Commodities have developed into a separate asset class for investors looking to diversify from traditional asset classes such as equities and bonds. In this article we will focus on commodities as an investment option. We will look at the advantages and disadvantages of investing in commodities and also look at the different options to invest in commodities.
Ways to Gain Exposure to the Commodity Markets
Direct Investments in commodities refers to buying the physical asset. However, this is very impractical considering the storage, transportation and insurance costs involved in buying physical commodities. Direct investments in commodities is practiced very rarely exception being some developing countries like India where people buy gold and silver.
One of the easiest ways that investors use to gain exposure to commodities is through commodities derivatives. Commodities derivatives include over the counter swaps and commodity futures, which are mainly traded through organized exchanges. Commodities futures are particularly used to gain exposure to commodities asset class. Commodities futures contract is a bilateral agreement where one party obligates to buy and another party to sell a commodity through an organized exchange at a set price and on a specified date. However, delivery of commodity is not required to close a futures contract as an investor can close the contract by taking the opposite position to the one he had previously taken.
Another option to gain exposure to commodities is through Index products targeting commodities indices such as Exchange Traded Funds (ETFs). By investing in Index based products, an investor can gain exposure to a number of commodities and does not have to actively manage each contract individually unlike a Futures Contract.
Pooled Commodity Funds
A commodity fund is a collection of investors, who pool their funds to invest in the commodities futures market. They are a subset of the hedge fund market. Commodity funds are managed by a general partner who must be registered with the Commodity Futures Trading Commission (CFTC) and National Futures Association (NFA).
Equities related to Commodities.
One way of gaining exposure to commodities is through investing in equities of listed companies that derive majority of their revenues from buying and selling physical commodities. The profits of such firms depend on the prices of commodities.
In a Commodity-Linked Note an investor can combine a standard interest paying debt instrument with either a commodities futures contract or an option on commodity prices. The bond investor accepts lower coupon payments in exchange for receiving the upside potential from commodities. Commodities-Linked Notes have credit risk.
Advantages of investing in Commodities
What is a gTLD?gTLD = Generic Top Level Domain = What comes after the dot = ‘com‘ in www.thiswebaddress.com
‘.com‘ is a gTLD, as are ‘.net’, ‘.org’, ‘.gov‘ and ‘.edu‘.
Domain Name Levels
In the example www.this.web.address, the top level domain is ‘address‘, thesecond level domain is ‘web‘ and the third level domain is ‘this‘.
What is the ICANN New gTLD Program?ICANN or, Internet Corporation for Assigned Names and Numbers is planning to allow organizations globally to apply for the right to operate a new gTLD registryof their choosing and introduce it to for use on the world wide web. They are expecting between 300 to 1000 new gTLD applications. There are already 100 groups who have declared intentions to apply (list) and there are probably hundreds more with plans to apply but remain in stealth mode. (prospective list).
What a gTLD is NOT
A gTLD is NOT a ‘domain name‘. It is a ‘NameSpace‘. Like .com, .net, .org and .de, a gTLD is critical piece of internet infrastructure. It is not meant for individuals or casual users. A gTLD registry is expected to be a functioning technical business, operating in a manner that supports the security and stability of the world wide web. more
When a new gTLD extension is delegated, the registry can, if they choose, make second level domain names beneath it available for registrars to then sell to end users (Registrants) for use as their address on the world wide web.
A gTLD Registry can be a profitable business enterprise for an exciting new business venture.
Internet users can expect to see domain names such as www.hotelrooms.vegas, www.chase.bank, www.indieart.film, www.videofilm.art and many more. ICANN expects New gTLD applications to number between 300 to 1000 (prospective list). This dramatic increase in the number of gTLDs will have far reaching implications. Every internet user will be impacted, especially businesses small to large.
Why New gTLDs?Openness, Change, Innovation
The internet is growing at an astounding rate. In addition to 50,000 new domains coming online every single day, the number of internet users globally will double to over 3 billion within 4 years. Internet commerce is expected to be $1.4 Trillion by 2015. There is insufficient space in the existing gTLD space to accomodate this growth. Even today it is increasingly difficult for entrepreneurs coming online to find a decent name for their business at a reasonable price. Because of this, ICANN is ‘opening up’ the domain name space.
The manner in which people and businesses use and interact with the information super highway is changing everyday. Users are going mobile. Apps are gaining popularity. Social media is huge. Internet search is getting more localized. New gTLDs can help facilitate these changes and more. New domain names and new opportunities can lead to . .
There can many new services and applications for new gTLDs. Already there are plans for gTLDs with special purpose or use that will provide new services. .SECURE, for example, is being developed to provide additional security for its domain users. The truth is, nobody can say exactly what new ideas and innovation may come as a result of the New gTLD Program. What will be the next big.THING? Who knows?
How will New gTLDs happen ?ICANN is the organization charged with the internet Domain Name System (DNS). After years of policy development, working with the internet community, governments and Intellectual property groups, ICANN has approved the New gTLD Applicant Guidebook. The Guidebook , at 360 pages, details the New gTLD Application Process . Applicants for New gTLDs will pay $185,000US application fee and undergo extensive evaluation for technical, financial, and administrative qualifications to operate a gTLD registry in a manner that supports the stability and security of the internet.
When will the New gTLD Program happen?The application window for this first round of New gTLDs opens January 12, 2012 until April 12. 2012. Evaluation, Resolution, and Delegation will take approximately 8 – 18 months, depending upon the type of application and the level of objection or contention. We can expect to see New gTLDs available for distribution and use early in 2013.