Commodities are the raw materials that are often later used for manufacture or production. They include food products, such as sugar and grains, energy sources, such as oil, and mined products, including metals and gemstones. With commodities, unlike manufactured goods, they can be exchanged with other commodities of the same type. The market sees products as the same, no matter which company they come from. More recently, some more modern definitions of a commodity have included foreign currencies and even cell phone minutes. Previously, many people didn’t invest in commodities because it required a lot of time, money and expertise. But today, there are some much more accessible routes into this type of investment.
Commodities are usually bought and sold on futures contracts on exchanges that specify a basic standard for the commodity being traded. A futures contract is an agreement to buy or sell a particular quantity of a commodity at a certain price in the future. Many of the commodity trading companies who invest in futures use the commodities that they trade. Others are mainly individuals who want to profit from changes in prices of the futures contract. If you wish to invest in futures and don’t already have a broker who trades in them, you need to open a new brokerage account. Contracts require minimum deposits, which will be different for each one. The value of your account increases and decreases with that of the contract and you will be required to put more money in your account if it goes down.
Exchange Traded Funds
You can also invest in commodities using exchange traded funds (ETFs) and exchange traded notes (ETNs). You can trade these like stocks, which allows you to benefit (or lose out) from the price fluctuations in commodities. But you don’t have to invest directly in futures contracts. An exchange traded fund typically tracks the price of a commodity or a group of them comprising an index using futures contracts. An exchange traded note is unsecured debt that mimics the price fluctuation of a commodity or index that is backed by the issuer. Unlike with futures, you don’t need a special brokerage account.
Another way to invest in commodities is to trade stocks. Whereas the futures market can be subject to large and fast price swings, stocks are more stable. Before investing in stocks, you need to research each company to make sure that they are a sound investment. It’s easy to buy and trade stocks, and it provides lots of options. You can also invest in stock options, which require a smaller investment than buying directly. Trading in stocks can be easier because investors usually already have a brokerage account and information about each company is easy to come by. However, the price of stocks can be affected by factors unique to the enterprise, as well as the market.
Although the futures market is a popular way to invest in commodities, there are other options too. It’s important to research each one to decide which is best for you.