A successful trading venture needs funds to operate profitably. The investment commodity of a business reflects the short term uses of funds. This short term usage of funds delves on the various requirements of the firm and ranges from resource management to administrative purposes. Liquidity is used to acquire stock which on being sold results in as inflow of liquidity, either immediately or after a time lag in case the sales are on credit. The rate of turnover of current assets in relation to total sales of a given time period is of critical importance to the total funds employed in those assets.
The amount needed to be invested in current assents is affected by many factors and many fluctuate over a period of time, manufacturing cycle, production policies, credit terms, growth and expansion needs, and inventory turnover are some of the important factors influencing the determination of investment in the commodity.
Inflation magnifies the need for investment in the commodity. The constant rise in the cost of inputs, if not accompanied by a corresponding increase in output prices, puts an additional strain on the management. However, by taking several measures on the production front and by keeping a strict watch on managed costs and expanding collection of credit sales, etc. the management can contain or at least minimize the upward thrusts for additional Investment in a commodity.
The management should ensure adequacy and efficiency in the utilization of Investment in a commodity.
For efficient management of investment in commodity, management of cash is an important as the management of other items of current assets like receivables and inventories. Too little liquidity may place the firm in as illiquid position which may force the creditors and other claimants to stop transacting with the firm. Too much liquidity results in fund lying idle, thereby lowering the overall return on capital employed below the acceptable level. An adequate amount of liquidity is always needed for meeting any unforeseen contingencies and also liabilities as well as day to day operating expenses of the business.
When it is realised that the excess liquidity will remain idle, it should be invested in such a way that it would generate income and at the same time ensure quick re- conversation of investment in liquidity. While choosing the channels for an investment of any idle liquidity balance for a short period, it should be seen that
(i) the investment is free from default risk, that is, the risk involved due to the possibility of default in timely payment of interest and repayment of principal amount;
(ii) the investment shall mature in a short span of time; and
(iii) the investment had adequate marketability. Marketability refers to the ease with which as assets can be converted back into liquidity. Marketability had two dimensions – price and time – which are interrelated.
If an asset can be sold quickly in large amounts at a price determinable in advance the asset will be regarded as highly marketable and highly liquid. The assets which largely satisfy the aforesaid criteria are: Government securities, Bankers’ Acceptances and commercial paper.
10 Benefits of Investment in Commodity
There are factors which make the prices of individual commodity fluctuate such as supply and demand, inflation and the overall health of the economy. In the past few years, demand has increased due to massive global infrastructure projects in turn influencing commodity prices. The related industries have observed a rise in commodity prices because of the positive impact on the company stocks.
Potential Hedge Against Inflation
Inflation - which is capable of fluctuating stock values and bonds, can result in price hike for the commodities. Although in the periods of high inflation commodities have shown strong performance, investors should understand that the commodities are much more volatile compared to other types of investments.
Diversified Investment Portfolio
Having a diversified portfolio means an ideal asset allocation plan. Commodities play a vital role in having a diversified investment portfolio. It is suggested to invest in raw materials simultaneously if you are already investing in stocks and bonds.
Often there is a fluctuation in values of commodities the same as we see in stock market shares. In various geopolitical and economic scenarios, they react differently. Hence you can consider diversification to give risk-adjusted returns and less volatility.
Transparency in the Process
Trading is supposed to be a transparent process in commodity futures. The action will lead you to have a fair price which in turn is controlled by large scale participation. In turn it reflects different outlooks and perspectives of a wider section of people who deal with the commodity.
If the liquidity is huge the commodities are riskier in form of investments. Companies are likely to have either a huge profit or they can experience heavy losses. Which means If you make investments right you can make huge profits in the commodity market.
Cushioning against market fluctuations
You would need more money to buy commodity goods from different parts of the world in case the rupee becomes less valuable. Mainly during inflation investors sell off their stocks and bonds to invest in commodities, hence the prices of commodity goods go up. Which means you can only get benefit from the commodities which will act as a hedge against the market risks.
Best bet for price safety and surety
At the time of inflation when the economy dips, prices of commodities usually go up; in turn the prices of raw material are also supposed to have a rise in prices. Hence there will be a few commodities which can bring you profit.
Trading on Lower Margin
As a trader, you are supposed to deposit 5 to 10% of the total value of the contract as a margin with your broker, which is very less compared to other asset classes. These low margins allow an individual to invest and take larger positions at a lesser capital.
Tradebulls offers numerous pointed benefits as a brokerage and consulting firm for your combined benefits in commodity trading.
Tradebulls aims at keeping your funds secure and deliverable during all such times when the commodity market investments are decided and deals are executed. For further details and to know more, click on the mentioned link: https://www.tradebulls.in/.