But investing in commodities requires more specialized knowledge and may carry more risk than more well-known investments. Commodities are raw materials that are used to produce finished goods. Commodities are physical goods that are bought, sold and traded in markets, distinct from securities such as stocks and bonds that exist only as financial contracts.
Commodities prices shift constantly as supply and demand change in a single economy and around the world. A bad harvest in India could lead to higher grain prices while climbing oil production in the Middle East could depress the global price of oil. Investors in the commodity market aim to profit from supply and demand trends or reduce risk through diversification by adding different asset classes to their portfolios.
Commodity trading is the exchange of different assets, typically futures contracts, that are based on the price of an underlying physical commodity.
With the buying or selling of these futures contracts, investors make bets on the expected future value of a given commodity. If they think the price of a commodity will go up, they buy certain futures—or go long—and if they think price the commodity will fall, they sell off other futures—or go short. Given the importance of commodities in daily life, commodity trading began long before modern financial markets evolved as ancient empires developed trade routes for exchanging their goods.
It allowed farmers to lock in sales prices for their grain at different points during the year rather than only at harvest, when prices tended to be low. By agreeing to a price ahead of time through futures contracts, both the farmer and the buyer gained protection against price changes. Today, the commodities market is much more sophisticated.
You can trade commodities nearly 24 hours a day during the workweek. There are a few different ways to trade commodities in your portfolio, with their own advantages and disadvantages. The most common way to trade commodities is to buy and sell contracts on a futures exchange. The way this works is you enter into an agreement with another investor based on the future price of a commodity. So in this example, when the futures contract reaches its expiration date, you would close out the position by entering another contract to sell 10, barrels of oil at the current market price.
On the other hand, if you had entered a futures contract to sell oil, you would make money when the spot price goes down, and you would lose money when the spot price goes up.
At any point, you could close out your position before the contract expiration date. To invest in futures trading, you need to set up an account with a specialty brokerage account that offers these types of trades. You will owe a commodity futures trading commission each time you open or close a position.
However, for precious metals like gold and silver, individual investors can and do take possession of the physical goods themselves, like gold bars, coins or jewelry. These investments give you exposure to commodity gold, silver and other precious metals and let you feel the actual weight of your investments.
But with precious metals, transaction costs are higher than other investments. Another option is to buy the stock of a company involved with a commodity. For oil, you could buy the stock of an oil refining or drilling company; for grain, you could buy into a large agriculture business or one that sells seeds.
These sorts of stock investments follow the price of the underlying commodity. If oil prices go up, an oil company should be more profitable so its share price would go up, too. A well-run company could still make money even if the commodity itself falls in value.
But this goes both ways. If you are looking for an investment that perfectly tracks a commodity price, buying stocks is not an exact match. There are also mutual funds , exchange traded funds ETFs and exchange traded notes ETNs that are based on commodities. These funds combine the money from many small investors to build a large portfolio that tries to track the price of a commodity or a basket of commodities—for example, an energy mutual fund based on multiple energy commodities.
When you trade on margin, you're trading borrowed money, which can amplify your losses. Given how volatile commodity prices can be, it's essential to have enough resources on hand to cover any margin call, which is when your broker requires you to deposit more money. Another way to invest in commodities is to buy shares of the companies that produce them. For example, you could buy mining stocks , oil stocks , or agriculture stocks.
A commodity-producing company won't necessarily rise or fall in line with the commodity it produces. Sure, an oil production company will benefit when crude oil prices rise and suffer when they fall. But far more important is how much oil it has in its reserves and whether it has lucrative supply contracts with high-demand purchasers.
Commodity ETFs and mutual funds offer commodity exposure for those who don't want to buy the commodity directly. Commodity funds may invest in physical materials, commodity stocks, futures contracts, or a combination. However, commodity funds may not move in sync with the price of the underlying good, which can come as a surprise to new investors.
Commodity trading is a high-risk, high-reward endeavor. It can be an effective way to hedge your portfolio against a bear market or inflation. But you should consider it only if you have a strong understanding of the supply-and-demand dynamics of the commodity market.
That includes knowledge of historical price trends and what's happening in real time. If you're getting started, you can reduce your risk by limiting your use of margin. Much of commodity trading amounts to speculation, not investing. Unpredictable factors like the weather, disease, and natural disasters can have huge impacts on commodity prices in the short term.
If you're looking to invest in a commodity for the long term, commodity stocks, mutual funds, and ETFs are a better option for most individuals. Discounted offers are only available to new members. Stock Advisor will renew at the then current list price. Investing Best Accounts. Stock Market Basics. Stock Market. Industries to Invest In.
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Take your position in just three steps:. Choose a commodities market to trade Focus on commodities like gold and oil, or commodity-linked stocks and ETFs. Decide whether to go long or short Speculate on market prices over the short term by choosing to go short or long.
Open a live account with us Fill in our online application form and create a CFD trading account. For a more detailed approach, take a look at our complete guide below.
Choose what commodity you want to trade Learn what moves a commodity's price Why should you trade CFDs in commodities Discover how commodity trading works Create your commodity trading account Find your first commodity opportunity Open, monitor and close your position. What are commodities? Choose what commodity you want to trade Choose from over 35 commodities or a range of commodity-linked stocks and ETFs with us. Hard commodities These are natural resources that are mined or extracted from the earth — such as gold , oil , copper and natural gas 2.
Soft commodities These commodities are grown and harvested — such as coffee , wheat and lumber — or reared, such as hogs and cattle You may also see commodities divided into more specific categories to account for their different purposes or the processes that are involved in their production.
These categories include: Energies: traditional energy sources such as crude oil , gasoline and heating oil Metals: mined commodities including gold , copper , silver and palladium Aricultural: commodities grown for human consumption — such as sugar and coffee — or clothing and building materials Livestock and meat: animals reared for food consumption as well as products like leather and gelatine.
Commodity stocks You can get indirect exposure to the commodity market by buying and selling the shares of companies that are involved in the mining, extraction, growth or harvesting of any type of commodity. Learn how to trade stocks. Commodity ETFs Exchange traded funds ETFs are investment instruments that hold an asset type or basket of assets, such as commodities or stocks. Discover what ETFs are and how you can trade them. Our range of commodities markets Select or search for commodities to view real-time prices, charts and more.
Learn what moves a commodity's price Commodities prices are driven by the forces of supply and demand, which means there are a variety of factors that can impact them. Why should you trade CFDs in commodities. Find out more about CFD trading. Create a live account. Discover how commodities trading works Commodities trading works in the same way as speculating on any other market, in that buyers and sellers come together to exchange goods.
Trading commodity futures Futures are contracts to exchange an asset for a set price on a set date in the future. Find out which are the different commodities you can trade on. See a commodity futures example. Trading commodity options Options give you the right but not the obligation to exchange an asset at a specific price on a specific date. Learn more about how to trade options. See a commodity options example.
Learn how to trade stocks and ETFs. Find a commodity opportunity The best way to identify an opportunity is to keep an eye on breaking news and your target price levels using technical and fundamental analysis.
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