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How to invest in cotton
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. Here we’ll discuss different investment methods and their risks.
Compare online brokers to trade cotton stocks, ETFs and CFDs
How to invest in cotton
1. Cotton ETFs
Instead of investing in the stock of one or two companies, ETFs give you the option of placing your money with a bundle of assets. You can learn more about ETFs here.
ETFs are a simpler way of entering the market. While they work much like regular stocks, ETFs are protected somewhat from market movements because 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 with a number of companies offering ETFs, so it may be a good place to start.
Pros
- By bundling stocks from different companies together, ETFs give you access to a larger part of the industry.
- ETFs are considered by some to be the safest choice for investors.
Cons
- Because you are investing in a collection of stocks, you lose some of the control you might have with a single company’s stock.
2. Cotton futures
Futures are one of the riskier methods of investing, and while they can be very profitable they can just as easily lose you a lot of money.
By investing in futures, you are agreeing to buy a commodity at an agreed price to receive 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, but the market may be 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.
Pros
- Investing in futures gives you complete ownership over a commodity.
- If you make the right investment, futures can bring you solid returns.
Cons
- There is a real element of gambling present in futures, and you can end up paying dearly for a mistake.
- Futures expire if they aren’t used within a certain period of time, becoming worthless.
3. Cotton stocks and shares
Shares are a common option for investors, taking back the control you lose when investing in ETFs, while also remaining less risky than futures. While shares run a comfortable middle ground between the other options, they are still vulnerable to market movements and should be approached with a bit of market knowledge.
Cotton is a massive industry and will continue to be as long as we choose to wear clothes. There are plenty of brokers offering a selection of company stocks for you to choose from, and with its prevalence cotton may be a good place to start.
Pros
- A range of company stocks to choose from.
- Withdraw from the market whenever you want.
- A stable and conventional approach to investing.
- Investment control.
Cons
- While futures are certainly more dangerous, stocks still have their risks. Market fluctuations are unavoidable and can have a real impact on your investment.
Reasons to invest
- As worldwide energy consumption rises, and resources such as fossil fuels decline, the demand for sustainable, renewable resources is growing rapidly.
- The world is becoming more environmentally conscious, renewables can be an ethical investment.
- As the technology behind renewable energy production advances, renewable resources are becoming more efficient, reliable and lower in cost.
Is cotton a safe investment?
- Stockpiles: Countries hoarding cotton can influence prices if they decide to withhold their stockpiles during a shortage or put them on 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 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.
How much is cotton worth?
Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades.
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