How to invest in commodities
Commodity trading isn't the only way to invest in commodities. Here are four basic ways.
1. Invest directly in the commodity
The most straightforward way to invest in commodities is by physically buying a commodity. One advantage is that you don't have to go through a third party. Typically you can do a simple internet search to find a dealer to sell you a particular good. When you no longer want it, that dealer will often buy it back. But you have to figure out delivery and storage logistics.
If you're buying gold, this may be relatively simple. You can easily find a coin dealer online who can sell you a bar or coin. You can safely store it and later sell it as you wish.
But it gets a lot harder when you're trying to figure out delivery and storage of cattle, crude oil, or agricultural commodities, like bushels of corn. For that reason, investing in most physical commodities typically takes too much effort for individual investors.
2. Invest in futures contracts
You can trade commodity derivatives, such as futures contracts, as long as you have a brokerage account that allows for it. But futures contracts are largely designed for major companies involved in commodities rather than for individuals.
When you trade futures, you'll be required to maintain a certain amount of capital, known as margin, in your brokerage account. One risk of trading commodities is that the margin requirements are often lower than for stocks.
When you trade on margin, you're trading borrowed money, which can amplify your losses. Given the volatility of commodity prices, it's essential to have enough resources on hand to cover any margin call, which is when your broker requires you to deposit more money.
3. Invest in commodity stocks
Another way to invest in commodities is to buy shares of the companies that produce them. For example, you could buy metal stocks, energy stocks, or meat stocks.
A commodity-producing company won't necessarily rise or fall in line with the commodity it produces. Sure, an oil production company will benefit when crude oil prices rise and suffer when they fall. But far more important is how much oil it has in its reserves and whether it has lucrative supply contracts with high-demand purchasers.
4. Invest in commodity ETFs and mutual funds
Commodity exchange-traded funds (ETFs) and mutual funds offer commodity exposure for those who don't want to buy the commodity directly. You can find an investment fund that invests in physical materials, commodity stocks, futures contracts, or a combination.
For example, investors who want broad exposure to gold could invest in the SPDR Gold Trust ETF (GLD -4.12%), while those who are bullish on oil prices could buy shares of the United States Oil Fund LP (USO -3.54%). If you want more exposure to commodities in general, you could invest in the iShares S&P Commodity-Indexed Trust (GSG -1.73%). The fund's benchmark index is the S&P GSCI, which includes 24 commodities from all commodity sectors.
However, commodity funds may not move in sync with the price of the underlying good. That may come as a surprise to new investors.
