How to invest in commodities

If you’re looking for an additional investment type to add to your portfolio, you might like to think about commodities. These are essentially just items that can be interchanged, like corn or gold. Due to supply and demand, their prices tend to fluctuate, so investors use the opportunity to attempt to make money from them. Find out why they might have quite volatile prices, whether they’re a good investment and how you can invest in them.

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. For example, if you need unleaded petrol for your car, you can go to any petrol station and 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. Say you choose a nice fluffy jumper from your favourite online retailer, but a different jumper arrived. You’d be pretty miffed — just because they do the same thing, they’re not the same.

Can commodities be differentiated?

There are some things which could be considered to be both commodities and not commodities, such as eggs. Pick up two different boxes of eggs at the supermarket and you’d be able to cook them up however you like your eggs in the morning, but there is a differentiation between “organic”, “caged” and “free range” eggs, so there could be brand differentiation. Energy is the same — we’re seeing more energy companies that use specifically renewable energy. While some customers may choose these companies because they gave the lowest quote, others may choose it because of the type of energy they’ll get.

This suggests that items are on a scale, rather than being one or the other.

What is commoditization?

Commoditization is where, over time, a product loses differentiation between brands. You’ll have experienced this if you’ve ever been prescribed something by your GP that has a well known brand name, but the box is a generic unbranded one. In this case, the GP has prescribed you a cheaper version of the same medicine. Knowing that Vaseline is a branded version of petroleum jelly or that the own-brand paracetamol is often the same as branded paracetamol can save customers money down the road.

There’s suggestions that cannabis is slowly becoming a commodity as it’s becoming more widely used in healthcare.

What are the different types of commodities?

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 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.

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

Why do commodity prices change?

The price of commodities is all about supply and demand — when more people want something than there are available, the price may rise, as the seller of that item realises that those who want it enough might settle on a higher price – think back to the start of the coronavirus pandemic when you couldn’t get hold of hand sanitiser. Those that were selling it were able to raise their prices.

These days, hand sanitiser is readily available to purchase — in fact, stores have placed free-to-use bottles of it at the front of their stores – the price is more levelled out now the supply and demand is more equalised.

The opposite is also true — after Easter, supermarkets find themselves with Easter eggs or other egg-shaped confectionery that they didn’t quite manage to shift before the Easter weekend — you’ll find these at reduced prices. This is also the precise reason why companies have January sales.

How to invest in commodities

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

• Purchase the commodity
• Invest in commodity futures or options contracts
• Buy commodity exchange traded funds (ETFs)
• Buy stocks and shares in companies that produce commodities

1. Purchase the commodity

One way to invest in a commodity is actually purchasing it. The idea is that you purchase it, hold onto it for a period, then sell it at a later date for a profit. 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. Sometimes the broker will deal with this for you, but this isn’t always the case.

Commodities brokers

Not all share dealing platforms let you invest directly in commodities – you’ll need to make sure you find one that allows you to purchase the commodity you’re interested in. Here’s some information on which providers let you trade commodities.

2. Invest in commodity contracts

If you’re not familiar with futures contracts, they’re quite simple in principle, but are a fairly risky investment type if you don’t understand how they work. 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 product long before it could actually be sold, so they would organise sales ahead of time to help manage the financial risk.

Think of it like buying a puppy. Often breeders will start organising buyers for their puppies before they’ve been born or before they’re ready to leave their mum — this is very similar to a futures contract. You agree on the terms, such as the type of puppy you’ll receive and the price you’ll pay, and in the future, you collect your puppy and pay for it.

The same happens with livestock, such as cows, sheep and chickens. This does come with risks – after all, you shouldn’t count your chickens before they hatch.

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. Buy 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 you if you’re a newbie. There are loads of ETFs for a huge range of different commodities, so you have plenty of choice. You can search your chosen investment provider for the commodity you’re interested in to see if it has ETFs available to invest in.

4. Buy shares in companies that produce or use specific commodities

Which shares you choose to purchase will depend on what specific commodity you fancy investing in. You might choose to buy Starbucks shares to invest in coffee, or Tate and Lyle shares to invest in sugar. Do some research into the commodity you want to invest in to find out some companies that produce it or use 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?

All investing carries risk, but many commodities are items that consumers continue to buy even in a recession. Everyone will still need to eat, for example, so some people view commodities as less risky, but within that, there will be a huge range – oil is a commodity and can be highly volatile.

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Hargreaves Lansdown Fund and Share Account Finder Award		£11.95	£5.95	£0	Hargreaves Lansdown is the UK's number one platform for private investors, with the depth of features you'd expect from an established platform. The minimum deposit with HL is £1. Capital at risk.	Go to site View details	Compare	loading Fetching your data...
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interactive investor Trading Account		£5.99 (plus 1 free trade each month)	£3.99	£9.99 per month	Interactive Investor offers everything most investors need. Its flat fees makes it pricey for small portfolios, but cheap for big ones. The minimum deposit with ii is £0. Capital at risk.	Go to site View details	Compare	loading Fetching your data...

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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