How to invest in commodities in Australia
Coffee, cotton and even cattle. Find out how you can invest in commodities.
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Commodities are items that can be interchanged, such as corn or precious metals. Find out why they might have quite volatile prices, whether they're a good investment and how you can invest in them from Australia.
How can I invest in commodities?
There are four different ways that you can invest in commodities:
- Purchasing the commodity
- Investing in commodity futures contracts
- Buying commodity exchange traded funds (ETFs)
- Buying stocks and shares in companies that produce commodities
What are commodities?
Commodities are basic natural resources such as oil, food and metals. They can be thought of in some ways as the basic building blocks of our economy.
There are two categories of commodities:
- Hard commodities are those that need to be mined or drilled to be found, such as metals and energy products.
- Soft commodities are those which are grown, like corn and wheat.
Are commodities volatile?
Commodity volatility (how much the price moves up and down) is generally reflective of supply and demand. If there were loads of avocados grown just as everyone decided they didn't like guacamole anymore, then the price of your average avocado is likely to go down. If a worldwide virus leads to everyone panic buying toilet roll, you're likely to see the price rise.
Due to supply and demand, the volatility of commodities tends to be higher than for other types of investment, but this depends entirely on the commodity.
List of commodities
This isn't an exhaustive list of commodities, but it gives you a good idea of what can be considered to be a commodity.
- Oils, such as soybean oil and crude oil
- Live cattle, such as cows and pigs
- Metals, such as gold or silver
- Orange juice
You can choose to invest in a commodity by purchasing the commodity. You can often do this by looking for a dealer that sells the commodity and purchasing it from them. You can choose whether you want to eventually sell it back to the original dealer or to sell to someone else.
This is often done with gold and silver, but you'll need to ensure that you have somewhere to store the commodity between buying and selling it.
With futures contracts, you are agreeing to purchase commodities at a specified point in the future. These were created for sellers like farmers, who would start growing a type of commodity, such as wheat, long before it could actually be sold, to help manage the financial risk.
Nowadays, futures contracts aren't solely for farming. You can purchase futures contracts in just about anything, and they don't always end with physical items.
Physical commodities trading is only available to advanced traders or corporations. In Australia, retail investors can trade commodities via contracts for difference (CFDs). These are derivatives contracts where you're not actually trading the underlying asset, instead you're betting on the price volatility of commodities. Traders typically use leverage, which can make CFDs a lot riskier than stock trading.
Trading CFDs and forex on leverage is high-risk and you could lose more than your initial investment. It may not be suitable for every investor. Refer to the provider’s PDS and consider the risks before trading.
Commodity ETFs allow you to invest in a series of different firms or companies, allowing you to spread your investment out and reduce the risk. We explain ETFs in some detail in our handy guide if you're not completely sure on how they work.
ETFs are a much simpler way of accessing the stock market, so they're quite well suited to you if you're a newbie. There are loads of ETFs for a huge range of different commodities, so you have plenty of choice.
Important: Share trading can be financially risky and the value of your investment can go down as well as up. “Standard brokerage” fee is the cost to trade $1,000 or less of ASX-listed shares and ETFs without any qualifications or special eligibility. If ASX shares aren’t available, the fee shown is for US shares. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.
Which stocks and shares you choose to purchase will depend on what specific commodity you fancy investing in. Do some research into the commodity you want to invest in to find out some companies that produce it and buy shares in those companies.
You might need to know your way around the stock market to buy shares. The share trading platform that you choose to use will have some guidance to help you along the way.
Are commodities a good investment?
All investing carries risk, but many commodities are items that consumers continue to buy even in a recession. Everyone will still need to eat, for example, so some people view commodities as less risky, but within that, there will be a huge range - oil is a commodity and can be highly volatile.
Compare share trading platforms
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