Commodities have always had a reputation for being a tricky asset class, leaving tons of people with the fear that investing in this asset class would be a tricky move. Some of these fears remain largely unfounded.
Based on ascertained risk levels, investing in stocks has proven to be higher in risk than investing in commodities, but more is generally known about the former than the latter, therefore many investors have ignored investing in commodities as an asset class, as they would rather invest their money in what they know whether that yields profit or not.
It is reasonable to be that careful with money, as people work hard for their monies and would be loath to lose hard-earned cash. This, however, does not mean that people should avoid investing in commodities as an asset class, but that they should get suitably educated and access all the necessary information needed to make the right decisions.
In an economy like Nigeria’s, investing in commodities provides protection against the ravages of inflation and instead helps investor portfolios to retain and even increase in value during such times.
This is because the prices of raw materials and labour often increase during times of inflation. Forward-thinking investors, therefore, reduce the risk of inflation on their investments by hedging. Hedging is the practice of investing in assets for the purpose of reducing or eliminating particular sources of risk in a portfolio. It is simply a strategy to protect an investment against loss. Besides protecting an investor from various types
of risk, hedging makes the market run more efficiently.
Hedging is important for investment because successful investing is about managing risk, not avoiding it. In the world of investing, every form of financial vehicle holds certain level advantages and disadvantages, and commodities are no different. One of the best ways to manage risk is through diversification of assets both within and among different classes. One of the benefits of using commodities to minimize your overall portfolio risk is that commodities tend to behave differently than stocks and bonds.
A portfolio with assets that do not move in the same pattern can help you better
manage the uncertainties of the market. Developments in the commodity markets in Nigeria are creating opportunities for investors to take advantage of commodities as an alternative investment vehicle with the attendant benefits of portfolio diversification and the possibility of higher returns. AFEX Commodities Exchange Limited is Nigeria’s first
private sector exchange firm, which has built a platform that facilitates effective trade and settlement on commodity transactions.
The Exchange is creating and launching innovative new products that make investing in commodities accessible for all investors, while also lining up training and other avenues of
interaction that make it easier for everyone to understand the products.
Derivatives and commodities exchange markets can help deliver improved market transparency, lead to increased access to finance for commodity value chain operators and financial market participants and promote hedging and risk management. What is necessary is an understanding of the market by investors which will enable them to tap into the opportunities imminent in investing in commodities.