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How to invest in commodities
Coffee, cotton and even cattle — find out how you can invest in commodities.
What are commodities?
Commodities are tradeable raw materials. These basic goods can be sorted into four broad categories: metal, energy, livestock and agriculture.
The commodity market predates the stock market, as people have exchanged commodities like gold, food and livestock for centuries. Today, the modern commodities market operates as publicly traded exchanges that facilitate the movement of contracts for physical goods.
Investors can gain exposure to commodities through commodity futures, exchange-traded funds (ETFs) or by purchasing stocks from companies that produce commodities. It’s also possible to purchase commodities as physical goods, but doing so requires you to store the goods yourself.
While far from exhaustive, this list includes some of the more popular commodities.
Are commodities volatile?
Due to supply and demand, commodities can be more volatile than stocks, and some commodities are more volatile than others. The overall volatility of the commodities market is often reflective of global events, but can also be impacted by environmental concerns, geopolitics and more.
For example, oil tends to be more volatile than most. As one of the most liquidly traded commodities, it’s vulnerable to a variety of market-impacting events, including trade discrepancies, taxation and more. The oil industry is no stranger to market disruption and investors interested in this commodity will need to assess their risk tolerance before getting involved.
On the other hand, gold is typically one of the more stable commodities on the market. Gold has both historical and cultural value that predates modern currency. In fact, gold is often viewed as a safe haven for investors when the stock market is down.
How to invest in commodities
There are four different ways that you can invest in commodities:
- Purchasing the commodity
Buying stocks is one of the simplest ways to invest in commodities. This method involves purchasing shares of companies that manufacture or sell physical goods.
You’ll need a brokerage account to invest, but many trading platforms offer online applications that can be completed in minutes. Once you’ve applied, all you need to do is fund your account to begin investing.
Before purchasing stocks, research the commodity you’re interested in and find out which companies contribute to the industry. Stock screeners are beginner-friendly research tools that can help you find a company that fits your criteria.
Once you pick a company, you enter the number of shares you’d like to purchase and execute the order. After that, you can monitor your investment by logging into your brokerage account.
Exchange-traded funds (ETFs)
Commodity ETFs allow you to invest in a collection of companies. Like stocks, they’re a beginner-friendly asset that can be bought and sold through a brokerage account. But unlike stocks, they offer a more diverse investment opportunity, spreading your investment across multiple companies to dilute the risk of volatility.
ETFs are a practical way to gain exposure to a variety of companies in the industry you’re interested in. Funds typically have a theme and contain a basket of stocks that conform to that theme — there are oil ETFs, gold ETFs — an ETF for any segment of the market you can think of. There’s no shortage of choices available and you can buy and sell ETFs through your brokerage account in the same way you do stocks.
Futures contracts are one of the most complex assets on the market and are typically only traded by professional investors. New investors will want to steer clear of this security until they have a solid understanding of the market and how futures contracts work.
A futures contract is an agreement to buy or sell an asset at a set price on a certain date. Contracts can be bought and solid repeatedly until the expiration date and the contract’s value will fluctuate based on market conditions. A futures contract is a gamble — and a dangerous one, at that. If you hold a futures contract, you are obligated to fulfill the terms of that contract on its expiration date, no matter how the commodity’s price has shifted since you purchased the contract.
Futures contracts should only be pursued by experienced traders.
Purchasing the commodity
Finally, you can invest in a commodity by actually purchasing physical goods — gold, wheat, livestock, you name it. This approach takes hands-on investing to a whole new level and is the most challenging and time-intensive investment method on this list.
You’ll need to locate a dealer that sells the commodity you’re interested in, purchase it and arrange for pickup. You’ll be responsible for the storage of what you purchase — a complex undertaking if you’re investing in something that’s bulky or difficult to transport. And should you plan to sell your commodity in the future, it’s up to you to identify a buyer and facilitate the transaction.
The bottom line? This method is not for first-time investors and should only be attempted by those with experience trading a specific type of commodity.
Compare stock trading platforms
If you plan to invest in commodity stocks, ETFs or futures, you’ll need a brokerage account. Explore your options below.
Commodities may help diversify your investments, but are prone to volatility. Conduct some research before investing to make sure the commodity you purchase aligns with your portfolio and investment strategy.
Explore your brokerage account options with multiple trading platforms to find the account that best meets your needs.
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