Throughout 2018, commodities have been considered the investment to make – but why, and how do you go about doing this?
Commodities are integral to our day-to-day lives, whether they’re related to metals, food or energy. Yet, in the past, investors steered clear of commodities due to how time-consuming and complicated they were.
But not anymore.
Thanks to numerous avenues, investing in commodities is now something many investors are doing. And below, we’ll explore exactly what commodities are and how you can invest in them quickly and easily.
What Are Commodities?
Commodities are considered fungible, which means they can be interchanged with other commodities that are of the same level, regardless of who farmed it or produced it.
For example, if an American company cultivates high-quality orange juice concentrate and a Portuguese company also produces high-quality orange juice concentrate, the orange juice produced by both of these companies is fungible, so long as they meet the same grade.
Therefore, commodities are physical assets and include gas, oil, copper, silver and gold, as well as ‘soft’ commodities like orange juice, cocoa butter, corn, sugar and wheat.
Trading these types of commodities dates back hundreds of years – way before anyone ever invested in stocks and bonds. This type of trading was integral to all businesses, from those selling spices to seashells.
How Can You Invest in Commodities?
There are three key ways to make an investment in commodities – by physically buying them, by buying shares in a commodities company or by buying them using a trading platform or investment fund.
If you were to invest in them physically, this means you’re actually buying the asset and are holding it (storing it) yourself.
Understandably, this often presents a problem if you don’t have safe and secure storage facilities. Plus, you have the cost of this storage and insurance as well as the commodity, which can get quite expensive. So unless you are a major player in the commodity world, this option is often a non-starter.
If you wanted to invest in a company who sold a commodity, you could buy shares in one of these organisations. This gives you indirect access to the commodity and the company. However, it does mean you’re not only subject to changes in the commodity price but in any movements in the stock market, too.
This means one of the easiest ways to access commodities is to use an investment trust or to trade an exchange traded commodity (ETC) via a reputable trading platform. Not only do they mean that you can invest directly in the commodity but they also give you the chance to diversify your portfolio by investing in more than one.
What Will Influence Your Returns?
One of the biggest influences on the value of a commodity is the supply and demand constraints. For instance, if something is in plentiful supply, it’s likely that the price of this commodity will fall, whereas when something is in short supply, prices will often rise.
For example, gold, platinum and other precious metals are more costly than industrial metals because they’re in far shorter supply. The price of these precious metals, as well as other commodities, will rise when there’s demand and will fall when the demand diminishes.
Bad weather can also play a role. It has a significant impact on agricultural commodities, for example. And global macroeconomic and political factors can also influence prices.
Protecting Your Investment
As with all investments, it’s important to note that the value of commodities can rise and fall, so there’s always the possibility that you’ll lose money.
Commodities can also be highly volatile so you need to be prepared for this as, sometimes, you may get back less than what you originally invested.
Future performance cannot be reliably indicated by past performance.