ON THE MONEY: Commodities as an alternative investment
Many people, especially retail investors, mistakenly think that investing begins and ends with stocks (stocks) and debt (bonds). A game-changing revolution in Nigeria’s investment space that may change this thinking is fast happening with commodity exchanges springing up across the country.
Through these platforms, several investors can access various commodity investment products as an alternative to stocks and debt. As commodity prices rise globally, following the COVID-19 lockdown, this alternative asset class is attracting the attention of investors around the world.
The commodity exchange is a legal entity that determines and enforces the rules and procedures for trading standardized commodity contracts and related investment products. A commodity exchange also refers to the physical center where trading takes place. The commodity market is huge, trading over a trillion dollars every day.
Traders rarely deliver physical commodities through a commodity exchange. Instead, they trade futures contracts, where the parties agree to buy or sell a specific amount of the commodity at an agreed price, regardless of what it is currently trading in the market for on a given date. predetermined expiration. The most traded commodity futures contract is crude oil.
Meanwhile, Commodities are interchangeable raw materials or resources of nearly identical quality in their primary form. These are usually used as raw materials to produce various goods in our daily lives or are consumed directly. Wheat-based breads, metal car parts, coal-based electricity, among others. In these examples, wheat, metal and coal are respectively the products used in their base form. Raw materials like gold, silver, cashew nuts, others are used directly in their natural form.
All commodities have economic value and are tangible. It can be cultivated by agriculture or extracted naturally by mining. Based on their natural form, they can be grouped into three broad categories; Agriculture, metal and energy.
In Nigeria, the commodity trading ecosystem has been one to watch for the past few years, with the federal government stepping up its efforts to diversify the economy and reduce overreliance on crude oil, a lot of investment has been channeled into the commodity space commodities, especially agriculture. commodity market space.
Further efforts are being put in place by the Securities and Exchange Commission through the activities of the Technical Committee (TC) on the Commodities Trading Ecosystem, which brings together members from various stakeholders in the commodities ecosystem. , including the Central Bank of Nigeria, Financial Markets Dealer Quotes (FMDQ), Nigeria Stock Exchange (NSE), Standards Organization of Nigeria (SON), Bank of Agriculture (BOA), The Nigeria Incentive-Based Risk Sharing System ( NIRSAL), Financial Systems Strategy (FSS 2020), AFEX Commodities Exchange Limited and the Nigerian Commodities Exchange (NCX).
Taking the floor, the Managing Director/Managing Director of the Lagos Commodities and Futures Exchange (LCFE), Mr. Akin Akeredolu-Ale, explained that “the commodity ecosystem creates structure, it is like having 10 farmers in a particular place and everyone decides to sell their product after the harvest, it will be better if they come together and form a , by which the cooperative will group the goods and help in the sale, that is, a structure, which helps to have a common price system.
He added that the Commodities Exchange allows people to engage in the buying and selling of commodities through a broker, saying that “Nigeria is a technologically advanced country, unlike the market commodities in other parts of Africa that still indulge in what is called the “call system”, Nigeria has moved from the call system to digital instruments that can be traded, reflecting the commodity through which people can now use their systems to trade.
Finally, investment/commodity trading should be encouraged in an emerging economy like Nigeria given its low margin, transparency, risk management and benefits to economic parameters such as farmers who have been neglected over the years. The uncertainties surrounding the stock market and other investments during a period of high inflation like this could be hedged by investing or diversifying into commodities.
The Managing Director/Managing Director of the Lagos Commodities and Futures Exchange (LCFE), Mr. Akin Akeredolu -Ale
What are raw materials?
Raw materials are products that we deal with every day. From the perspective of the stock market, we look at four asset classes in the commodities space. When people hear of commodities, what comes to mind is solely agriculture, but in other parts of the world commodities go beyond agriculture, precious metals, solid minerals , petroleum products (crude oil and refined oil). Commodities are just products that people engage in on a daily basis.
What are the opportunities in the commodity exchange?
Wherever you go in the world, no matter how good you are, if you don’t have a structure to create common sense in a particular ecosystem, it will be chaos. Even if there is no chaos, the development goals they will have advanced a particular ecosystem in such a way cannot. So what the commodity ecosystem does is it creates a structure it’s like having 10 farmers in a particular location and each decides to sell their product after the harvest it will be better than they come together and form one, where the cooperative will group the goods together and help in the sale, ie the structure, which helps to have a common price system. Commodities Exchange allows people to engage in the buying and selling of commodities through a broker. Nigeria is a technologically advanced country unlike other parts of Africa which still engage in what is known as the ‘calling system’. Nigeria has moved from the call system to digital instruments that can be traded mirroring the product by which people can now use their systems to trade. Overall, the Commodity Exchange brings together a buyer and a seller and increases the space for capital aggregation and savings mobilization for people who will need it in the commodity ecosystem.
How can you invest in the Commodity Exchange?
There are two types of investors on the LCFE, the owner of the Stock Exchange, there are 50 shareholders of which 42 are member companies of the Nigerian Stock Exchange that have come together to form the Stock Exchange. Then we have individuals who make up to 50, these are stock market investors. Now, if you want to trade on the Exchange, you must go through one of the registered member firms. Just like what we have in the stock market, the difference is that the instruments have underlyings that are commodities instead of companies.
What is the investment risk?
The instrument before the trade was de-risked. First of all, the quality of the products taken has been ensured by the agent, the warehouse is insured by the insurance houses and also the warehouse to be exchanged is going to be checked by the warranty managers. Collateral managers are persons appointed by the Securities and Exchange Commission (SEC). Indeed, when you buy these instruments and resell them, the only risk that may exist is perhaps the movement of the price of the raw materials. But, not getting delivery of your merchandise you purchased if you overdue it, there is no risk, you will get what you paid for
What is the minimum amount to invest?
There are different types of products and they come in different bundles. You can decide to buy maybe a ton of paddy rice, a ton of soybeans or a half ton. It comes in batches.