Sick of the rising cost of in prices for food, energy and your morning cup of coffee? Well, you can actually invest in all of these to benefit from good old fashioned supply and demand. If you’re looking for some extra diversification in your portfolio, you might want to think about investing in commodities. Our guide covers the risks as well as how to do it.
Commodities are goods or resources that trade based on supply and demand. They tend be raw materials that are then used for another purpose, like manufacturing or agriculture.
The 2 main types of commodities are:
Investing in commodities is a strategy that tends to be used by more experienced investors. But, finding ways to invest in commodities is becoming more accessible and less complex. However, trading commodities usually works a bit different to something like stocks.
The reason commodity investing is different is because most of the time, it’s not very practical to buy a few barrels of oil and keep them in your garage until you decide to sell.
So, commodity investing tends to involve derivatives. This basically means you’re buying or something that represents a particular commodity and mirrors the price. This is why trading methods like futures contracts and options are commonly used.
There are alternative ways to invest in commodities through exchange-traded funds (ETFs) , buying commodity-related stocks, or even purchasing physical precious metals like gold or silver.
Commodity investing can be more complex than other forms of investing, so don’t dive in without doing plenty of research.
If you do decide that investing in commodities is something you’d like to explore, here’s a step-by-step guide:
Commodities’ volatility (how much and how quickly the price moves over time) 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.
This isn’t an exhaustive list of commodities, but it gives you a good idea of what can be considered to be a commodity.
Here are 4 different ways that you can invest in commodities:
"The best commodity for your portfolio is going to depend on your investing style, risk appetite and timeframe. When it comes to commodity investing, a lot of the action usually relates to relatively short-term trading.
However, if you’re more of a long-term investor than short-term trader, the most popular commodity investment would be gold. It’s a commodity that has a long and storied history acting as a store of value (and useful material). Investing in gold is still quite volatile, but holding a portion of gold can be a solid way of using a commodity investment as a hedge in your portfolio."
All investing carries risk, and commodities are no different. They can sometimes act as a portfolio hedge, moving in different directions to other assets, acting as a potential diversification tool.
Investing in commodities can be useful, but is best done with care and plenty of research. Make sure you’re comfortable with the particular commodity market or type of investment before you jump in.
Soybeans are a popular commodity to invest in. Usually you would invest in soybeans with futures, but you can also invest in futures options and exchange-traded funds (ETFs).
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