The Future of a Commodity: Maximizing Potential Profits

The commodity future market is one of the most dynamic investment markets in the world today. As an investor, you will want to do your homework on the future of the particular commodity in which you are investing in order to maximize your potential profits. Here are a few things to consider about the future of a commodity before investing.

Limited Resources

Before investing in a commodity, you will want to take note of whether it is a renewable resource or a limited resource. Renewable resources such as wheat and corn should be able to be produced for as long as the earth remains in a suitable fashion to grow crops. Other types of resources, such as oil, are considered nonrenewable resources. Therefore, at some point, these resources are going to run out. As an investor, you need to pay special attention to estimates that tell you how much longer a resource will be available. Thanks to technology, you can get a pretty good idea of how much oil is available in the world today and how long experts believe it will last. You do not want to invest in anything that will be running out in the near future.

Obsolescence

Something else to consider is whether the commodity will become obsolete in the near future. If this happens, your investment could be devastated. For example, using oil as an example again, at some point it could become obsolete. Let's say that in the search for alternative forms of fuel, a fuel source is discovered that costs 1/10 of what oil does and is more efficient. At that point, resources would go into changing our current system to fit the new fuel source. Oil would basically become obsolete. Anybody that was investing in oil at that time would stand to lose a lot of money because no one would want to buy oil anymore.

Growing Demand

When investing in a commodity, you will also want to be aware of a potential growth in future demand. Just because there is a certain amount of demand for a commodity in today's world does not mean that the demand could not grow 50 years from now. For example, the demand for oil over the years has doubled about every decade. Therefore, as long as the supplies of oil are good, the price of oil should consistently go up during that time. As an investor, you can take advantage of this by purchasing oil futures.

Investment Considerations and Research

You will want to make sure that you do your homework on every potential commodity before purchasing. This can help you avoid major investment mistakes that could cost you in the long run. Otherwise, your portfolio could suffer greatly as a result.

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