How To Invest In Commodities: A Beginner’s Guide.

It has long been proven that a diverse portfolio is the best way to minimize risk and maximize profits as an investor. After all, spreading out your assets offers protection against market changes — something that is becoming increasingly important in today’s world. It turns out investing in commodities can be a great opportunity to do just that. If you have tried your hand at more traditional investments (such as real estate, stocks, or bonds) it can be a good idea to start branching out. Luckily, commodities investing for beginners is not as complicated as it may seem. There are multiple ways for investors to begin seeing profits from commodities, all you have to do is a little research to get started. Let’s go over how to invest in commodities.

What Are Commodities?

Commodities refer to any uniform resources that are considered to be basic goods. A few well-known examples are wheat, corn, and oil. Each of these resources can be used in various ways and are oftentimes in demand all over the world. Trading commodities is a practice that dates back hundreds of years, and today there are even more ways to see profits from commodities. These include exchange-traded funds (ETFs), futures contracts, and options. There are two main categories of commodities: soft and hard. Soft commodities refer to grown or ranched items, such as rice, corn, soybeans, and livestock. Hard commodities are resources that must be mined or drilled, like coal, gold, aluminum, and gas. This distinction is helpful when searching for investment opportunities. Despite a global demand for many commodities, there is still some risk involved to be aware of before investing. Every market will be subject to some uncertainties, and commodities are no different. For example, during the COVID-19 pandemic, there has been a dramatic decrease in oil demand. However, by diversifying your assets you can help safeguard your portfolio with commodities and mitigate some risk.

How To Invest In Commodities In 5 Different Ways

There are several ways to invest in commodities, each with unique benefits and risks to consider. Investors should research each type before choosing a strategy (or two) for their portfolios. The five main ways to invest in commodities are: Buying stocks in companies that produce commodities Purchasing futures contracts Buying shares in exchange-traded funds Using mutual and index funds to trade commodities Working with commodity pool operators

How To Use Stocks To Invest In Commodities

Stocks are perhaps the most straightforward method of investing in commodities. To get started investors can simply purchase shares of a company that deals with commodities. For example, those interested in metal commodities could buy shares in a mining company that focuses on gold. This option is especially attractive to investors who are unable to make a large initial investment. The risks associated with commodity stocks typically center around the companies themselves. Prices may be negatively influenced by business operations or other company-related factors, as opposed to just the actual value of the commodities. Unfortunately, there is not a way to reduce this risk completely but investors can heavily research the companies before purchasing stocks.

How To Use Futures To Invest In Commodities

Futures are a great opportunity to invest in commodities, especially if you are familiar with the market you are investing in and are interested in speculating on price changes. Futures contracts are essentially agreements made to buy or sell shares at a certain time in the future, for a predetermined price. Investors can profit from futures contracts when the value of the commodity changes. This can be done on a short or long-term basis. Getting started in futures contracts does involve a lot of research on the industry, and is typically not recommended for beginner investors. The reason is that a lot of futures investing revolves around speculation. However, investors can work with a broker or opt for contracts with an option to buy. These methods can help investors who may not be familiar with market analysis benefit from the profitability of futures.

How To Use ETFs To Invest In Commodities

ETFs are a great option for those who are interested in fluctuating commodity prices but don’t want to necessarily purchase futures contracts. ETFs refer to exchange-traded funds and act as a collection of securities. They can be bought and sold similar to stocks, with prices changing throughout the trading day. Investors hoping to purchase commodity ETFs can do so with the help of an online or traditional broker. It is worth noting that not all commodities have associated ETFs; therefore, investors with a specific commodity in mind may need to look elsewhere.

Using Mutual & Index Funds To Invest In Commodities

Mutual funds can be a great vehicle for investing in companies that deal with certain commodities. While this opportunity does not allow investors to work with the commodity directly, there are several protections associated with mutual funds to consider. For the most part, mutual funds are known for their professional management and liquidity. This makes these funds a great option for investors hoping to profit from the companies that deal with commodities, without directly buying stocks themselves. In many ways, this can be a good gateway into commodity investing. Again, investors will need to be aware of market fluctuations and company-specific news. However, the right mutual fund can provide some insight into this process.

Using Commodity Pools To Invest In Commodities

Commodity pools are a way to combine resources from a group of investors to purchase futures contracts and options. The commodity pool operator (CPO) will distribute account statements and annual financial reports to the investors involved. The combined structure of a commodity pool will typically allow for larger investment opportunities to be made. Each pool will typically employ an advisor who is required to register with the Commodity Futures Trading Commission (CFTC). Advisors are then able to provide investment advice on the various options. Similar to mutual funds, investors will often choose to work with commodity pools because of the added benefit of a financial advisor.

Summary

Trading commodities is one of the oldest forms of investment types, dating back hundreds of years. Learning how to invest in commodities is a fairly simple process as well. Even today, they continue to offer a high-profit potential because of steady global demand. While commodities are not entirely immune to market fluctuations, they can still be a great opportunity for those looking to diversify. Investing in commodities can be done in several different ways, with options catering to various levels of experience and capital. What they all have in common is their ability to expand even the best investment portfolios.