Commodities are often an overlooked component of an investment portfolio but can help investors smooth out returns. This is because both soft and hard commodities have an overall positive return over the long run and act as a hedge against inflation.
This guide will help you find out why they might have 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 4 different ways that you can invest in 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.
Commodities are most often used in the production of goods and services. If you are thinking about commodities, basically think of the raw materials used in manufactured finished goods.
There are 2 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 rolls, 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.
Types 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.
Agricultural products. These are soft commodities such as corn, cocoa, coffee, wheat, soybean, coffee, orange juice, oats and lumber.
Livestock and meat. These are soft commodities. Think of items such as live cattle, beef, pork and milk.
Energy products. These are hard commodities. They include natural gas, coal, oil, ethanol and propane.
Metals. These are hard commodities. These commodities can be broken into 2 types: precious metals, such as gold, silver, platinum and bronze, and industrial metals, such as copper, aluminium, zinc and tin.
Purchasing the commodity
You can choose to invest in a commodity by purchasing the commodity.
In Australia, you can do this by looking for a dealer that sells the commodity and purchase it from them. You can choose whether you want to eventually sell it back to the original dealer or to sell it 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.
Commodity futures contracts
This is probably the most common way to trade commodities. 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 speculating on the price volatility of commodities. Traders typically use leverage, which can make CFDs a lot riskier than stock trading. But remember, trading CFDs is significantly more risky than trading traditional shares due to factors including leverage.
Disclaimer: General information only. All forms of investments (and in particular, trading CFDs, commodities and forex) carry significant risk, including the risk of losing more than the invested amounts, market volatility and liquidity risks. Past performance is no guarantee of future results. Such activities are not suitable for most investors.
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.
Buying commodity exchange traded funds (ETFs)
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.
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 in Australia for a huge range of different commodities, so you have plenty of choice.
Important: The standard brokerage fee displayed is the trade cost for new customers to purchase $1,000 of either Australian or US shares. Where a platform charges different fees for both US and Australian shares we show the lower of the two. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.
Buying stocks and shares in companies that produce commodities
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 Australian 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.
Important information: Powered by Finder.com.au. This information is general in nature and is no substitute for professional advice. It does not take into account your personal situation. This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for most investors. You do not own or have any interest in the underlying asset. Capital is at risk, including the risk of losing more than the amount originally put in, market volatility and liquidity risks. Past performance is no guarantee of future results. Tax on profits may apply. Consider the Product Disclosure Statement and Target Market Determination for the product on the provider's website. Consider your own circumstances, including whether you can afford to take the high risk of losing your money and possess the relevant experience and knowledge. We recommend that you obtain independent advice from a suitably licensed financial advisor before making any trades.
Zoe is a writer for Finder specialising in investment and banking. Zoe has a BA in English literature and several years of experience in writing about all things personal finance. She has a particular love for spreadsheets, having also worked as a management accountant. In her spare time, you’ll find Zoe skating at her local ice rink.
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