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How to invest in cotton in Ireland
A guide to investing in one of the world's most traded commodities.
Cotton makes up around half of the fibre used in the production of our clothes and other fabrics. 20 million tonnes is harvested and traded each year; for comparison, that is around 20 T-shirts for each human being annually.
Due to its demand, cotton has a large and fairly stable presence on the stock market, making it a favourite for investors in Ireland. You can gain exposure to cotton through a variety of investment vehicles.
1. Cotton ETFs and ETNs
Instead of investing in cotton stocks of one or two companies, ETFs give you the option of placing your money into a bundle of assets.
ETFs are a simpler way of entering the market. While they work very much like regular stocks in Ireland, ETFs are protected from market movements through diversification — they don’t rely on the performance of one company.
If you are still learning the basics of investing, then ETFs are a great introduction. Cotton is a massive industry that’s been around for a long time, so it might be a good place to start. While there aren’t any cotton ETFs to choose from in Ireland, you can always invest in overseas markets with ETN choices like the iPath Series B Bloomberg Cotton Subindex Total Return ETN.
ETNs, or exchange-traded notes, can be traded just like ETFs and track an underlying index of securities and exchanges. It’s especially popular for trading commodities like cotton.
- Simple way of gaining exposure to a larger number of companies in the industry.
- One of the safest investment vehicles in the market.
- ETNs allow you to access cotton securities on overseas exchanges.
- Limited control over the individual stock selection.
2. Cotton stocks
Stocks are also a common option for investors in Ireland, allowing you to invest in individual cotton companies. Although stocks offer a comfortable middle ground, they’re vulnerable to market movements and should be approached with sufficient market knowledge.
Cotton is a massive industry and will continue to be as long as we choose to wear clothes. There are plenty of brokerages offering a selection of company stocks to choose from and considering this ubiquity, cotton may be a good place to start your investing journey.
- Range of stocks to choose from.
- Flexibility of withdrawing from the market whenever you want.
- Control over specific investments.
- While futures are certainly more dangerous, stocks still have their risks. Market fluctuations are unavoidable and can have a real impact on your investment.
3. Cotton futures
Futures are one of the riskier methods of investing in Ireland, and while they can be very profitable, they can just as easily lose you a lot of money. Futures trading is more commonly the domain of cotton farmers or manufacturers, though speculators can also buy and sell futures contracts through select brokerage accounts. Only a few mainstream brokerage accounts allow futures trading alongside stocks, ETFs and options.
By investing in futures, you are agreeing to buy a commodity at an agreed price to receive directly at a later date. If the price you agree to buy at ends up being lower than the price of the commodity when you receive it, you will have made a solid return; however, the market may go against you and you could end up paying more than necessary.
Futures operate on both buyer knowledge and luck. If you are new to investing, it is recommended you learn the ropes before considering futures as an option.
- Complete ownership over the commodity.
- High possibility of making solid returns.
- Significant element of speculation in futures that can result in huge losses.
- Possibility of futures expiring worthless if they’re not exercised before expiration.
Compare these providers for access to cotton ETFs and more
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How much is cotton worth now?
Reasons to invest
- Cotton is a staple commodity that is almost always in demand.
- Demand in fast-developing countries like China and India is likely to outpace their ability to produce cotton.
- Consequences of climate change could disrupt the production of cotton in various places around the world, stifling its supply and raising prices.
Is cotton a safe investment?
- Stockpiles: Cotton-producing countries can influence prices if they decide to withhold their stockpiles during a shortage or release them onto the market when there is no domestic demand.
- Subsidies: Policies to keep prices low and supply high can be altered over time, influencing prices both positively and negatively.
- Substitutes: Synthetic materials such as polyester can undercut the price of cotton and weaken its market share. Large but struggling economies can drastically influence prices if they switch to a cheaper material.
- Environment: Weather shifts will influence pollination, growth and yield, subsequently impacting supply.
- External influences: Other industries can have an influence on cotton prices. If oil becomes more expensive, the harvesting and production costs for cotton can rise as a result. It is a good idea to keep an eye on relevant industries.
Cotton is an in-demand staple you can invest in by purchasing stocks, futures and ETFs. But keep an eye out for shifts in competing industries and commodities that could impact the market.
Explore your investing options across trading platforms and commodities before you make a decision.
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