When it comes to investments, a diversified portfolio is always recommended. For one, diversifying your assets is believed to help minimize risks by protecting you against market fluctuations and help maximize returns. And as such, investing in commodities can be a terrific way to do just that.
So, if you’re planning to invest in commodities in the near future, then this article can be for you. Below are some essential points to guide you and help you get started in commodity investing.
Understanding Commodity Investing
Commodity trading dates back centuries, long before stocks and bonds were traded. In fact, commodities have long been a popular investment option, from spices, gold, and silks to the exchanges where they are now traded. It was a significant business that connected cultures and people.
Branching out can be a smart option if you’ve explored traditional investments like stocks, bonds, mutual funds, and real estate. However, investing in commodities for novices is not as difficult as it seems. There are numerous ways for investors to earn from commodities; all it takes is sufficient research, data analysis, and understanding of market trends.
More so, check out this news and information about investing in commodities and the trends to look out for in 2022, according to Money Morning.
Common Types Of Commodities To Invest In
Commodities include oil, agricultural products, livestock, energy, and metals. Significantly, investing in commodities requires understanding their differences.
Metals are hard commodities that include gold, silver, copper, platinum, and others. Some of these assets, like gold, are fairly common. Although, it’d be good to note that in most cases, you don’t physically own these goods. They often live in paper form within your portfolio.
These commodities are primarily agricultural produce. Corn, rice, barley, cocoa, sugar, cotton, and the like are common agricultural commodities. However, seasonal and weather-related risks are connected with these commodities. But, in general, population increase and limited agricultural supply may help boost your profits, should you invest in these types of commodities.
Oil, natural gas, coal, and ethanol are all included in the energy market. Wind and solar electricity, on the other hand, are examples of renewable energy.
All live animals, such as cattle, chickens, and hogs, are included in the term ‘livestock.’
Many people make a distinction between livestock and agriculture in order to emphasize that livestock are living creatures rather than products for sale. Animals are also more susceptible to sickness and reproductive failure than other agricultural goods, which can negatively impact the market.
With that all in mind, to diversify your portfolio, you need to invest in at least one of the mentioned categories. Although it’d be worth noting that commodity prices fluctuate continuously as global supply and demand patterns change. For instance, the recent war in Ukraine might raise grain costs, while increased Middle Eastern oil production could potentially lower world oil prices.
Ways To Invest In Commodities
Today, investing in commodities isn’t only limited to commodity trading. Outlined below are the other ways to start investing.
- Purchase Commodity Producing Companies’ Shares/Stocks
Commodity stocks are a simple method to invest in commodities. Essentially, with this approach, you can invest in companies that use commodities as raw materials or deal with them. For example, you can invest in agricultural commodities by purchasing stock in companies that produce such. Or perhaps, if you want to invest in precious metals, you can buy stock in firms that mine them.
This can be an excellent alternative for individuals who do not have the hefty initial investment required for these goods. Beginners may also find success with this strategy, as it allows them to gain some expertise before moving on to more sophisticated approaches.
Investing in commodities via stocks may help reduce investment risks. But before buying any stock, you should always investigate the company’s situation, especially its financial condition. More so, find out how it competes with other companies that buy, sell, or produce the same commodity.
- Invest In Futures Trading
Buying commodities on the future market is perhaps one of the most well-known, if not the simplest, approaches. And since futures are a high-risk and high-reward strategy, certain traders are drawn to it.
In a nutshell, future trading involves speculating or hedging a commodity’s price direction. Futures often require a little initial investment to open a contract, and you can leverage your position to quickly win or lose money. If the transaction goes your way, you won’t have to put up any additional money, making it a low-cost way to speculate.
- Buy Physical Commodities
Physical commodities can be one of the most straightforward ways of investing in commodities. This approach can be for individuals who prefer to store actual precious metals. The disadvantage, however, is that investors will have to pay for insurance and storage. Then, when it comes time to sell, they must seek out a prospective buyer, agree on a price, and hand over the products.
Physical ETFs may offer a solution in this case, as they are backed by physical commodities but allow investors to trade in and out of the market without ever needing to acquire the underlying commodity.
- Buy ETFs
Exchange-traded funds (ETFs) are a terrific choice for investors who want to track commodity prices but do not want to buy futures contracts or physical commodities.
They are a type of mutual fund that invests in a group of assets. They trade like stocks, with prices fluctuating throughout the day. Commodity ETFs can be purchased through an online or traditional broker. Notably, not all commodities have ETFs, thus investors seeking a specific commodity may need to explore elsewhere.
Should You Engage In Commodity Trading And Investing?
Commodity trading entails a high degree of risk and reward. It can be an efficient way to protect your assets against a bear market or rising inflation.
However, you should consider it only if you have a good grasp of the commodity market’s supply-and-demand fundamentals. This includes an understanding of both past price trends and current market conditions. And if you’re just getting started, you can mitigate risk by minimizing your margin usage.
Bear in mind that the majority of commodities trade is speculative, not investing. And more so, it can be unpredictable in some cases since commodity prices might be affected by various factors, such as the weather or environmental disaster.
Commodities, like any investment, include associated risks. However, they can be an excellent method to diversify your investment portfolio, especially once you have sufficient knowledge of the various facets of the commodity in which you choose to invest in.
And with the insights outlined in this article, you can now have more information on how commodities investing works and how it can help boost your investment profile. But much like with any investment decision, research and an expert’s inputs can go a long way.