How to invest in cotton in 2023
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This page explains how to invest in cotton. We offer a step-by-step guide on getting started, explain what makes cotton a good investment, and discuss what to consider when investing in it.
Where can I invest in cotton online?
Not all brokers offer cotton as a market to invest in. Our commodity experts have selected some of the best platforms around who do. Click the links to sign up in a few minutes and begin investing. Or continue scrolling lower to learn more about cotton.
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Why invest in cotton?
Diversification and hedging against inflation are two of the most common reasons people invest in cotton. However, there are many other factors that draw investors to the cotton market, some of which we’ve explained below.
- Portfolio diversification. Adding cotton to your portfolio can protect it when other sectors or industries are not performing well. Cotton is used globally and has a broad range of uses. It tends to act differently than other asset classes and even other commodities.
- Hedge against inflation. Commodities are often used as a way to protect or hedge against inflation. Cotton can consistently be grown; however, there will always be a finite supply in the market at any given time. This means it will usually hold its value, even in times of rising inflation.
- Speculation. Cotton is traded just like any other commodity, and it’s possible to bet on its future price. Many factors (which we’ve explained further below) can affect its value, making it an attractive choice for short term speculators. For example, in 2010 – 2011, its price spiked by almost 200% in a few months.
- Rising oil prices. The harvesting and production costs of cotton are high and requires a lot of oil, especially compared to other agricultural commodities. If the price of crude oil is rising, it is highly likely the price of cotton will follow and could make a good investment.
5 top tips for investing in cotton
If you want to invest in cotton, it’s not a difficult task, although there are a few things to consider before doing so. Below we’ve explained the steps required to invest in cotton.
- Decide on an investment strategy. Making a strategy for investing is an excellent first step to take. You’ll want to consider how much risk you’re prepared to take, along with if you want to passively or actively invest.
- Do your research. Conducting well-balanced research into the cotton market and the factors that affect it is an important process. Further down this page, we’ve explained the many different ways you can invest in cotton, along with information on what impacts its price.
- Set a budget. You may have already decided on how much you are willing to risk; however, setting a budget and sticking to it is vital. It goes without saying never to risk more than you can comfortably afford to lose.
- Choose between the long term and short term. If you’re looking to speculate on short term demands and price movements, you may want to conduct technical analysis before investing. If you have a longer-term outlook, conducting a fundamental research of the cotton market will help your investment.
- Find an investment platform. Cotton is a commonly traded commodity; however, not all brokers offer it on their platforms, so you’ll need to check with yours if they do. You can click the button below to be taken to our list of expertly selected brokers who all offer ways to invest in cotton.
Ways to invest in cotton
There’s more than one way to invest in cotton, and depending on the type of investor you are, you may be better suited to some over others. Below we’ve listed the different ways you can invest in cotton and explained each one.
Invest in cotton stocks
Buying shares in companies directly or indirectly linked to the cotton industry is an excellent way to get exposure to the market—stocks range from cotton manufacturers to clothing brands. Companies with a vested interest in the cotton trade will usually move in line with the commodity.
Invest in cotton ETFs
Buying shares in exchange-traded funds is one of the easiest and cheapest ways for new investors to get involved. ETFs track the performance of a particular industry or even track the futures price, and some follow the price of cotton. The most popular is the iPath Series B Bloomberg Cotton Subindex.
Invest in cotton mutual funds
Mutual funds are similar to ETFs, although the main difference is that it is managed by a professional fund manager who controls what is bought and sold. There are currently no funds that offer pure exposure to the cotton industry. However, there are many that invest in the broader agricultural sector, which includes cotton.
Invest in cotton futures
For anyone wanting to speculate on the short term price of cotton, futures contracts tend to be the first port of call. Futures contracts are simply an agreement to trade at a future date for a predetermined price. Trading or investing via futures contracts require a lot of knowledge and expertise and is most suitable for experienced investors.
How does the cotton market work?
It works like any other market where supply and demand determine its price. Although the factors that impact supply and demand vary, we’ve explained the most common and important ones below.
- Production. Half of the world’s cotton production occurs in India and China. A further 25% is produced in the United States and Brazil. Any political instability, exporting issues, or other significant events in any of these countries will most certainly affect the price of cotton.
- Stockpiling. Many countries hold commodities for their economies. However, between 2011 and 2013, China started a cotton stockpiling program to support local farmers and artificially inflated prices. At its peak, China held about 60% of the worlds cotton. If it suddenly starts to sell its stockpile, its likely prices will fall.
- Weather. Like many agricultural commodities, climate plays a big role in yields, and it’s the same with cotton. Too much sun or rain in countries like China or India could lower crop outputs and lead to higher prices.
- U.S. Dollar. Cotton is priced in U.S. dollars, and any changes in the currencies value can impact its price. A stronger dollar could result in greater supply as fewer buyers would be buying. A weaker dollar may increase demand, as foreign buyers could take advantage of a favourable exchange rate.
- Alternatives. Although cotton is widely used in the textiles industry, other materials are often used in its place. The price of materials like wool and polyester directly impacts cotton demand. The raw material used to make polyester, purified terephthalic acid, can have the greatest impact as it is mostly produced in China.
When should you invest in cotton?
You can invest in cotton at any time, although one of the best times is when inflation is rising globally. As we mentioned earlier, investing in agricultural commodities such as cotton is often a hedge against inflation. When inflations rates are on the rise, it is more than likely that cotton prices will increase.
To help time your investment, its wise to keep up to date with the points we discussed in the section above. Political instability, weather, and exchange rates, especially in the central regions where cotton is farmed, can impact when you should invest.
Is cotton a good investment in 2023?
It might be, but there are a few things to consider before investing. Much of what we have covered on this page will impact cottons price this year. It is also worth keeping an eye on the Chinese stockpiles as any offloading of these would more than likely see an oversupply resulting in lower prices.
It’s also a good idea to stay up to date with worldwide inflation rates and changing exchange rates which could help you made a decision on when to buy.
What should I do now?
If you’re ready to invest in cotton, registering with a broker that offers it could be a good first step. You can also check out our learn hub, where we offer free online courses on the stock market, cryptocurrencies, and foreign exchange. Keeping up to date with the latest news and analysis may also be beneficial to your investment which you can do by clicking the links below.
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