What is commodities trading?

Are you exploring the world of investing? If so, you’re not alone. One industry report found around 435,000 people placed their first trade on the share market in 2020, marking a 34.8% jump in newcomers. Stock and foreign exchange trading are among the most popular routes – but another option well worth considering is commodities trading.

Commodities are simply raw materials or goods that we collect and process for human use, like oil for fuel, sugar for food, or metal for construction. They form the basis of our economies and lifestyles – and you can buy and sell them on exchanges just like stocks.

Commodity prices are driven by supply and demand and the various factors that impact this, like political or natural events, economic trends and competition. One recent example is the record rise of fuel prices, which was in part due to Russia’s ongoing invasion of Ukraine.

So if you’ve got a keen eye for financial trends and want to diversify your portfolio, read more on the types of commodities and how to invest in them below.

The different types of commodities

We gave some examples of commodities above, but investors tend to break them down into two key categories.

Soft commodities are those that are grown or ranched. That includes agricultural products such as coffee, corn, wheat and cotton, as well as livestock and meat such as live cattle, beef and milk.

Hard commodities meanwhile are accessed by mining or drilling. Examples include energy products such as crude oil, natural gas and coal, plus precious metals like gold, and industrial metals like aluminium.

How to invest in commodities

The most direct way to invest in commodities is by buying the physical goods – though this isn’t suitable for most investors. You’ll need to think about things like storage and delivery, which can get complicated with commodities like cattle, corn and oil.

More practical options include contract for difference (CFD) trading, which involves trading price movements of underlying assets without actually owning them. Similarly, exchange-traded funds (ETFs) and mutual funds give you exposure to commodities without directly buying them.

Another way to invest in commodities is buying shares of the companies that produce them. Prices of these stocks are still influenced by supply and demand, as well as factors like supply contracts and stock reserves.

As with any asset class, it’s important to have a strong understanding of commodity markets and their dynamics. But if you can incorporate them wisely as part of a broader investment portfolio, you could stand to make healthy gains.