Commodities are the raw materials we put into products. Commodities can be livestock, agriculture, metals or energy.
This could be the coffee we have in the morning or the gold we out on before we leave, this could also be the gas that powers our cars.
How to invest in commodities
You can invest in commodities directly which means you physically have to buy them. This means you will have to take into account the insurance, delivery and storage of the commodity to ensure nothing goes wrong. This is quite expensive and time consuming.
Invest in commodities through futures contracts
You can also trade in commodities by using a derivative such as the futures contracts to invest in commodities. When we use a futures contracts we do not have town the underlying asset( the commodity) but simply buy the right to acquire an asset at a particular price on a particular date using the futures contracts which is priced based on the underlying asset( the commodity).
Future contracts are often used by speculators who believe the commodity will rise or fall in price. Small movements in price could result in big gains for investors who own large quantities of a commodity.
Invest in commodities via a contract for difference trade
You can also invest in commodities using a contract for difference trade. This is an agreement between two parties to exchange the difference between the opening and closing price of a contract. CFDs allow leverage, which means you don't have to pay the full price of the underlying assets to get involved but only a fraction of the total value upfront. This makes CFDs more flexible and attractive to investors. Gains can be made using the Contract for difference trade but in the same way huge losses can be made.
When dealing with futures contracts of contract for difference trades there will be commissions and transaction charges charged by the broker who is executing the trades on your behalf and you should take these costs into context when considering either option.
Invest in commodities through stock index funds
Another option when looking to invest in commodities would be to buy shares of companies who are engaged in the particular commodity sector you are looking for. This could be gold or oil. The companies could be engaged in extraction, trade or the full cycle of the commodity. You can invest in the shares of these companies by buying individual shares or much better you can invest in a particular index fund, Mutual fund or ETF which tracks the whole market or a particular niche sector of the commodity market you are interested in investing in.
ETFs are the cheapest way to invest in a huge number of company shares and they can track particular indexes such as the Gold and precious index (XAU) by holding a proportional basket of all the stocks in that index. This means you don't have to buy all individual stocks but can simply by a share of the XAU ETF index and get broad market exposure to the whole market.
ETFs will offer you liquidity and great diversification for your investment portfolio.