How to Invest in Aluminum

Aluminum doesn’t immediately come to mind when you think about investing in metals. Aluminum doesn’t have the allure of gold and silver, and it’s not useful as a hedge against inflation or deflation. But aluminum closely follows changes in the housing and industrial sectors, which makes its price movements easier to track than precious metals. Investors can use this information to help spot a good entry point to open an aluminum trade.

How to Invest in Aluminum

Step 1

Listed under the symbol AL, aluminum is a physical commodity traded on the New York Mercantile Exchange. One futures contract controls 44,000 pounds of aluminum and one price tick up or down is worth $22.00. Aluminum’s initial margin requirement to trade one contract is $3,038, and the maintenance margin is $2,250. Investors like aluminum futures for its volatile nature, which makes trading aluminum very risky. The metal is known to give investors a roller coaster ride of unexpected price movements.

Step 2

Trading aluminum exchange traded funds (ETF) provides investors with a good return and has substantially less risk than trading aluminum futures. iPath DJ-IBS Aluminum ETN stands out from the other ETFs by combining different aluminum futures into one exchange traded note. PowerShares DB Base Metals is an assortment of aluminum, copper and zinc futures put together in one investment basket. If you prefer a pure aluminum play, take a position with Global X Aluminum, an ETF that invests in aluminum producers worldwide.

Step 3

Investing in the stocks of aluminum producers may be more attractive to the risk-adverse. Alcoa is the world’s largest aluminum producer, followed closely by Aluminum Corporation of China. Investing in the latter gives you exposure to the burgeoning Chinese market for aluminum. Use your stock screener to create a list of aluminum companies and select the ones that fit your investment goals.

Step 4

Consider mining stocks like Century Aluminum, Australia’s Rio Tinto and Norwegian company Norsk Hydro as another investing alternative. Aluminum prices took a hard hit during the global economic slowdown and many mines scaled back their operations. The recent housing uptrend may indicate mines will increase production as demand picks up.

Step 5

Analyze the strengths and weaknesses of each investment. Let your broker enter the trade if you decide to trade aluminum futures to get the best fill. Use your online account to enter a stock or ETF trade. Check your account after the trade is completed to be sure it’s reflected in your positions window.

Tip

  • Keep tract of new housing starts and changes in industrial production to get a better idea of where aluminum prices are headed.

Warning

  • Aluminum is a highly cyclical and thinly traded compared to other metals. Monitor the trade carefully and have an exit plan in place to close out the trade.

Photo Credits

  • Jupiterimages/Creatas/Getty Images

About the Author

Based in St. Petersburg, Fla., Karen Rogers covers the financial markets for several online publications. She received a bachelor's degree in business administration from the University of South Florida.

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