When I began learning about investing I often came across the word commodity and heard different specialists suggesting that people should invest in them. Here I explain what they are, some ways to invest in them and why you might want to consider it.

Commodities are basic goods that people use in their everyday lives such as grains, oil and gas. These goods are interchangeable with other goods of the same type, so prices are not affected by who produced them. Grains, for example, are pretty much the same regardless of who produced them. If a company uses wheat to produce crackers, for example, this company will have a variety of producers to choose from that offer a similar product. There is no branding or value added by a specific company.

Commodities are typically sorted into four categories: energy, livestock, metal and agricultural. Because those basic goods are subject to unpredictable factors such as the weather, pandemics, natural disasters and changes in supply and demand, they can be considered risky investments.

Trading commodities is not new and people have been trading them since ancient times. More recently people began to trade them in commodities exchanges and nowadays you have other options to invest in commodities, such as such as futures contracts, options, and exchange-traded funds (ETFs).

Why invest in commodities

If commodities can be considered a risky investment, as they are subject to unpredictable factors, why do people invest in them?

How to invest in commodities

While manufacturers and other companies typically invest in commodities, there are also ways an individual investor can take a position. Some ways are more complex and riskier than others, and therefore less suitable to a beginning investor.

Here are some ways you can invest in commodities:

Some of the options above, like futures contracts, options and commodity pools are more complex and not recommended for every investor. The easiest way for an individual investor to take a position in commodities is through stocks, ETF’s and mutual funds. As always, make sure to check how much you will be paying in fees, especially if you choose to use mutual funds for your investment.

Are commodities part of your investment portfolio? How do you invest in them? Let me know in the comments below.

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