Investing in commodities can be a great way to diversify your portfolio and profit from fluctuating commodity prices. However, it does require some specialized knowledge to be successful. This guide covers everything a beginning commodity investment basics, with up-to-date price data and news.
What Are Commodities?
Commodities are basic goods and raw materials, such as agricultural products, fuels, and metals, that are bought and sold in large quantities. Prices for commodities fluctuate based on global supply and demand.
The main commodity categories are:
- Energy – Crude oil, gasoline, natural gas, coal, uranium
- Metals – Gold, silver, copper, aluminum, zinc
- Livestock & Meat – Lean hogs, live cattle, feeder cattle
- Grains – Corn, soybeans, wheat
- Softs – Coffee, cotton, cocoa, sugar, orange juice
Commodities can be traded directly by purchasing the physical goods, but they are more commonly invested in through futures contracts or instruments like commodity exchange-traded funds (ETFs).
Why Invest in Commodities?
There are several reasons investors choose to allocate part of their portfolio to commodities:
Diversification – Commodity prices tend not to correlate strongly with stocks and bonds, making them an excellent portfolio diversifier.
Inflation hedge – Commodities like gold and other raw materials hold their value better than other assets during inflationary periods.
Growth potential – Developing countries are using more commodities, driving up global demand.
However, commodities come with significant volatility and other risks that Beginningers need to be aware of. Proper education is key before allocating money to this asset class.
How to Invest in Commodities
While buying physical commodities like precious metals is an option, most commodity trading occurs through futures contracts or commodity ETFs. Here are some of the most common ways to gain exposure to commodities:
Futures
Commodity futures enable you to agree to buy or sell a specific type and quantity of a commodity at a predetermined price on a set future date. They trade on dedicated commodity exchanges like the Chicago Mercantile Exchange (CME) and Intercontinental Exchange (ICE).
Futures allow you to speculate on commodity price movements. For example, if you think the price of oil will rise, you can buy crude oil futures. You will profit if the price goes up beyond the price defined in your contract and incur losses if the price declines.
ETFs
Commodity ETFs provide exposure to physical commodities or futures contracts without having to directly trade futures. Many track popular commodity indexes like the Bloomberg Commodity Index.
Investing in ETFs offers simplicity and diversification across multiple commodities in a single fund. Some popular commodity ETFs include the Invesco DB Commodity Index Tracking Fund (DBC) and the iShares S&P GSCI Commodity-Indexed Trust (GSG).
Stocks
Rather than buying commodities directly, you can invest in the stocks of commodity producers and mining companies. For example, buying shares of ConocoPhillips provides exposure to oil and natural gas price fluctuations.
One benefit of buying stocks over other commodity investments is that companies aim to deliver shareholder returns even if commodity prices decline. However, stock performance will still depend heavily on the underlying commodities they are involved in.
Mutual Funds & ETNs
Actively managed mutual funds focused on commodities aim to outperform benchmark indexes by timing trades in commodity futures and options. They offer professional management but have higher fees than passive ETFs.
Exchange-traded notes (ETNs) are unsecured debt securities issued by financial institutions. They track the total return of commodity indexes. Both commodity mutual funds and ETNs provide easy access to a managed portfolio of commodity investments.
Which Commodities to Invest in?
With over 30 major commodity markets spanning energy, metals, agriculture, and livestock, beginning investors may wonder which ones to focus on. Here are some of the most heavily traded and mature commodity markets:
Crude Oil – The world’s most traded commodity and critical to the global economy. Prices ticked up significantly in 2022 amid supply concerns.
Gold – The classic safe haven investment has shined through periods of high inflation and market instability.
Corn – Trading volumes for the staple crop remain high, as corn is used widely for food, animal feed and ethanol fuel.
Copper – This base metal is essential for construction and electronics manufacturing. Demand should rise with electric vehicles and renewable energy.
Of course, making the right commodity investments comes down to understanding global supply and demand trends for individual markets. Conduct thorough research rather than relying on speculation or rumors alone.
READ ALSO: A Comprehensive Guide to Understanding and Investing in Commodities
Commodity Prices & Market News
Staying on top of the latest commodity market news and price movements is crucial. Here are some key resources:
MarketWatch Commodities Section – Timely news articles covering major commodity markets.
OilPrice.com – Leading source of energy news and data. Great for tracking crude oil, natural gas, and more.
AgWeb – In-depth coverage of agriculture commodities like corn, wheat, livestock, and dairy.
Kitco – Reliable spot and chart pricing for precious metals commodities including gold, silver, platinum, and palladium.
Nasdaq Futures – Live streaming quotes and charts for commodities, currencies, and indices.
Staying informed on relevant global issues that may impact supply and demand across key commodities is also advisable. These include factors like economic growth rates, geopolitics, weather patterns, and more.
Commodity Trading Strategies for Beginners
Deploying the right trading strategies can help Beginningers achieve commodity investing success:
Dollar-cost averaging
Dollar-cost averaging means making consistent investments at regular intervals, which smooths out risk rather than committing a large sum all at once. It helps avoid trying to “time” entry points.
Using stop-loss orders
Stop-loss orders minimize losses by automatically selling futures or stocks when they fall to a defined price threshold. They help beginners control downside risk.
Researching seasonal trends
Commodities like natural gas, grains, and livestock often see recurring price patterns each year related to supply and demand cycles. Understanding these seasonalities through research can uncover advantageous trading opportunities.
Diversifying across multiple assets
Rather than betting big on a single commodity, beginners should aim for diversification across different metals, energies, grains, soft, and livestock. This balances out volatility. ETFs provide instant diversified exposure.
The right mix of commodities, futures, and stocks can lead to enhanced returns without taking on excessive risk. Stick to these basic strategies at first while monitoring performance.
Common Risks of Commodity Investing
While commodities offer portfolio diversification benefits, Beginningers need to be fully aware of the substantial risks involved as well:
Volatility – Commodity prices fluctuate intensely according to supply and demand changes. Markets like crude oil, natural gas, and lean hogs are notoriously volatile.
Leverage risks – Commodity futures generally utilize high leverage, meaning huge losses can quickly accrue if prices move against your position. Beginners often underestimate leverage risk.
Complexity – There are many intricate trading considerations like contract roll timing, storage costs, etc. Lack of experience exposes beginners to unnecessary complexities & mistakes.
Geopolitical impacts – Global conflicts, trade wars, embargoes, and politics severely impact commodity flows and prices, adding uncertainty.
The combination of volatility, leverage risk, and complexity makes commodity trading decidedly riskier than stocks or bonds. Beginners must take things slowly and keep position sizes small. Consider working with a fee-only commodity trading advisor to minimize early mistakes.
To Recap
Commodity trading appeals to Beginninger investors because of historic price surges across assets like oil, gold and natural gas. However, the volatility and complexity inherent to commodities necessitate significant education.
This guide provided key background on what commodities are, why they matter, how to gain investment exposure, which markets to consider, plus critical beginning trading strategies and FAQs.
While commodities have a place in diversified portfolios, Beginningers should take an incremental approach. Start with a small allocation to broad-based ETFs, complemented by select commodity stocks. As skills improve, Beginning futures traders can wade into leveraged derivatives — yet only with strong risk control procedures in place. Sticking to these basics in 2024 can lead to sustainable commodities success.
Commodity Investment FAQs
Should beginning commodity investors focus on futures or ETFs?
ETFs provide a much more Beginner-friendly method of accessing a diversified group of commodity investments. Individual futures trading involves leverage and roll timing decisions that most beginners aren’t ready for. Begin with broad-based commodity ETFs like DBC or GSG.
What percentage of my portfolio should I allocate to commodities?
Most financial advisors suggest limiting commodity exposure to 5-10% of your total portfolio as a Beginner. This balances out volatility risks. Conservative Beginninger portfolios may want to start with just a 2-3% allocation.
How much money do I need to begin trading commodities?
Unlike stocks that can be bought in single shares, each commodity futures contract has a defined size, like 1,000 barrels of oil or 5,000 bushels of corn. You must fund the entire contract value, which can require thousands of dollars. However, ETFs and commodity stocks have no minimums beyond a single share purchase.
Should I trade multiple commodities or focus on one?
While diversification reduces volatility as compared to trading a single market, beginners may want to choose 2-3 closely correlated commodities at first, like WTI and Brent crude oil. This allows you to better understand how global events impact interconnected commodity markets before diversifying.
What tools do I need to analyze commodities from home?
Key resources include streaming quotes, interactive charts with technical indicators, breaking news feeds, historical price data downloads, and analytics/visualization tools. Leading multi-asset platforms like Nasdaq.com, TradingView, and MetaStock offer robust commodity trading toolsets for analysis.
How much of a price movement can I realistically target as a beginning trader?
With proper risk management through stop-losses and prudent position sizing, Beginninger traders should initially target modest price objectives in the 3-5% range. Assuming you risk 2% on a trade, that 3-5% target translates to a 1.5-2.5 reward/risk ratio — a sustainable approach as you refine skills.
In another related article, Different Types of Commodities and How to Invest in Them in 2024
