How to Invest in Commodities: Getting Started

Read the Article

Save more, spend smarter, and make your money go further

Commodities in the investing world refer to raw materials and essential goods, such as grain, gold, and oil. 

Investing in commodities gives you the potential to diversify.

Unlike short-term investments, like CDs and bonds, investing in commodities can potentially help you minimize the volatility of your portfolio, as long as you know how to invest.

Understanding how to invest in commodities and what types of commodities are available is important. That way, you can make informed decisions about how to manage your investments and leverage them as much as possible.

In this guide, we’ll discuss how investing works when it comes to commodities, including everything you need to know to get started. Keep reading to learn more.

How to Invest in Commodities
There are several ways to invest in commodities, including physical ownership, futures contracts, individual securities, and more. When deciding, you should consider your risk tolerance, investment goals, and the types of commodities you want to invest in.

What Is Commodity Investing?

Commodity investing is a type of investment that’s centered around commodities, or raw materials and agricultural products. This may include:

  • Precious metals like gold and silver
  • Natural resources that are used to create energy
  • Wheat and other agricultural goods

Commodities are very diverse, so you have a lot of options for what to invest in. 

Because these commodities have intrinsic value, they’re not affected by the economy in the same way that typical stocks are. Interest rates don’t necessarily affect the value of gold and other raw materials, which means investing in commodities is one way to diversify your portfolio to help guard against inflation.

There are several ways to invest in commodities, including simply purchasing physical goods. A common example of this would be investing in gold, where individual investors can buy gold bars and coins. As gold appreciates in value, the total value of the gold held by the investor also increases, which is how people generally make money investing in precious metals and other raw materials.

Another option is to invest in commodities through an exchange-traded fund, or ETF. Certain ETFs track particular commodity indexes, so theoretically, one could potentially earn money when the commodities included in those indexes increase in value. When it comes to how to invest in a commodity as a beginner, using ETFs could be one way to try to diversify and reduce your risk.

There’s a lot to consider when it comes to how to invest in the commodity market, including your risk tolerance. However, commodities can be very volatile, so you may want to consult a financial advisor before you start investing in commodities.

Other Commodity Investing Terms to Know

As a beginner in investing in commodities, you have a lot to learn. Here are some of the commodity investing terms you may want to know before you start investing:

  • Commodity: A commodity refers to the raw material you’re investing in, whether that’s gold, silver, wheat, oil, gas, or cattle. The commodity you choose could have a major effect on your investment because different commodities are affected by different factors.
  • Forward price: The forward price is the price you agree to pay for an asset in a forward contract. While the prices of assets are already set in a forward contract, the delivery and payment portion of the contract occur later on.
  • Futures: With futures, you have an obligation to buy or sell an underlying asset at some point in the future for a specified price. While this can be a risky investment strategy, it could potentially be one way to try to balance out losses from other investments.
  • Index performance: Many commodity ETFs and mutual funds track a commodity index rather than tracking the spot price of a specific commodity.
  • Spot price: The quoted price for a commodity in the event that payment and delivery are made immediately.

You don’t necessarily need to understand the ins and outs of commodity investing and what every individual term means, but understanding these terms is a good starting point if you’re considering investing in commodities.

What Types of Commodities Can You Invest In?

As an individual investor, it’s up to you to choose what type of commodity to invest in. Common commodities include precious metals, resources used to create energy, and agricultural products. 

Here are some of the types of commodities you can invest in:

  • Precious metals: This includes metals such as gold, silver, platinum, and copper. Because these metals are somewhat scarce and have value for one reason or another, they often increase in value over time. These metals can be bought in the form of bars and coins, and you can typically purchase as little as one gram at a time.
  • Energy: Investors who are interested in the energy sector have the option of investing in crude oil, natural gas, ethanol, and other resources that are used to create energy. It’s important to keep in mind that investing in the energy sector can be difficult because the rising popularity of newer forms of renewable energy (especially solar and wind power) can affect the prices of oil and other energy-creating resources.
  • Agriculture: There are several commodities you can typically invest in when it comes to agriculture, including corn, cotton, sugar, and wheat. These are popular investment options due to the fact that there’s a combination of population growth and a somewhat limited supply of agricultural materials.

The commodity you invest in may be one of the most important decisions you’ll make in your investing journey. While investing in certain resources at the right time could be advantageous for certain investors, commodities are also volatile and can potentially be a dangerous investment for beginners.

How to Invest in Commodities

Now that we’ve covered the basics of what commodity investing is and what types of commodities are available to you, let’s talk about how to invest in a commodity. There are several ways to invest in the commodity market, including:

Physical Ownership

Physical ownership is typically the simplest way to invest in commodities, especially when it comes to commodities that are easy to obtain like precious metals. By purchasing a few grams or an ounce of gold, you have a specific amount of a commodity that you purchased at a set price. If that commodity increases in price, you’ve made a profit off of your investment. 

Of course, physical ownership isn’t practical for agricultural and energy commodities that are difficult to transport and store.

Futures Contracts

Futures contracts allow the buyer to take on the obligation to purchase a commodity at a set date for a specific price. When this date arrives and the transaction is complete, the purchaser of the contract receives the underlying asset. If the price you paid (the forward price) is higher than the current price (the spot price) of the underlying asset, then you’ll lose money.

Individual Securities

Individual securities are shares of companies that produce the commodities you want to invest in. So rather than purchasing oil or gold, it’s possible to purchase individual securities in a company that mines or processes oil or gold. It’s not unusual for these companies to increase in value as the value of underlying assets increases, so investing in stocks rather than physical commodities is a common strategy.

Mutual Funds, ETFs, & ETNs

As far as how to invest in commodities in the long term, mutual funds, ETFs, and ETNs are popular options. Rather than buying individual securities, you could potentially pool your money with a group of investors to invest in several commodities. This could be a way to help you to diversify your portfolio without investing a lot of money.

Alternative Investments

Alternative investments include hedge funds and private investments. While these alternative investments may be suitable options for some, it’s important to note that they typically come with higher risk and more volatility. As a beginner, this is something you may want to carefully consider.

If you’re trying to figure out how to invest in commodities long-term, it’s important to understand all your options.

Potential Benefits & Risk of Investing in Commodities

Now that you know how to invest in commodities, you might be wondering about the pros and cons. Like any investment, there are pros and cons to investing in commodities.

One thing you have to consider is your risk tolerance. Commodities can be very volatile, which means they’re not right for every investor. If you’re on a tight budget when it comes to investing, there may be a less-risky strategy for you. This is especially true with futures trading, which is all based on speculation. That being said, the volatility of commodities also means there is potential for higher returns.

Commodities are a popular investment because they can help protect against inflation. In fact, commodities often increase in value during periods of inflation, plus they are a way to bet against the U.S. dollar.

If you’re not sure if commodities are right for you, you may want to consult a financial advisor.

Track your Commodity Investments with Mint 

While there are a lot of factors to consider before getting started, learning how to invest in commodities is fairly simple. Just keep in mind that commodities are a fairly volatile investment, so another investment strategy may be better suited to your goals and financial situation.

If you’re planning on investing in commodities, you need a way to track your investments. With Mint, you can keep an eye on all your investments to make sure you’re on track to meet your goals. Try the Mint app and see how much easier investing can be with the right tools.

Now that you know more about how to invest money in the commodity market, what’s stopping you from getting started?

This is for informational purposes only and should not be construed as legal, investment, credit repair, debt management, or tax advice.  You should seek the assistance of a professional for tax and investment advice.

Third-party links are provided as a convenience and for informational purposes only. Intuit accepts no responsibility for the accuracy, legality, or content on these sites.

Mint
Mint

Written by Mint

Mint is passionate about helping you to achieve financial goals through education and with powerful tools, personalized insights, and much more. More from Mint