Commodities are in the news often. An oil shortage/surplus, or expectations of one, can influence the commodity price. But how does one invest in commodities?
What is a commodity?
Raw materials such as oil, wood, or grains are used in the production of a final product.
Within investing, the commodity market is an aggregate of all tradeable commodities.
Think about groups such as agriculture, energy, or metals.
Most likely, you have heard the news on the following commodities: gold, grain, crude oil, and timber.
The commodity market.
You don’t buy a piece of a commodity like you buy a stock of a company.
Nor do you need to buy the physical commodity. Imagine the storage alone.
Instead, commodities are tradeable at their expected future price (aptly called a future).
Note, you can also invest in commodities through ETFs or CFDs. Yet the market is most often represented through futures.
A future is a contract and one of several trading product types.
Both the buyer and seller are obligated to complete the transaction they signed on for.
Individual investors like you and me can sell the contract before the delivery date to avoid receiving the physical commodity.
However, every day a commodity’s future is held, the price fluctuates and both buyer and seller could be forced to provide extra margin based on the price gap.
In other words, this is a high-risk product with complex mechanics. If the above confused you, kindly seek extra help or consider stocks, ETFs, and mutual funds instead.
Start investing in commodity futures.
If you are still keen to invest, then please consider if you have the required knowledge to trade complex products involving margin.
Most brokers offer commodities on CFDs & futures. Etoro provides a solid commodity offering whilst having more investor-focused products for diversification.
*eToro is a multi-asset investment platform. The value of your investments may go up or down. Your
capital is at risk.