rare, so bonds tend to be a less risky investment choice. It’s a good idea to include a mix of stocks and bonds in your portfolio in order to diversify. It’s also a good idea to review your ratio of stocks to bonds at various points throughout your lifetime as your goals and income streams change. As you get older, for example, you may want a more conservative investment strategy that leans more towards using bonds.
Stocks are issued by companies when they’re looking to raise cash. Once stock is issued, investors can choose to purchase shares of the stock at a particular price, which is determined by the stock market. In exchange for helping to fund the company, investors like you get to benefit from the profits (hopefully) and sometimes losses (bummer).
If you choose to invest in stocks, you hope that the company performs well so the value of each share goes up. If the share goes up and you sell it at a higher price than your purchase price, you make a profit. Shareholders can also benefit from receiving dividends, which are a percentage of earnings that a company pays to its shareholders at regular intervals.
Stocks can be a very lucrative investment vehicle, but with the possibility of higher returns comes higher risk. It’s impossible to truly predict future company performance, so it’s very possible that the stock you choose to purchase ends up losing value.
Because of the higher risk of investing in individual stocks, it’s a good idea to include a mix of investment vehicles in your portfolio like bonds or mutual funds, in addition to stocks. Some people even opt out of investing in individual stocks entirely, choosing more diversified investment options instead.
In the same way that a bank can lend you money if you have equity in your home, a stock brokerage can lend you money against the value of certain investments in your portfolio. Generally speaking, you can borrow up to 50% of the purchase price of eligible investments. In other words, you may only be required to put up $5,000 of your own money in order to purchase $10,000 worth of stocks or bonds.
By doubling your purchasing power, you also double your potential returns. If your $10,000 investment grew to $15,000, you could sell the shares, pay back your $5,000 margin loan, and be left with a $5,000 profit, effectively doubling your money. Amplifying the power of your money in this fashion is known as using “leverage.” However, the power of leverage works both ways. If your $10,000 investment were to decline by 50%, the broker could force you to sell your shares and you’d lose your entire original $5,000 investment, so there’s still no such thing as a free lunch.