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Commodities Vs Stocks-Where You Can Get A Better Return?

Richard Dennis was a small time trader who started with only 0 and in a few years ended up making 0 million trading commodities. So, you can see the potential of trading commodities. But over the years, investors and traders have been afraid of commodities considering them to be risky. How much risky commodity trading can be? If we do a comparison with other asset classes, we find commodities to be at par with them in terms of risk. Commodities are no more riskier than stocks. But for whatever reasons, investors have always preferred stocks over commodities! Discover Chris Rowe’s Options GPS-the ultimate Stock Options Trading Course that can make you a fortune in 2010. Chris is known as a master options trader. He was already a millionaire while still in his 20s when he quit Wall Street. Read the story of Richard Samuels, a post office mailman with a head injury and how he made a fortune with these Forex Signals. Turn $200 into $100K in just 3 months with this Penny Stock Trading System.

Stock have always been the preferred method of investment for many investors and traders. As said before, statistically speaking, commodities are no more riskier than stocks. What about the return? Let’s do a comparison. Every investor knows about the famous Dow Jones Industrial Average (DJIA). DJIA is considered to a barometer of NYSE and is a price weighted average of 30 blue chip stocks. Let’s compare DJIA with another index, the Dow Jones-AIG Commodity Index. This index tracks the performance of a basket of commodities and is published by the same company that publishes the DJIA.

Let’s make a ten year comparison. DJIA had a negative return of -7% in 2002. While the Dow Jones-AIG Commodity Index had a return of 26% in 2002 alone. So what was better? Investing in commodities or investing in stocks? Now, DJIA had an average return of 7% over a period of 2002 to 2005. In the same period of 2002 to 2005, the Dow Jones-AIG Commodity Index had a return of 21%. You can now clearly see that commodities as an asset class had outperformed stocks in the last decade. But still investors feel shy of investing in commodities. This has something to do with human psychology.

Investors are afraid of what they don’t know. Many investors tend to stick with an investment that they know even if that investment doesn’t perform well for them. For example, in the recent stock market crash of 2008, investors lost trillions of dollars. In 2000, when the dot.com bubble burst, investing public lost something like Trillion. Yet, no one warns of stocks! Many investors are afraid of commodities because they don’t know much about them.

When you trade stocks, you have to have 50% of the capital in your trading account before you can enter a position on margin. In other words, a leverage of 2:1 is maximum permissible. Now margin requirements for commodity futures may vary. There are dozens of commodity futures contracts that you can trade.

Suppose, you decide to trade Soybean Futures on CBOT (Chicago Board of Trade). The margin requirement is only 4%. What this means is that with only 4% in your trading account, you can buy ,000 worth of Soybeans Futures Contracts. Now if the trade goes your way, you make a hefty profit on a very small amount.

But hey, leverage is a double edged sword that cuts both ways. If the market goes the wrong way, you can lose a lot more than your principle. Anything you do in life is risky. Even your marriage! Love can turn sour and end up in a messy divorce. But that doesn’t mean you shouldn’t love.

Commodities are going to see a many decade long boom in the first part of the 21st century. This boom is being fueled by the increasing population and it’s demand for a better living in all parts of the world. Countries in Asia, Africa and other parts of the world are developing. They need resources for their development. Commodities are the most important resource that are going to face high demand in the coming decades. Take the example of oil. Without oil, the global economy cannot run. With it’s supply dwindling and demand going up, you should expect to see crude oil reaching the 0 per barrel in this decade! So get ready for trading commodities and making a fortune in 2010 decade!

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