Think of all the goods and products that a person uses in their daily life. The alarm clock that wakes them up, the brand of coffee they drink, the clothes they choose to wear to work, the car that they drive. All of these goods and more are essential to the lives of millions of people throughout the globe. In stock market terms, goods and products that are purchased by households and individuals are defined as ‘consumer goods’. Investors can trade in consumer goods stocks just as they would any other type of stocks.
As the name suggests, consumer goods are purchased by individuals and not by manufacturers or companies. Investors trade in stocks or shares of companies that produce consumer goods.
The sector is usually broken down into three different types of consumer goods: services, durable goods, and nondurable goods. Services include actions such as getting a haircut or having your car fixed. Durable goods are any products that have a lifespan of over three years, like a bed or a refrigerator. Nondurable goods have shorter lifespans and include things like food and drink.
Understanding how the consumer goods market is divided and what companies are making the biggest profits is crucial when trading in consumer goods stocks. As well as the three main definitions we outlined above, the consumer goods market is divided into many different subsectors. The main subsectors are shopping (items such as televisions and furniture), convenience (essential goods), speciality (luxury goods), and unsought goods (insurance products, etc).
Profits can be made by using an online broker to either buy shares in companies that produce these goods or speculate on stock price fluctuations.
Many new investors will enter the consumer goods market by first opening an account with an online broker. The internet is overflowing with brokerage firms, many of whom promise unrealistic returns with little risk.
It can therefore be incredibly difficult for inexperienced investors to select a reputable and trustworthy broker. Make sure you look for a broker that is regulated by the appropriate authorities, such as the Securities Investor Protection Corporation (SIPC) or the Financial Industry Regulatory Authority (FINRA). Make sure that they are insured and that they have a good track record.
Let’s assume you have found a reputable brokerage firm and signed up with them. You will then need to research and choose which consumer goods companies you want to invest in. Because of the massive amount of diversity in the consumer goods market, it is difficult to know where to start investing.
One of the best ways to enter the consumer goods market is to invest in companies that produce staples or convenience goods. These are goods that are essential for everyday life. Usually, companies that produce staples maintain steady levels of growth.
The next step is to become familiar with how to invest in the consumer goods market itself. Many new investors choose to buy consumer goods stocks using an ETF (exchange-traded fund), which is a company that creates bundles of assets for investors to buy. Instead of buying shares or stocks from one company, you are buying a diverse amount and so minimising your risk. This makes ETFs a good vehicle for newer investors. You can also simply buy shares or stocks from a particular company, and your broker can advise you on the best strategy.
In simple terms, leveraging is where an investor will utilise debt to increase their buying power. It works like this: an investor borrows an amount from a brokerage firm or a financial institution. The latter use this amount to partially finance a trade. If the trade is successful, then the investor will be able to pay back the borrowed (leveraged) amount and keep the profit. The risk in leveraged trades is that an investor may wind up losing their initial investment while still owing the leveraged amount. It's important to use caution when making leveraged trades.
Is investing in consumer goods stocks profitable? Consumer goods stocks – especially convenience consumer goods (staples) – have been consistently high performing assets since the 1960s. Because we all depend on consumer goods every day of our lives, the market retains high value and stability regardless of economic situations.
This is to say that even in times of economic depression, the consumer goods market stays stable. In fact, sectors such as alcohol, tobacco and food can actually increase in value in times of economic hardship. This stability ensures steady profits can be made by smart investors.
The top tip that we have for any investor who wants to buy consumer goods stocks is to do their research. The incredible diversity of the consumer goods market makes it attractive to new investors, but this can also be a negative aspect. Investors who are looking for fast profits would do well to look at other market areas. The consumer goods market can be susceptible to changes in government legislation, consumer trends and economic and geopolitical events.
We’ll now look at what moves the consumer goods market and strategies to use when investing.
Although not anywhere near as volatile a market as the precious metals market or the technology sector, the consumer goods market can experience price fluctuations due to a range of outside pressures on the market. Changes in retail legislation, the cost of raw materials and consumer trends can all impact prices. Climate change is causing agricultural product prices to rise, which is then passed on through the chain to consumers. Some goods are not performing as well due to price increases.
Innovation, product development and technological advancements can also move consumer goods prices.
As we have mentioned, the consumer goods market is known for its reliable growth and stability. This makes it an excellent market for people who wish to employ a slower, safer trading style. If an investor is looking to make large profits quickly and wants to trade with a high degree of risk, then the consumer goods market is probably not the place for them. Slow and steady is the name of the game when it comes to trading in consumer goods. A long term, incremental style is therefore best suited to this market.
Successful traders use strategies to minimise their exposure to risk and maximise their chances of making good profits. Trading strategies are mostly focused on using research and analysis to predict the supply and demand and price fluctuations. Generally, a good broker will adopt a number of strategies.
Some common strategies include the ‘news’ strategy, where brokers monitor news releases to assess their impact on the market; the ‘scalping’ strategy, where brokers place short term trades with small profit margins; and the ‘trend’ strategy, whereby traders employ technical analysis to identify future consumer trends.
Understanding what these short and long trades are and their implications for your profits is one of the fundamentals of trading. A long trade is a relatively easy concept: a trader buys a stock with the intention of selling it at a future date for more than what they paid for it.
Short trades are more complicated. A short trade is where a trader will sell a stock before they have actually bought it. The idea is to buy the trade at a lower price in the future and thus make a profit.
Stop orders and limit orders are ways in which traders limit their exposure to risk and safeguard their investments. Stop and limit orders are used when an investor does not wish to trade at the current market value of their stock. A stop order instructs a broker to trade a stock at a less favourable amount. A limit order is activated when the stock reaches a more favourable price. Stop orders are not visible to the market. A limit order can be seen and may impact prices, depending on who is making the orders.
Any type of trading carries with it an element of risk. Without an inherent risk, there would be no opportunity to make a profit. Although the consumer goods market is relatively stable when compared to other sectors, there are still substantial risks that investors must be aware of. As we have mentioned, the impact of climate change is posing a real threat to the stability of supply chains. Drops in demand for certain consumer goods can occur quickly due to consumer trends or government legislation. Investors should always stay well informed of current events.
If you want a portfolio that ensures steady growth and incremental profits, then the consumer goods market may be the perfect vehicle. Its stability and reliable growth mean that profits can be made even in times of severe economic downturn. However, it is not completely without risk since rises in interest rates, consumer trends and supply issues can all impact the consumer goods market. For investors who want fast profits, the consumer goods market will not be suitable. However, diversifying at least part of a portfolio into consumer goods is a good idea.