What are Commodities?
Investing in commodities can hold promising opportunities. However, you need to first understand what commodities are. Tea, coffee, wheat, and coffee, gold and oil are all examples of commodities.
Commodities are naturally occurring materials or goods that are collected and processed for use in human activities. Because raw materials are required for the creation of food, energy, and clothes, they serve as the foundation of any economy. Commodities are frequently mass-produced and standardized in terms of quality and quantity. In other words, commodities are the raw materials used in creating new products though some can be used in their raw forms.
Based on the previously provided definition, commodity items include a wide range of products for which people don’t care about the brand. However, Investors typically have a narrower perspective. When using the term “commodities” for investment purposes, they refer to a restricted group of essential items that are in high demand around the world. This group includes two types that are to be clarified in the following few lines.
Types of Commodities You Can Invest In:
In general, there are two types of commodities traders can invest in. They are the soft commodities and the hard commodities. The difference between the two is as follows:
1. You Can Invest in Hard Commodities
As the name indicates, hard commodities are the ones that are usually extracted from the ground. They are physical substances used in producing the final product. Here are some more examples of hard commodities:
a. Metals
Metals can include gold, silver, iron, aluminum, and copper.
b. Energy Resources
Energy resources refer to the materials we extract from the earth and use as power. Examples of energy resources include coal, oil and natural gas.
c. Minerals
Coal and diamond are both examples of minerals.
2. You Can Invest in Soft Commodities
When we use the term “soft commodities”, we refer to the products that we harvest or grow. In other words, soft commodities are agricultural and food products. To make clearer to you, here are some examples of soft commodities:
a. Livestock
Livestock such as cattle and chicken are soft commodities.
b. Food products
Food products like coffee, cacao and orange juice are also examples of soft commodities.
c. Agricultural products
Wheat, corn, soybeans and other agricultural products are also soft commodities.
Why Investing in Commodities Add Value?
Investing in commodities can add great value to your trading portfolio and help you achieve better returns. Here are the main reasons why:
1. With commodities you can diversify your portfolio.
Investing in commodities can be a risk management strategy. Unlike bonds and stocks, commodities have low or even negative collaboration with other markets. Therefore, it is possible to move in the opposite direction of other commodities thus giving a chance to increase your returns even when other trading products are not performing well.
2. Investing in Commodities can help you hedge against inflation.
As the only certain thing about the market is uncertainty, you need to arm yourself with tools that can help you hedge against extreme events such as inflations. Commodities can act as great tools in this regard. Because they are tangible assets, they can retain value when the cost of goods and services rises.
3. Commodities prices can stay stable even when the market is volatile.
Commodities are used in a wide range of industries including but not limited to energy, agriculture and mining. The result of that is that commodities are high on demand all over the world, they can be an excellent investment option.
4. Commodities are highly liquid.
Because commodities are highly liquid assets, they give the traders the chance to enter and exit positions quickly and simply.
5. Commodities can be profitable.
Commodity prices are influenced by a variety of factors, including supply and demand dynamics, geopolitical events, and natural disasters. Therefore, they can fluctuate in the long run. If their prices go up, the trader can open a buy position. If they go down, the trader can open a sell position, and get good investment opportunities.
Types of Commodities Investments:
1. Physical Commodities
You can buy and sell commodities such as gold or silver in their physical forms. It is possible to secure those in a certain location, such as a safe deposit box, and use them as an inflation hedge.
2. Future Commodities
A futures contract is an agreement to buy or sell a particular amount of a commodity on a future date at a predetermined price.
4. You can invest in commodities via exchange
If you want direct exposure to physical commodities without the inconvenience of owning them or trading them on the futures market, you can do so through ETFs.
5. Stocks of Commodities producers
Instead of investing in commodities directly you can invest in the stocks of the producers of certain commodities. When investing in stocks of commodities, you can make profit in two ways. The price of commodities may rise, or the company may increase production.
How to Invest in Commodities?
1. Determine your commodity investment objectives
You need to learn about the numerous investing alternatives, such as futures contracts, exchange-traded funds (ETFs), stocks of commodity-producing firms, and physical commodities investment. After you study each one, find out which one is the best option for you.
2. Create a risk management strategy in investing commodities
Once you have determined the type of investment that interests you in regard to commodities, you need to work on your risk management strategy.
3. Investigate commodity market conditions
You need to study and analyze the conditions in the market that could affect the supply and demand of the commodity you would like to invest in. Weather patterns, geopolitical events, and economic indicators are examples of such factors. In case you find it difficult to study these elements by yourself, you can seek professional advice to make sure you are taking the right decision.
4. Assess fees and expenses of commodity investments
When investing in commodities, it is critical to understand the fees and expenses connected with each investment option, such as brokerage fees and ETF management fees.
5. Make your commodity portfolio more diverse
In order to lower your risk, you need to think about investing in a variety of commodities and utilizing several investment vehicles, such as futures contracts and ETFs.
Managing Risks with Commodity Investments
Commodities investment can be a valuable strategy to boost returns and diversify a portfolio, but it also comes with increased risk as the markets can become highly volatile. It is of paramount importance to conduct market research, develop an investment plan to minimize your risks.
