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How to invest in commodities

Coffee, cotton and even cattle. Find out how you can invest in commodities.

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What are commodities?

Commodities are naturally occurring raw materials that are either consumed or used to build other products – such as oil, grains and precious metals.

These basic goods are mass-produced and standardised, which means that they aren’t much different from one another in terms of quality and quantity. For instance, if you’re looking to buy flour in the supermarket and your preferred brand is out of stock, you’d typically pick another one and it’ll serve your purpose just the same.

To help you understand better, consider the things that aren’t commodities. These are items that aren’t interchangeable – you’d be pretty annoyed if you place an order for a box of tampons and received a loaf of bread instead.

Commodities can be traded on exchanges, like stocks. Well-known exchanges include the Singapore Exchange (SGX), Chicago Mercantile Exchange (CME), New York Mercantile Exchange (NYMEX) and London Metal Exchange (LME).

Types of commodities

Commodities can be broken down into two categories – hard and soft.

  • Hard commodities are ones that need to be mined or drilled to be found, such as metals and energy products.
  • Soft commodities are ones that are grown, like corn and wheat.

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.

  • Oils, such as soybean oil and crude oil
  • Corn
  • Cocoa
  • Cotton
  • Live cattle, such as cows and pigs

Benefits of investing in commodities

  • Diversification. Unlike traditional asset classes such as stocks and bonds, the value for commodities is often determined by multiple variables specific to each commodity other than those in the broader economy. By adding broad commodity exposure to a multi-asset portfolio, its diversifying role can potentially lower its overall risk and boosting returns.
  • Protection against inflationary pressures. While the value of stocks and bonds is often eroded by inflation, commodities typically perform better during these periods. This means that owning a hard asset can ease help offset potential losses from other investments in your portfolio.
  • Hedge against other investments. Adding a commodity that takes an opposite position to a related asset can help mitigate overall investment risks.
  • Exposure to different growth opportunities. A commodity price can rise significantly within a short period of time if exposed to a sudden growth in demand, which can potentially result in high returns.

Are commodities volatile?

Commodities’ volatility (how much the price moves up and down) is generally reflective of its supply and demand.

For example, 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 rolls, you’re likely to see a spike in prices.

In general, the volatility of commodities tends to be higher than for other types of investment, but this depends entirely on the commodity. Gold, for instance, is considered relatively stable and its prices do not fluctuate wildly. Hence, gold serves as a reserve asset for central banks.

How can I invest in commodities?

There are four different ways that you can invest in commodities:

1. 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 it 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.

2. 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.

3. 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 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 choices.

4. 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 there any caveats to look out for when investing in commodities?

  • Prices can be extremely volatile. Commodity prices can peak and trough dramatically within a short time. Mutual funds or ETFs that only track a single sector or commodity can also exhibit higher than average volatility.
  • Not income-generating assets. Unlike stocks and fixed income, commodities don’t generate any dividends and/or interest.
  • Foreign and emerging market exposure. Besides its primary risks, commodity investing is also susceptible to volatility caused by political, economic, and currency instability.
  • Asset concentration. Commodity funds can serve as a good diversification strategy, but they are considered non-diversified since a significant portion of their assets is generally concentrated in one or two industries. This can potentially lead to greater price fluctuations compared to a more diversified fund.

Are commodities a good investment?

Commodity trading is a high-risk, high-reward endeavor and much of commodity trading amounts to speculation, not investing. While it can serve as an effective way to hedge your portfolio against a bear market or inflation, you should only consider it only if you have a strong understanding of the supply-and-demand dynamics of the market.

Unpredictable factors like the weather, diseases, and natural disasters can have huge impacts on commodity prices in the short term. If you’re looking to invest in a commodity for the long term, commodity stocks, mutual funds, and ETFs are better options for most individuals.

Compare online stock trading platforms

Name Product Brokerage Fee Market Access
Interactive Brokers
SGX stocks: $2.50
US stocks: $1 per share
SG, US, CA, AU, UK, IN, JP, HK, MX, FR & 17+ more
CFD service. Capital at risk. Take advantage of low trading fees, multiple platform support, and an extensive list of asset classes across global markets, including stocks, options, futures, forex, bonds, and funds.
SGX stocks: N/A
US stocks: $1.49 per trade (regular pricing)
Get $60 when you sign up on Syfe Trade (minimum deposit of $2,000 and make one trade). T&Cs apply.
Saxo Markets
SGX stocks: $5
US stocks: $4
SG, US, CA, UK, AU, HK, CN, SG, JP, IT & 16+ more
Trade 19,000+ international stocks on global exchanges with brokerage fees as low as $5. Low-risk account is also available for beginners.
Tiger Brokers
SGX stocks: $1.99
US stocks: $1.99
Sign up and enjoy unlimited zero commission trades for US stocks for 180 days. T&Cs apply.
SGX stocks: $0.99 per order
US stocks: $0.99 per order
Access Singapore, Hong Kong, US stocks and ETFs with one account. Enjoy free level 2 market data and lifetime commission-free trading on US stocks.
Maybank Kim Eng
SGX stocks: $25
US stocks: $20
CFD service. Capital at risk.

Compare up to 4 providers

Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades.

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