Like stocks and bonds, commodities from wheat to gold can be traded as well. In fact, there are dedicated exchanges solely for the purpose of trading commodities, as well as commodity trading for beginners. And there is a good reason for this. After all, there is a plethora of commodities to trade. Here are some of the most popular ones.
Popular Commodity Types
- Precious metals: Gold is the most popular precious metal across the ages to be traded. It is seen as a fail-safe investment, if everything else goes under. Times of political or currency crises are examples of times when it can be beneficial to hold in the investment portfolio.
- Energy: All of us are touched by prices of gas and oil on a daily basis. From our utility bills to our travel expenses, fluctuation in these prices are widely reported and tracked. Could trading in them be far behind? It is little wonder that crude oil is the most traded commodity around today. Not only are oil and gas products widely used, but their price can also be predicted based on economic events and trends.
- Industrial Metals: Like crude oil, industrial metals like iron and copper too, go hand in hand with the macroeconomic cycle too. Naturally then, they can be traded based on demand and supply based projections of their prices.
- Agricultural commodities: A range of agricultural commodities like wheat, oilseeds and pulses can also be traded. They also provide a way for producers to hedge through derivative products. This avoids the risk of future fluctuations in prices and allows them to lock in their contracts at a minimum price. In fact, this practice can be employed across all commodity types.
What You Need to Know About Commodity Investments
Once you have decided that commodity investments are for you, the next obvious question is how they should be traded. Like with any other financial investments, the most straightforward way to buy commodities is through a broker. The broker can link you up with various exchanges around the world. This means that you can trade in commodities listed around the world. They charge a small fee for transactions and execute the trade on your behalf. With online brokers, making the trade is possible in a matter of seconds on a phone app.
Next, an investor or trader needs to decide the form in which to buy the commodities. There are plenty of ways to buy them, like:
- Stocks: Some of the biggest and most actively traded stocks on exchanges are those of commodities. From big oil producers to industrial metal miners and manufacturers of soft commodities like sugar, they can all be found. Buying their stocks can effectively be like trading the commodity itself, since their financial fortunes are linked to commodities’ prices.
- Exchange traded funds: These funds consolidate multiple commodity stocks under a single umbrella. They can be broad based ones that cover various kinds of commodities, or they can focus on specific commodities like energy or metals. The big benefit of ETFs is that investors do not have to pick and choose individual commodity stocks themselves. Moreover, they can be traded as easily and conveniently as stocks.
- Derivatives: Through products like futures, options and contracts for difference (CFDs), traders can bet on the future price of a commodity. As discussed above, they can also be used by commodity producers themselves to hedge against future price fluctuations.
Benefits of Commodity Investing
Much like other investment options, commodities trading for beginners is relatively easy too. They do require initial groundwork to determine what kind of investment is best for the investor, but the process itself is straightforward.
They also offer a nice way to diversify the portfolio. Gold for example, is often used to offset a decline in stock prices. A broad-based fall in the stock market can often be linked to poor macroeconomic conditions. The fall-back option is gold. But even otherwise, it is a good way of ensuring that various sectors included in your investment portfolio.
Trade in Commodities
Diversification is a particularly appealing angle to buying into commodities. It allows exposure to potentially profitable opportunities while also protecting the portfolio from crashing. The ease, convenience and options available to trade and invest in commodities are another facet in their favour.
In fact, even investors who do not track the markets regularly may have their pulse on commodities. All of us buy them in some shape or form and have an idea of their prices. It is not for no reason that oil is so popularly traded. So, familiarity with commodities is easier than it maybe for other industries, making it more comfortable to trade in them.
