Jasmine Directory

Nearly every material that comes from the ground is categorized as commodities. Two categories determine how commodities are classified. Hard commodities either come from the ground or extracted from natural resources. These may include gold, aluminum and rubber. Soft commodities such as corn, wheat, sugar and cocoa beans are grown from the ground.

Typically, hard commodities are less problematic than soft commodities. Investors tend to focus more on hard commodities because of their easy integration with the industrial process. This is beginning to change as soft commodities such as corn is used to make ethanol-based products for energy purposes.

Emerging commodities are also on investors' radar. Water, water rights ethanol and pollution rights are considered emerging commodities. Financial experts project a boom in these commodities, if not sooner, within the next 10 years.

In the investment world, the price to buy and sell commodities is based on speculation. Generally, assumptions are made of how low or high commodities will cost. To illustrate, consider an investor who expects significant crop losses due to hurricanes in Latin America.

He or she would call a commodity broker to purchase a large amount of coffee. If the investor makes the right assumption, coffee prices will skyrocket because of devastated crops. Any crop that survived the bad weather is worth more on the market.

While commodities can offer huge returns for investors, they also come with tremendous risks. In the same hurricane scenario, the investor will lose if Latin America experiences a mild season with little to no affect on crops.

Experienced investors welcome the opportunity to realize high a significant return on investment. Speculating on commodities puts the initial investment at substantial risk with the odds against anyone looking for a permanent wealth-building strategy. The potential loss is not an ideal investment strategy for a novice investor. However, possibility of a positive outcome may justify the risk of a potential loss.