You can invest in the commodities market using a variety of ways, including physical orders, futures, mutual funds, and stock market.
Physical Orders
Buying the commodities directly and physically is the most direct and obvious way that a person can invest in the commodities markets.
For example, if you want to invest in gold, you may simply buy gold and hold it until prices are higher, in which time you will sell it.
On the flipside, you must keep in mind some of downsides of using this approach when investing.
For one, you must have a large amount of capital to make an outright purchase. The financial markets offer the usage of leverage, which is obviously not available when you’re using direct purchases.
For another, there are commodities that are not safe and easy to store and take possession of, such as crude oil and uranium. You usually need an expert to help you handle them.
Lastly, it would not be wise to take deliveries of large quantities of commodities like corn and meat because these are perishable goods and they should be disposed of quickly.
These are the reasons why there are very few investors who actually take possession of the underlying commodities. Most of the contracts are settled in cash, and there are rare cases when the delivery is actually taken—corporations that use the commodity for commercial purposes.
Through the Stock Market
Investors can also find opportunities in the stock market to gain some exposure to commodities. The reason is that when you buy shares of companies that use a kind of commodity for their goods or services, you automatically gain some amount of exposure.
For instance, if you invest in shares of companies that make pipelines for construction of oil transportation, you become dependent to the commodities market in terms of your investment’s success. In other words, they are essentially more affected by the trading activities in the commodities markets instead of the stock market.
- Mining Companies – a number of mining companies specialize in one single metal while others specialize in a number of metals. Depending on which metal you want to be exposed with, you can close in on a company. The returns that you will get will be highly dependent and correlated with the returns given by the underlying commodities.
- Energy Companies – energy companies can also provide different degrees of exposure. For example, one company may be exposed largely with the extraction phase while another may be more into the supply transportation process.
- Utilities – these are known to be defensive stocks that perform better than other stocks in times of bearish conditions. Electricity and utilities companies provide exposure to the commodities market since they are highly dependent on the price movement of commodities such as coal.
Specialized Funds and Futures
You can find a lot of specialized mutual funds that track the commodities market. You can invest in these funds if you want to gain some exposure to the market even if you are not quite familiar with the ins and outs. You can find funds solely dedicated to commodities, while others get a mix of different commodities. If all else fails, you can invest in the futures market and sell contracts on commodities.
