How to Invest in Commodities

Making sound investment decisions is a critical step towards your financial independence journey, and the more diversified your portfolio is, the better.

Therefore, it’s no surprise that more people are shifting towards investing in commodities to hedge against uncertainty and optimize returns. But how exactly can you get started in commodities?

Here’s how to invest in commodities:

1. Buy physical goods/physical ownership.
2. Use futures contracts.
3. Buy ETFs of commodities.
4. Buy shares/stocks in commodity-producing companies.
5. Invest in commodities using mutual and index funds.
6. Use commodity pools to invest in commodities.

This article will explain what commodities are, the various commodities that you can invest in, and the various investment options available.

If you’re new to commodities and want to kickstart your investment journey, I recommend reading on. 

What Are Commodities?

Commodities are simply physical goods or resources used as-is or as raw materials that can be processed to make other goods. They include metals, crops, livestock, oil, gas, and other natural resources.

There are different types of commodities you can invest in, including the following: 

• Agricultural produce such as wheat or rice.
• Precious metals such as silver or gold.
• Energy-related resources such as oil and gas.
• Livestock such as cattle, and so on.

Accordingly, there are numerous commodities to invest in to diversify your portfolio and hedge against uncertainties.

1. Buy Physical Goods/Physical Ownership

One of the most basic approaches to investing in commodities is buying these goods directly.  The financial experts from US Bank refer to this approach as physical ownership, adding that small and transferable commodities such as precious metals are an excellent example of this form of investment. 

Recommended for: This approach is only practical with small assets. For more considerable assets like gas, petroleum, agricultural produce, and the likes, physical ownership is only ideal if you have the capacity to transform them into finished products. 

2. Use Futures Contracts

Futures contracts are legal agreements that relate to purchasing or selling a given commodity or security at a specified period in the future and for a predetermined price.

You can enter into future contract agreements to buy or sell a given commodity at some time in the future.  If the value of the commodity changes in the future, then the investor will make some money.

To enter into a futures contract, you can work with a broker to determine which contracts are available to buy.

Recommended for: Because future contracts are speculative, there’s an ideal option for seasoned investors with ample prior market analysis experience. Unfortunately, beginners are not seasoned enough to participate in this commodity to be successful.

3. Buy ETFs of Commodities

You can also invest in commodities by buying shares in Exchange-traded funds (ETFs), which are pooled investment securities similar to mutual funds.

However, the main difference between ETFs and mutual funds is that the former can be bought and sold on the stock exchange just like regular shares. 

You can easily purchase ETFs through a traditional broker or an online broker. To buy these securities online, follow the following simple steps:

1. Create a brokerage account to buy and sell securities. 
2. Use screening tools to find and compare ETFs.
3. After deciding on which ETFs to purchase, place your trade, you’re all set.

Recommended for: If you’re drawn to fluctuating commodity prices and are unwilling to use futures, then this option is for you.

4. Buy Shares/Stocks in Commodity Producing Companies

Stocks provide an easy and straightforward way to invest in commodities.  In this approach, all you need is to buy shares in companies that use these commodities as raw materials or that deal with these commodities.

For example, if you want to invest in agricultural commodities, you can buy shares in companies that produce these agricultural goods.

Alternatively, if you’re interested in precious metals, you can purchase shares in companies that mine these rare metals.

Recommended for: This option is ideal for persons who can’t raise the high initial investment for these commodities. Beginners also might enjoy more success with this method, as they can get a little experience before going for more advanced methods.

5. Invest In Commodities Using Mutual and Index Funds

Mutual and index funds provide an alternative option to invest in securities or commodities. You can purchase stocks in companies that deal directly with the commodities, much like shares and stocks using this option.

However, unlike buying shares yourself via a broker, index and mutual funds give you access to professional financial management. This approach is also linked with higher liquidity and more diversification. 

Unfortunately, the associated management fees can be high because of these advantages.

Recommended for: Mutual and index funds are an excellent option for those investors interested in companies that deal with commodities but want to limit the risks associated with buying the stocks directly via a broker. 

6. Use Commodity Pools to Invest in Commodities

Commodity pools are shared private collections of financial resources generated from multiple participants.  These funds are pooled to speculate in options markets, swaps and futures.

In essence, you’ll be combining, or “pooling,” resources with other investors, and these pooled resources are used to buy options or futures contracts.

Because of this significant resource pool, participants collectively benefit from a much larger investment opportunity. Most of these futures are registered with the National Futures Association and feature commodity pool operators to manage the pool. 

The larger investment base also provides greater leverage and allows better diversification than individual investment. The pool participants will then share the profits based on their contributions.

Recommended for: This approach is recommended for investors who want to pool resources and access larger investment opportunities because they can’t or are unwilling to risk this large sum alone. 

Should You Invest in Commodities?

Depending on your level of risk aversion, the number of resources you have available to invest in commodities, and the degree of financial support you need, there are various options on how to invest in commodities. 

There’s arguably an option for everyone, whether you want to start small with a few hundred dollars or go big from the get-go. This notwithstanding, investing in commodities is an excellent way to diversify your portfolio and hedge against risks from other more volatile investments.