Commodities 101: How to Invest in the Commodities Market

The word ‘commodity’ is not something you hear in everyday conversation. Yes, you might have seen headlines about oil prices and gold prices in a discussion about commodities. Investing in commodities markets might seem glamorous, intimidating and something  reserved for financial experts but if you choose to, it is actually an accessible choice for investors, both new and more experienced.

Unless you actually work in finance you have probably only caught the term once or twice on the news. The truth is that just because you might not know the ins and outs about commodity investing now doesn’t mean that it is hard to understand – in fact, the contrary is true. Investing in commodities can be straightforward and with just a bit of care and attention it can be a great addition to a portfolio of investments.

What Are Commodities?

When you hear people talking about commodities markets they can be referring to any and all of the different things that are produced from the earth such as orange juice, wheat, cattle, gold and oil. These are all commodities and you can buy and sell shares in the companies who produce and sell these goods as part of your commodity investments.

When To Invest In Commodities?

• Hedging For Protection

Many investors buy commodities to provide protection to their portfolio – such as through buying gold. Some commodities like gold, are able to maintain value even when the rest of the market, such as stocks and bonds, are falling in price. This helps protect your money over the long term.  For this kind of commodity investing, anytime is the right time to add them to your portfolio.

• Speculation For High Risks, High Reward

However, many investors buy and sell commodities based on speculation, which means based on an opinion.  For example, you might think Kenya was going to have an poor coffee crop one year due to bad weather then you would call your commodity broker and have them purchase as much coffee as possible. If you are right, the price of coffee would surge up because the crop had been less due to weather, making the produce that was actually harvested worth more. This is a riskier approach to investing in commodities but can generate more returns if you have done your research properly.

Why Commodities – Benefits?

The best part about buying commodities is that by adding commodity investments to a portfolio of other assets, such as stocks and bonds you can reduce the risk and enhance the returns to your money.

What Are The Risks of Commodities Investments?

When it comes to the first type of commodity investing mentioned – the one designed to protect your money – the risks are small and thereby reducing the risk to your overall portfolio. However for speculation based investing the main thing you need to remember is that commodity investing can be more volatile than investing in the stock market. This means that prices can swing up and down a lot more and if you really do not like that kind of behaviour when it comes to your investments you might want to choose a more conservatively behaving asset.

Where To Buy Commodities?

There are many different ways to buy commodities. You may choose to buy shares in companies that produce the commodity – such as shares in coffee producers. This can be done through your stock broker.

You might want direct exposure to the commodity price itself – this can be achieved through a commodity futures broker who will instruct you on how to buy futures on certain commodity products such as oil.   This is a popular way to invest in commodities.

A futures contract is nothing to be nervous about – it is simply an agreement to buy or sell, in the future, a specific quantity of a commodity at a specific price. Futures are available on commodities such as oil and natural gas, gold and even on agricultural products such as coffee and cattle.

Another effective choice is to buy a commodity ETF – this will track the price of a particular commodity or range of commodities – normally the ETF tracks commodity futures prices. The benefit of this is you get the return on this market without having to go to the hassle of having to buy, sell and monitor the futures contracts yourself.

Finally you can invest in some commodities physically – such as gold, for which you can buy gold bullion coins and keep them at home if you like, or your broker will keep hold of them for you in a secure holding and account set up.