What are commodities and how to invest in them

Karl 19th Dec 2022 No Comments

Reading Time: 5 minutes

This is a sponsored post on behalf of eToro

It’s often suggested that mixing up your investments can be a winning strategy, especially over the long-term.

One way to increase the diversification of your portfolio is to invest in commodities.

But what exactly are commodities? And how can you invest in them?

Keep on reading for all the details or click on a link below to head straight to a section…

• What are commodities?
• What are commodity currencies?
• How do they usually perform?
• How can you invest in commodities?

What are commodities?

Commodities refer to the raw materials needed to produce agricultural products, consumer products, energy, or food.

Just like other types of investments, the value of individual commodities can rise and fall.

Commodities are relatively liquid in the way that they are usually quite easy to sell. The same can’t be said for all other asset classes, such as property and antiques, where selling them can be laborious and expensive.

Examples of commodities

Commodities can be sub-divided into two groups: ‘Hard’ commodities and ‘Soft’ commodities.

Hard commodities include natural resources. They typically have to be mined or extracted. All of the following are examples of hard commodities:

• Gold
• Silver
• Platinum
• Oil
• Natural gas
• Rubber

Soft commodities differ from hard commodities in the way that they can refer to assets that can be grown, or reproduced in some way. Examples include:

• Livestock
• Corn
• Wheat
• Sugar
• Coffee
• Coca

How do commodities usually perform?

Commodities, just like equities and bonds, can be bought and traded by investors.

Commodities aren’t directly correlated to the performance of equities, though some commodities may be heavily impacted by the performance of the economy.

For example, if the economy looks shaky, then the price of oil and gas may slide. We saw this happen during the emergence of the Covid-19 pandemic in early 2020, when fossil fuels took a massive hit due to dampened global demand. In the end though, it turned out to be just a minor setback, as the price of oil and gas soared the following year.

Of course, the economy isn’t the only factor that can influence the price of individual – or several – types of commodities. Inflation, politics, foreign issues, and new technologies are other factors that can have an impact.

This is why commodities are generally considered to be more volatile than equities and bonds.

What are commodity currencies?

A ‘commodity currency’ is a currency that moves in line with the price of certain commodities.

For example, the Australian and New Zealand dollar may both be considered commodity currencies.

That’s because Australia is a major exporter of natural resources such as coal and iron ore. Meanwhile, New Zealand is a major exporter of agricultural products. As such, the success of the exports from these two neighbours can have a massive impact on the strength of their respective currencies.

While there’s no set definition, other countries that some consider to have commodity currencies include Canada, Japan, Norway, South Africa, Brazil, and Chile.

How can you invest in commodities?

If you’re looking to diversify your portfolio, then buying commodities can be a good way to mix things up.

Assuming you don’t want to buy physical assets, then there are three ways to gain exposure to commodities:

1. Invest in companies involved in commodities
2. Buy a commodity exchange-traded fund
3. Buy a commodity ‘contract for difference’ (“CFD”)

How to buy commodities through etoro

eToro – the sponsors of this article – is a major multi-asset investment company. Regardless of the way you wish to gain exposure to commodities, you’ll find a way to do it with eToro.

Disclaimer
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 79% of retail investor accounts lose money when trading CFDs with this provider.

You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

1. Invest in companies heavily involved in commodities

When investing through eToro, search for the company you wish to invest in on its investing page and click ‘invest.’ When buying shares through eToro you won’t pay any commission, though other fees apply.

Examples of companies heavily involved in commodities include:

• BP – one of the biggest oil producers in the world.
• Glencore – a multinational natural resource company
• Mercuria – a trading company active in global energy markets

To learn more about buying shares through eToro, take a look at our comprehensive guide: How to buy shares and invest with eToro.

2. Buy a commodity etf

An exchange-traded fund (ETF) trades on the stock exchange, so you can buy and sell them just like you can with stocks and shares.

If you buy a commodity-based ETF, you can gain exposure to one (or several) types of commodity, without having to buy physical assets. Here are some examples of commodity ETFs.

• iShares Commodity Curve Carry Strategy ETF
• SPDR Gold ETF
• iShares Silver Trust ETF
• Teucrium Wheat Fund ETF
• KraneShares Global Carbon Strategy ETF

You can buy the ETF of your choice on the ‘Markets’ section of the eToro website.

3. Buy a Contract for Difference (CFD)

A commodity ‘Contract for Difference’ (CFD) is a derivative that allows investors to predict which way they think the future price of a commodity will go.

If you buy a CFD you’ll never actually own the commodity itself. Instead, you’re betting on the future price of a particular asset. If you get the call right then you can make a profit. However, get it wrong and you’ll have to make up the difference in price.

CFDs are high risk, especially if leverage is involved, and are usually only recommended for very experienced investors.

79% of retail investor accounts lose money when trading CFDs with eToro.

What about fees? And is etoro safe?

Like other investment platforms, eToro charges fees. The amount you pay will depend on how you plan to invest. See the eToro website for a full list of its fees.

eToro is regulated in the UK and you can find the full details here.

To learn more about investing, sign up for our fortnightly MoneyMagpie Investing Newsletter. It’s free and you can unsubscribe at any time.

Disclaimer: Don’t invest unless you’re prepared to lose all the money you invest. This is a high-risk investment, and you should not expect to be protected if something goes wrong. Take 2 minutes to learn more.

MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence. Capital at risk.

eToro is a multi-asset platform which offers both investing in stocks and cryptoassets, as well as trading CFDs.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 79% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.

This communication is for information and education purposes only and should not be taken as investment advice, a personal recommendation, or an offer of, or solicitation to buy or sell, any financial instruments. This material has been prepared without taking into account any particular recipient’s investment objectives or financial situation, and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or a packaged investment product are not, and should not be taken as, a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication.