Commodities are just one of a huge range of investment types. But what exactly are they, how are they traded, and are they worth investing in? Read on to find out…
What are commodities?
The term ‘commodities’ is used to refer to the raw materials that are used to produce goods. There are two different types of commodities:
- Hard commodities can be either reared or grown, including livestock and agricultural products.
- Soft commodities are materials that are extracted or mined. These include metals – including precious metals – as well as energy products such as natural gas, crude oil and coal.
How are commodities traded?
There are two main ways of trading commodities.
The first is to buy shares in the companies that produce or mine the commodities in question. The second is to buy Exchange Traded Commodities (ETCs). These can be traded on the stock market, just like regular company shares, and can also – for the most part – be held as an ISA.
Why do investors choose commodities?
Investors may potentially experience three benefits of investing in commodities. The first, of course, is the potential for returns – although, like any investment, prices can go down as well as up.
The second is diversification. It may be the case that when other investment types, like stocks, fall in price, commodities rise: their price is driven by supply and demand. However, there is no guarantee of strong performance.
The third is protection from inflation. It is sometimes the case that commodity prices rise when inflation rises – meaning that some investors turn to certain commodities when inflation rises to try and give themselves some stability and protection.
There are, of course, risks: agricultural commodities, for example, can be negatively affected by things like weather, pests and natural disasters. Additionally, supply and demand – on which commodity prices are based – can change quickly, potentially leading to sharp price changes.
As with any investment type, commodities may be an interesting area to explore for some investors – but it’s vital to understand the market before investing.
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