Do you need commodities in your portfolio?
Commodities impact us daily. Whether it’s the cost of food, fuel or metals, we’re all affected by fluctuations in the market. But traders don’t have to be at the mercy of these fluctuations. When approached smartly, commodities can be a useful component of a healthy financial portfolio.
Trading commodities is hardly a novel concept. Spices, jewels and ores have been used as monetary sources for centuries. The same laws of supply and demand that determined how many denarii a trader received for his goods in the forum of Rome still control the market today. If crude oil is in high demand its value increases, and vice versa. This principle still lets you capitalise on both rising and falling commodities.
Why trade commodities
Commodities are considered the most volatile asset class and are therefore popular among active traders. Many factors effect commodity prices, such as natural events, supply and demand and geopolitics.
What commodities can be traded
There are four key groups of tradable commodities:
- Agricultural, such as corn, wheat, coffee, sugar and soybeans
- Energy, such as oil and natural gas
- Livestock, such as pork and cattle
- Metals, such as gold, silver and copper
These are split into hard commodities, or natural resources that must be mined or extracted (like gold, rubber and oil), and soft commodities, which are agricultural products or livestock.
How to invest in commodities
There are a few different ways you can add commodities to your portfolio. Popular options include:
Futures: A futures contract is an agreement to buy or sell an amount of a chosen commodity for a set price at a later date. The price of the contract represents the predicted future price of the commodity. The food futures market is a popular option for traders and contains products such as meat, wheat, coffee, cocoa, orange juice and sugar. Energy and metals futures are also common.
Rather than trading the actual futures contract, you can open a spread betting or CFD position to buy or sell the underlying commodity.
Stocks: You can trade the strength of individual commodities in the performance of related stocks. Investors look to companies in industries that are related to certain commodities, such as the gold or oil industries. It is important you know enough about a company and its reputation, as well as its financial standing, before deciding to trade.
Again, you can use a spread betting or CFD position to buy or sell individual stocks.
ETFs and ETNs: Exchange-traded funds and exchange-traded notes are dealt with in the exact same way as stocks, but allow investors to benefit from commodity price fluctuations without being tied to a futures contract. While they provide an easy way to participate in trading, they do not always accurately reflect point-for-point fluctuations, and not all commodities include ETF or ETN options.
Commodity pool operator: If you want to trade commodities but also want some expert guidance along the way, a commodity pool operator (CPO) is a good place to start. A CPO is a partnership or person that creates a pool of money from multiple investors, then uses it to buy or sell futures contracts. CPOs will provide a risk disclosure document, as well as periodic account statements and financial reports. This is a reliable way of keeping on top of your finances, and offers structure; however, it is vital that all participating investors have read the disclosure documents and understand what is happening with their finances.
Mutual funds: Mutual funds can be used to invest in stocks of companies involved in industries related to certain commodities. Just as you can purchase ETFs for groups of stocks within a single industry, you can buy into a mutual fund that relies heavily on a certain commodity.
How to get started
You can choose InterTrader to trade spread betting or CFD positions on commodity futures, or to trade individual stocks associated with certain commodities. As with any market, it’s advisable to do your due diligence before starting. Once you’ve thoroughly researched the markets, you can simply log into your account, open the trading platform or mobile app, and buy or sell the commodity of your choice.
You should under no circumstances consider the information and comments provided as an offer or solicitation to invest. This is not investment advice. The information provided is believed to be accurate at the date the information is produced.