How to Invest in Commodities

We cover commodities investing from top to bottom.

Updated: January 24, 2024
Matt Crabtree

Written By

Matt Crabtree

 

More people are turning to gold… 

Diversifying your holdings provides insurance against volatility, which is becoming more crucial today and is why more people are turning to gold.

Diversifying your holdings has long been established as the most effective strategy for reducing your exposure to loss and increasing your potential for gain in the stock and wider markets. It turns out that commodities investments may be a fantastic way.

If you've already dabbled in the more common forms of investing (such as property, stocks, or bonds), it may be time to broaden your horizons. With a little time and effort and knowing where to look, you can start making money in the commodity market. Let's talk about how to invest in commodities.

How to Invest in Commodities — 5 Methods

Many commodity investment strategies exist, each with its potential returns and dangers. Before deciding on a strategy (or two), investors should learn as much as possible about all of the options available to them. Five common commodity investment strategies are:

  1. Investing in commodity-producing stocks
  2. Investing in commodities with futures 
  3. Investing in commodities with ETFs 
  4. Commodity trading using mutual funds and index funds
  5. Using a commodity pool operator (CPO

Method 1: Stocks

How to invest in commodities? First off, investing in commodities via stocks is perhaps the simplest option available. To get their feet wet, investors need to do nothing more than buy stock in a firm actively engaged in the commodity trade.

Shares of a gold-focused mining business, for instance, might appeal to investors interested in metal commodities. Investors who cannot put up a sizable sum might consider this alternative.

Companies are the primary source of risk when investing in commodities equities.

Yet, variables unrelated to the worth of the commodities themselves, such as the company's internal operations, may have a detrimental impact on price.

Although there's no foolproof method to mitigate this danger, savvy investors may mitigate their exposure by doing their homework on firms before buying shares.

How to invest in stocks:

This mini-section is for those in a hurry, using your spare cash.

  • Choose eToro. Because of its beginner-friendliness, we like eToro. You can also invest in an ISA via a broker or tweak your investments. eToro provides both individual savings accounts and ETFs.
  • Register Your ID, address, and national insurance number may be requested. Payment details for account funding.
  • Finish verification. After identification verification, you may invest.
  • Pick one of the commodity funds below. Enter the ticker symbol and trade.
eToro logo

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. {etoroCFDrisk}% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.

Method 2: Futures

Why invest in commodities through futures? If you're acquainted with the commodity market and want to speculate on price fluctuations, futures are a fantastic way to invest in commodities. 

Futures contracts are agreements to purchase or sell a particular number of shares at a certain future date and price. As the value of a commodity goes up or down, investors who bought futures contracts stand to gain. This may be done temporarily or permanently.

Futures contracts need extensive background knowledge, hence they are not advised for novice investors. The main reason for this is the high degree of speculation involved in futures trading. Investors, however, have other options, like working with a broker or purchasing contracts with a purchase option. 

Method 3: ETFs

If you want to capitalise on the ups and downs of commodities prices but don't want to commit to buying futures contracts, exchange-traded funds (ETFs) are a terrific alternative. Investing in commodities exchange-traded funds, or ETFs, means using pools of investments that trade like stocks. 

They are traded like stocks, with prices often fluctuating throughout the day. Investors may purchase commodity exchange-traded funds via either an internet or brick-and-mortar broker. Investors interested in a particular commodity may need to go elsewhere without a corresponding fund.

Method 4: Mutual & Index Funds

Commodity investment using mutual funds is an excellent option for gaining exposure to the stock market without the randomness of something like a spread bet on gold.

While investors won't have hands-on experience with the commodity, there are several safeguards built into mutual funds that should be taken into account. Mutual funds are often praised for their efficient management and high liquidity. 

As a result, investors who want to get exposure to firms that deal with commodities may do so without having to acquire equities individually by investing in these funds. This is an approachable method to start trading commodities.

Once again, investors must keep tabs on general market conditions and any developments within their target firm. A mutual fund, however, may help shed light on this procedure if chosen carefully.

Method 5: Commodity Pool Operators

Investing in futures contracts and options may be done collectively via commodity pools. The CPO will send out investor announcements and yearly financial reports. Oftentimes, a commodities pool's structure will allow for more investment potential.

Typically, each pool will hire an adviser who must also be registered with the CFTC.

Advisers may then guide how to best allocate capital among the available choices. Having access to a financial counsellor is a major selling point for commodities pools, leading many investors to choose them over mutual funds.

What is Commodity Trading?

Resource trading is commodity trading. The practice is hundreds of years old but looks quite different today. Material and spice commerce enabled global cultural interaction. Investors may buy commodities, ETFs, and mutual funds now.

Commodity trading may diversify a portfolio if handled properly. Commodities have stable demand, enabling investors to maximise earnings. Commodities may hedge against inflation and currency depreciation.

Types of Commodities

Commodities include agriculture, livestock, energy, and metals. Know the distinctions between commodities before investing. These characteristics might help you choose risk-appropriate investments.

Examples:

Crops are agricultural commodities. Coffee, wheat, cocoa, sugar, cotton, and maize are agricultural products. Certain commodities have seasonal and weather-related hazards. Population increase and limited agricultural supply drive profitability.

Livestock: Many people equate agriculture with animals. Animal commodities include cattle, chickens, pigs, and others. Livestock commodities have some hazards, but fewer than crops.

Energy: The most famous commodities are crude oil, gasoline, natural gas, and heating oil. Development has driven energy-related product demand. According to Trusted CEO and Founder Adam Ng, energy stocks were among the best performers in the market in 2023, while the sector as a whole needs to adjust to those gains.

This leaves many good reasons to perhaps add shares of a company like Diamondback Energy at this time. It operates two segments — upstream and midstream — as an independent oil and natural gas firm. As demonstrated in 2020, economic downturns may hurt energy commodity markets.

Metals: Base or precious metals are mined commodities. Zinc, lead, steel, aluminium, and nickel are utilised industrially. Investment and decoration employ precious metals. Gold, platinum, silver, and ruthenium are precious.

Two Principles of Commodities Investing 

1. Demand-Supply Rule

Supply and demand underpin commodities investment. Many commodities are raw ingredients or fundamental items, limiting product variation. Commodity prices are not affected by manufacturers or sentiment like other sectors. Instead, demand determines commodity prices.

Like oil, many commodities are susceptible to market volatility.

Current events and market knowledge might help you invest in commodities. This is the greatest way to protect your money and prepare for significant changes.

2. Low-Cost Commodities Profit Most

Unpredictable markets make low-cost goods the best. High-overhead commodities businesses are less adaptable to falling prices. They must pay increased expenditures to earn margins.

Low-overhead commodities may better adjust to swings, since producers still earn money when selling units. Consider this while researching possibilities and market demand.

Reasons to Invest in Commodities

When you invest in commodities, particularly if you come from the real estate business, you may diversify your portfolio. But, commodities are unique among investing options for many key reasons:

  • Commodities may act as a portfolio buffer since their performance is often uncorrelated with other assets. Instead, supply and demand dynamics in the economy and politics affect commodity prices, which makes it similar to monetized website traffic.
  • Depending on your investment strategy, commodities may serve as a risk buffer for your portfolio. The simplest way to describe this is to invest in a commodity whose value rises when another of your assets falls.
  • You may hedge against inflation by purchasing commodities. Again, this is because of the nature of demand; hence, commodities do not tend to appreciate at the same rates as other assets.

Risks 

Commodities are not immune to the fact that there is no such thing as a foolproof investment. Before you begin an account with a brokerage platform, consider the following potential downsides:

  • Unpredictable market shifts, like the one caused by the COVID-19 epidemic, are not uncommon for commodities. Although keeping up with the news might help you prepare for potential shifts, there is no foolproof method of predicting market volatility or price swings.
  • Returns on commodity investments are very speculative because of the inherent risk involved. This may work against novice traders in commodities who cannot anticipate market shifts.
  • Commodity prices are susceptible to fluctuations in value caused by macroeconomic variables such as worldwide events, foreign government policies, international trade rivalry, and economic circumstances.

Best Investment Commodities

Investment in a commodity requires careful consideration of supply and demand.

Certain commodities have done better over time than others owing to supply constraints, even though most commodities benefit from stable or worldwide demand. Those who are just getting started in the investment world may want to look at the following commodities.

  • Crude Oil
  • Gold
  • Inferior Metals

1. Hydrocarbons/Crude Oil

Investment in crude oil has been a safe bet for a long time because of the commodity's versatility. Petroleum goods, such as plastics, asphalt, fertiliser, solvents, ink, and cosmetics, are all derived from crude oil. 

There are a variety of methods to invest in the oil industry, albeit some of them may demand a sizable sum to get started. Stocks in oil businesses, exchange-traded funds (ETFs), and mutual funds are all available to those interested in investing in crude oil.

The volatile nature of crude oil's profit margin is one of the commodity's main dangers. As was noted above, the events of 2020 had a detrimental effect on many different sorts of investments, oil being only one of them.

Yet, recent months have seen a substantial increase in the price of oil as a result of shifting geopolitical circumstances. These swings show how rapidly demand and pricing may shift.

2. Gold

For the vast majority of individuals, investing in gold means buying gold jewellery or antique gold coins. In fact, there is more than one method to acquire this product, and all of them have the potential to provide profits if handled properly.

In light of gold's resistance to inflation, it's easy to see why it's considered a desirable investment. Gold prices often rise as the value of the US dollar falls. As this is the case, many people who are wanting to diversify their investments choose to purchase gold.

Physical gold, futures contracts, and shares of gold mining firms are just some of the gold investment options available to you. Even though there are potential downsides and upsides to each of these investing strategies, together they provide a chance to earn from this precious metal.

3. Inferior Metals

Investment in base metals is common because of the commodity's steady demand across the world. These metals are ubiquitous due to their widespread use in manufacturing and other commercial enterprises. Because of this, investing in basic metals may be done at little cost and yet provide substantial returns.

Yet, in order to profit from actual commodities, investors would need to acquire substantial quantities. So, acquiring stocks in mining firms is frequently the most accessible approach for beginners to invest in base metals.

Best Commodity Stocks & ETFs

You may be overwhelmed by the variety of commodities stocks and exchange-traded funds (ETFs) available when you begin your investment study. If you want to know more about a certain commodity, that's the best place to start, followed by examining the industry's major participants. 

These are the most important firms for a beginner to start with while looking at commodities stocks:

  • Fuel and home heating oil from Valero Energy.
  • Cattle and pig products by Tyson.
  • Corn, wheat, and several other agricultural commodities from Archer-Daniels-Midland.
  • Platinum, English and American: Scrap metal.
  • Gold from Barrick.
  • Copper, gold, and energy goods from Freeport-McMoRan.
  • Crude Oil by ExxonMobile.

Anyone thinking about investing in ETFs should do the same. Find out more about the commodity class that most interests you, and then investigate several commodities funds. The following are examples of some of the most widely traded ETFs:

  • Mining Companies Tracked by VanEck.
  • Fund for Teucrium Maize.
  • Stocks in Aberdeen Standard Physical Silver.
  • Fund for American Petroleum Production.
  • A Silver Investment Trust Issued by iShares.
  • ETF: SPDR Gold.

When Should You Invest in Commodities?

How to invest in commodities is simple. When to invest in commodities is not always obvious. The usual rule of thumb for investing in anything is to do it when the price is cheap and the outlook is promising. To anticipate these events, investors must have a solid grasp of the market.

One further leading signal of when to purchase commodities is inflation.

In the long run, investors who buy commodities may better weather inflation. This tactic might be useful if inflation is showing signs of increasing. Inflation is not always simple to anticipate, particularly as markets continue to react to the effects of COVID-19.

Is it a Good Investment?

Before you put into practice how to invest in commodities, you need to know your reasons. There are several types of investment portfolios, and commodities might be a solid choice. Unlike other investments, commodities are not subject to the same market factors.

Instead, the laws of supply and demand determine the prices of many common goods. The danger of investing in commodities is reduced as a result of this.

Historically, certain commodities, like gold, have been considered safe bets for investors. At times of market volatility, many investors choose to hedge their holdings with gold. But, investors should always use caution, since commodities are not safe from all threats.

Summary

To summarise our guide on how to invest in commodities, the practice of buying and selling commodities has been around for centuries and is one of the earliest sorts of investing. The education process for commodity investing is very straightforward. Due to consistent demand worldwide, they continue to provide a substantial opportunity for profit. 

Those seeking diversification may choose to consider commodities, despite the fact that they are not completely safe from market swings. Depending on your degree of expertise and financial resources, you may choose from a variety of commodity investment strategies. They can all be relied on to increase the value of even the most robust investment holdings.

In addition, it’s possible to get dividend payments from your stock or fund commodity, depending on your security. This can be part of a long-term investment plan.

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