What Are Commodities?

Commodities are present all over our everyday lives. They are products that are found all over the world and including cattle, heating oil, platinum, sugar, silver, and lumber just to name a few. Commodities are traded in a global marketplace and are often used in a strategy to diversify investment portfolios. There are billions of investment dollars involved in commodities trading each day.

Commodities Trading

Commodities can be traded in either real-time, referred to as spot markets, or in futures markets. With futures, the way most commodities are traded, it is a contract to buy and sell a commodity for a certain price is actually what is being traded. The contract to buy or sell is set at a certain price and a specific date into the future. Due to this factor, there can be significant fluctuations in the market. Investors who are interested in earning a lot often enjoy the excitement of the market, despite its sometimes volatile activity.

The aim of commodities investments and trading is to buy at a low price and sell at a high price. Commodities trade by contract size rather than shares. Investors in commodities can buy and sell whenever the markets are open. This investment type is popular in the media with the prices of certain commodities, especially gold and oil, make news headlines daily.

Types of Commodities

The term ‘commodities’ is a generic one. There are several specific types of investments surrounding the commodities market. Here is a brief outline of those types:

  • Commodity Funds - Considered real commodities because they have direct holdings in commodities.
  •  Commodity Funds Which Hold Futures - A popular mutual fund approach where the investor holds commodity-linked derivatives rather than the actual commodity in order to make a profit from ongoing price changes.
  • Combination Funds -Some commodities funds include a combination of commodity futures and actual commodities. As an example, gold funds are holdings which have both futures contracts and bullion.
  • Natural Resource Funds -These are funds which allow investors to invest in those companies operate in commodity-relevant fields such as oil drilling, farming, and energy. These types of funds do not allow investors to keep the actual commodities or futures but allow access to the commodities markets by association.

Read: What Are Bonds?

Diversification Opportunities

Commodities give investors the opportunity to diversify their portfolios. They provide an investment portfolio with strategies not like traditional bonds, stocks, and mutual funds. Commodities markets may not always have the same fluctuations in line with movements in the market. Profits for investors are made when prices go up due to the supply and demand laws. However, the market can also offer price jumps for just a short period of time but have prolonged lulls in activity. There is also the potential of high prices to fall to record lows in just a couple of days.

While commodities can allow investors access to exciting investments and strategies for portfolio diversification, commodities markets may be difficult to understand and require some education before one starts investing. Investors are advised to seek professional investment assistance when just starting out in the commodities market and keep the percentage of commodity investments to the small side in your overall investment strategy.

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