Commodities are particular kinds of assets in the financial markets. Formerly reserved for specialized traders, investments of this type have become widely available in recent years. However, it’s better to know the specifics of this asset class before taking a trading position. Keep reading in order to discover three important things prior to investing in commodities.
Commodities – Assets With Their Own Market
Commodities include a large number of materials, which can be energy (oil, gas), agricultural (wheat, corn, barley, etc.), metallic (gold, silver, copper, etc.). These are provided after exploitation, with the particularity of not creating value. It is the essence of raw materials, some of which cannot even be preserved in the long term, such as agricultural raw materials, for example. Commodities are traded on spot markets or derivative markets. The Chicago Stock Exchange, the oldest food exchange in the world, is an example of a stock exchange specializing in commodity transactions.
Correlation Between Raw Materials and Equities’ Price
There is a complex correlation between commodity prices and changes in the equity markets. When the equity markets shrink, the price of certain commodities soars. On the contrary, when the equity markets shrink, the price of certain raw materials such as oil falls, a situation linked to a weakening of demand in this context.
The price of raw material is largely based on the relation between supply and demand. These two are, as to raw materials, governed by many factors: good or bad harvests for agricultural raw materials (mainly due to weather conditions), the discovery of more or less significant deposits for fossil and metallic raw materials, but also particularly important – human factors.
3. How to Invest in Commodity Market
There are different ways to invest in raw materials stocks.
- Investing directly in commodities
- Investing in heavyweight stocks
- Investing in commodities thanks to ETFs
- Investing via derivative markets
Investing directly in commodities
It is undoubtedly the most restrictive solution and which only really makes sense for metallic raw materials. It is not a question of filling jerry cans with diesel fuel at the local petrol station to resell them a few euros more expensive to its neighbors after a few months but instead acquiring ingots of precious metals (gold, platinum, etc.) and keep them yourself or use a specialized third party.
Investing in heavyweight stocks
You can acquire securities from companies specializing in the targeted sector: oil companies to position on black gold, gold mining companies to position on plain gold, etc.
The purchase of shares directly from companies in the specific heavyweight sector can be recommended with a view to long-term passive investments for a buy & hold strategy.
Investing in commodities thanks to ETFs
ETFs, these index funds that replicate the index of an underlying asset, can allow the individual investor to invest in oil, gold, wheat or any other commodity very easily and at an ultra-competitive price.
UCITS funds specialize in raw materials, make it possible to invest in the primary economic sector while delegating the management and selection of securities to a professional specialized in raw materials, and therefore ideally competent.
Investing in raw materials via derivative market
Derivatives are a particular raw material (wheat, gold, petroleum, coffee, etc.) or a combination of raw materials, allowing speculation upwards or downwards on these assets. They are, of course, to be reserved for short term investments and should only be used by experienced investors who will understand their operation and will be careful with the leverage that often accompanies them, as is the case for options, futures, or warrants or turbos for example.