How to invest in commodities

Sick of the rising cost of in prices for food, energy, and materials? Well, you can actually invest in all of these to benefit from good old fashioned supply and demand. If you’re looking for some extra diversification in your portfolio, you might want to think about investing in commodities.

What are commodities?

Commodities are goods or resources that trade based on supply and demand. They tend be raw materials that are then used for another purpose, like manufacturing or agriculture.

The 2 main types of commodities are:

1. Hard commodities. This refers to natural resources that are usually mined or extracted like gold, rubber, oil, metals, and gas.
2. Soft commodities. This includes agricultural products or livestock. Things like coffee, sugar, wheat, soybeans, cattle, and yes – orange juice.

What is commodity investing?

Commodity investing is a strategy that tends to be used by more experienced investors. But, finding ways to invest in commodities is becoming more accessible and less complex. However, trading commodities usually works a bit different to something like stocks.

The reason commodity investing is different is because most of the time, it’s not very practical to buy a few barrels of oil and keep them in your garage until you decide to sell.

So, commodity investing tends to involve derivatives. This basically means you’re buying or something that represents a particular commodity and mirrors the price.

There are alternative ways to invest in commodities through exchange-traded funds (ETFs) , buying commodity stocks, or even purchasing physical precious metals like gold or silver.

How to invest in commodities

Commodity investing can be more complex than other forms of investing, so don’t dive in without doing plenty of research.

If you do decide that investing in commodities is something you’d like to explore, here’s a step-by-step guide:

1. Research how you want to invest. Think about whether you want to physically buy the commodity (if practical), invest in derivatives (like futures or options contracts), use commodity ETFs, or buy stocks related to commodities.
2. Find a platform. Finding somewhere to invest in commodities can be trickier. It’s more of a niche investing category. Access to commodity stocks is easy enough with most share dealing platforms, but other forms of investments can be harder to find.
3. Fund your account. Once you’ve decided what type of commodity you want to invest in and the platform you want to use, depositing into your account is next.
4. Buy the commodity. With a share dealing account set up, funds in your account, and a commodity investment in your crosshairs – investing and buying is your final step.

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Are commodities volatile?

Commodities’ volatility (how much and how quickly the price moves over time) is generally reflective of the supply and demand. If there were loads of avocados grown just as everyone decided they didn’t like guacamole anymore, then the price of your average avocado is likely to go down.

If a worldwide virus leads to everyone panic buying toilet roll or a suggestion of a fuel shortage leads to queues at petrol pumps, you’re likely to see the price rise.

Due to supply and demand, the volatility of commodities tends to be higher than for other types of investment, but this depends entirely on the commodity.

Examples of commodities

This isn’t an exhaustive list of commodities, but it gives you a good idea of what can be considered to be a commodity.

• Oil
• Corn
• Cocoa
• Cotton
• Live cattle, such as cows and pigs
• Metals, such as gold or silver
• Oats
• Orange juice
• Sugar
• Wheat

Different ways to invest in commodities

Here are 4 different ways that you can invest in commodities:

1. Purchase the commodity
2. Invest in commodity futures or options contracts
3. Buy commodities by investing in ETFs.
4. Buy stocks and shares in companies that produce commodities

Pros and cons of investing in commodities

Bottom line

All investing carries risk, and commodities are no different. They can sometimes act as a portfolio hedge, moving in different directions to other assets, acting as a potential diversification tool.

Investing in commodities can be useful, but is best done with care and plenty of research. Make sure you’re comfortable with the particular commodity market or type of investment before you jump in.

Frequently asked questions

• Are commodities alternative investments?

  Yes – commodities are considered to be a type of alternative investment. This is because it’s not a “conventional” investment, which would be shares, bonds or cash.

• Are commodities high risk?

  Commodities can be risky when they’re particularly volatile, which is where the price rises and falls very quickly. You might find it difficult to sell the commodity and end up selling for less than you purchased it for.

Learn how to invest in these commodities with our guides