How To Invest In Commodities

Commodities are certainly a risky investment, but they are still a good idea if you understand the various markets well. Just like bonds and stocks, commodities are assets that can be used while investing. Stocks will get you a piece of a company, while commodities will give you exposure to real-world assets such as gold, oil, pork bellies, and corn.

Investing in commodities can be broken down into four categories. The first category is agriculture – which includes the invests in crops grown all around the world such as soybeans, corn, rice, cocoa, barley, wheat, cotton, sugar, and coffee. Another category is energy – which includes natural gas, crude oil, and other similar products.

The other two categories are livestock and metal. Livestock includes hogs, cattle, and meat, while metal includes silver, gold, platinum, and copper. You can also include a variety of other mined metals in this group.  These investments are actually quite common. However, gold and many others are less common for regular investors.

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How You Can Begin Investing In Commodities

You can seek investments through your broker. Many firms are good at these types of investments, and they can help you find the right commodities to put your money in. Don’t worry, you don’t have to visit a farm or a mine in order to invest in the commodities they produce. Instead, you can pursue the options below.

Investing In Futures

Futures help you own an asset without necessarily taking control of it. Most contracts will give you options to exercise your contract on a specified date in the future. If the value turns out to be higher than what you had paid for, you will make money from the contract. But if it turns out to be lower than what you paid for, then you lose money when you sell.

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Options

These are commodity options that work just like stock options. They are instruments that allow you to buy – by making a call – a specific amount of a commodity at a future date using a specified price. Unlike futures above, options have a limit to the amount of risk involved, because you specify the price at which you will buy, but you do not buy immediately.

ETFs

This acronym stands for Exchange Traded Funds. There are usually more than 100 of them, which allow you to invest instruments that have a specified price for the commodities. You can then buy them and sell them as a stock. A good example is the SPDR gold trust which is an ETF that follows the prices of gold. You can own one commodity of the ETF or a basket of different commodities if you wish to diversify your portfolio. This is actually one of the easiest ways for you to invest in commodities.

Mutual Funds

If you do not wish to invest through futures or ETFs, mutual funds are a great option. They allow you to own commodities as underlying assets. They are the best when you want a long-term investment in commodities with a low level of risk.

Are Commodities Risky Investments?

We have decided to include this section in our review because it really doesn’t take much for you to find people online who have horror stories of how they lost their entire life’s savings in the commodities market on a whim. The following reasons shed light on why this is one of the riskiest investments today.

Market Factors

Market factors play a huge role in commodity investments because it really depends on how much a product is in demand. When the demand is high, the product’s price goes up. Likewise, when the demand drops, the price goes down as well. When the price of a commodity is high, most people tend to invest all of their money in that commodity. In such cases, they often forget that the commodity is in season, and soon the season will come to an end.

Environmental Factors

There are times when environmental factors kill a specific commodity. For example, when the weather is too cold and most of the earth is frozen, orange trees are likely to die. This destroys the crop, meaning that; if you had invested in oranges, you are likely to lose a huge chunk of money.

Fear

Most people are scared of issues such as a recession, which could drastically drop the price of gold. Good economic news tends to drive the prices of commodities up, but bad news will certainly cause them to go down, which is a huge problem.

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Conclusion

Almost all investments are risky. If you are the kind of person who likes to play safe, you may end up without a portfolio at all. It is therefore important to try and understand the market well and become a risk-taker in order to make some money in the world of investments. For this reason, we have given you some tips on how to invest in commodities, regardless of the risks involved.

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