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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, pretty simply, things that aren’t much different from one another if you were to get them from other sources. When you’re in the supermarket buying flour, there isn’t really much difference between the different brands. If they don’t have the one you usually buy, you would generally just choose another one.
It’s helpful to think about things which aren’t commodities to understand it further. These are items that aren’t interchangeable. You’d be pretty annoyed if you ordered a box of tampons from the supermarket and they were substituted with mandarins.
There are two categories of commodities:
- Hard commodities are ones that need to be mined or drilled to be found, such as metals and energy products.
- Soft commodities are ones which are grown, like corn and wheat.
Are commodities volatile?
Commodities’ volatility (how much the price moves up and down) 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, 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.
List 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.
- Oils, such as soybean oil and crude oil
- Live cattle, such as cows and pigs
- Metals, such as gold or silver
- Orange juice
How can I invest in commodities?
There are four different ways that you can invest in commodities:
- Purchasing the commodity
- Investing in commodity futures contracts
- Buying commodity exchange traded funds (ETFs)
- Buying stocks and shares in companies that produce commodities
Purchasing the commodity
You can choose to invest in a commodity by purchasing the commodity. You can often do this by looking for a dealer that sells the commodity and purchasing it from them. You can choose whether you want to eventually sell it back to the original dealer or to sell to someone else.
This is often done with gold and silver, but you’ll need to ensure that you have somewhere to store the commodity between buying and selling it.
Investing in commodity futures contracts
If you’re not familiar with futures contracts, they’re quite simple. Instead of purchasing the stock now, you are agreeing to purchase it at a specified point in the future. These were created for sellers like farmers, who would start creating a stock long before it could actually be sold, to help manage the financial risk.
Nowadays, futures contracts aren’t solely for farming. You can purchase futures contracts in just about anything, and they don’t always end with physical items.
Buying commodity exchange traded funds (ETFs)
Commodity ETFs allow you to invest in a series of different firms or companies, allowing you to spread your investment out and reduce the risk. We explain ETFs in some detail in our handy guide if you’re not completely sure on how they work.
ETFs are a much simpler way of accessing the stock market, so they’re quite well suited to newbies. There are loads of ETFs for a huge range of different commodities, so you have plenty of choice.
Buying stocks and shares in companies that produce commodities
Which stocks and shares you choose to purchase will depend on what specific commodity you fancy investing in. Do some research into the commodity you want to invest in to find out some companies that produce it and buy shares in those companies.
You might need to know your way around the stock market to buy shares. The share trading platform that you choose to use will have some guidance to help you along the way.
Are commodities a good investment?
In general, yes. Commodities are often things that you would continue buying even if there was a recession. They’re an example of a safe haven, which means that they continue to perform even when other stocks are reducing in value. Everyone will still need to eat, clean and travel, no matter the circumstances, so it’s generally seen as a good investment because they’re less risky.
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