Why Would You Want To Invest In Commodities Anyway?

10 mins

Why Would You Want To Invest In Commodities Anyway?

How To Trade Commodities

It's easier than you think

2 mins

How can I get involved?The simplest way could be to buy some yourself – though a bag of flour from your supermarket might not cut it. Storage sucks for agricultural and energy commodities (you probably don’t want a pile of coal under your couch) and to trade at scale (wheat futures are sold in 50 ton lots) you’ll need to buy into proper warehousing and an enviable logistics operation. It’s an option for precious metals, though: keeping gold bars under your mattress isn’t the worst idea in the world – just don’t tell anyone 🦹‍♂️

You can track the price of a commodity without owning it directly. Some exchange-traded funds (ETFs) buy and sell the physical assets, and you can invest to part-own the goods. Exchange-traded commodities (ETCs) are a bit different: you own an IOU note from the issuer, not their underlying gold. That makes them riskier – the issuer could default and leave you with nothing – but ETCs track the commodity’s price better than an ETF can. ETFs have to buy and sell the actual asset (or its futures contracts) so the price sometimes deviates from the actual spot price.

What if I want to do it myself? You can directly buy futures contracts, but this is pretty risky. You’re exposed to huge volatility, and the leverage on offer for commodity trading is a dangerous temptation. Leverage is where you borrow money to trade with – that can magnify your gains, but also magnify your losses to a devastating extent. Remember: never risk more than you can afford to lose.

You could also trade options on the futures contracts: rather than promising to buy oil next month, you buy an option – the right, but not the obligation – to buy an oil contract next month at a price agreed now. A cheap and feisty way to enter the market, we do a deepdive in our Futures & Options Pack.

Finally, you could invest in commodity firms by buying shares in metal miners, oil extractors, or dairy farmers. That is straightforward and less volatile, but you’ll be exposed to more than just the commodity price – losing money because your particular oil firm reported weak profits is a drag when the price of oil is soaring.

But to trade, you need to understand what moves the price and our final session has you covered.

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