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Transportation cost includes storage, insurance, and financing costs associated with holding physical products. Investors try to manage these costs by buying and selling products within given time periods.
Transportation cost is generally understood as the cost associated with holding a physical product for a specified period of time. There are several different forms of expenses that can rightly be considered the cost of transportation, including storage, insurance of the physical product, and financing costs incurred to acquire and maintain control of the product.
Storage costs are an excellent example of a transportation cost. As long as the investor owns the securities in question, it is necessary to store the physical products in an environment where they can be properly maintained. Often this involves not only a monthly rental or lease fee for the warehouse, but also the costs associated with the labor required to properly monitor the condition of the product.
Insurance premiums are another form of transportation cost. While in the control of the investor, it is often a good idea to insure the products. In the unlikely event that something unexpected happens to commodities, such as a natural disaster, the investor can turn to insurance coverage to recover at least partially from the loss. While universal insurance is not required by law to hold physical products, it is generally considered an essential part of responsible investment care.
Financing costs related to the cost of transportation may begin during the procurement process. In the event that products are purchased on margin, the investor may be subject to interest payments on the amount borrowed to make the purchase. As long as there is an outstanding balance due, interest will accrue and the investor is expected to make interest payments. Dividend payments made on short positions may also reasonably be considered a funding cost.
In general, investors try to manage the cost of transportation by buying and selling the products within given time periods. This can help minimize some of the expenses or costs associated with owning the commodity, while allowing the investor to earn a profit while in possession of the investment.
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