Commodities 101: Investing Basics & Tips

Are you sick of the same old ways to spend your money?

Looking for something to add variety to your portfolio and give you the chance to make a lot of money?

Don't look any further than goods. Yes, commodities, which are the raw materials and things that we use every day, can be a good way to invest. But what does it matter?

Well, for one thing, the prices of commodities can be affected by many things, from global events to weather patterns. This makes them a unique and changing way to trade. In this article, I'll look at the world of commodities, from how their prices are set to how to invest in them successfully. So, pour yourself a cup of coffee and let's get started!

Key Takeaways

  • Commodities can diversify a portfolio of stocks and bonds, lowering risk and boosting returns.
  • Supply and demand determine commodity prices.
  • Commodities have low or negative correlations with stocks and bonds, making them useful for diversification.
  • Investing in commodities can hedge against inflation, but understanding risks and choosing the right product is important.
  • ETFs are considered the best option for investing in commodities.
  • Staying informed about the commodity market and factors affecting prices is crucial for successful investing.

Commodities are basic things that are traded and can be swapped with other commodities of the same type. They are raw materials that are either eaten directly, like food, or used to make other things.

Metals like copper, gold, and silver, energy sources like crude oil and natural gas, farming products like wheat and coffee, and livestock and meat products like pork and cattle are all examples of commodities.

Why Invest in Commodities?

Commodities are a separate type of asset whose profits are mostly different from those of stocks and bonds. So, putting money into a wide range of commodities can help diversify a portfolio of stocks and bonds, which could lower the total risk and increase returns.

As a protection against inflation, it's a good idea to own commodities as part of a larger portfolio.

This is because commodity prices tend to rise along with inflation, which can help protect against the loss of purchasing power of the currency.

How to Invest in Commodities?

When you trade in commodities, you can either buy a physical good to get direct exposure to the commodity or buy commodity futures contracts, which are legally binding agreements to buy or sell a specific commodity at a future date for a set price and amount.

Investing in metals can be done in a number of ways. They can buy physical things like gold or silver, or they can buy exchange-traded funds (ETFs) or mutual funds that track specific commodities or commodity sectors.

Futures contracts, which are agreements to buy or sell a product at a certain price and time in the future, are another way for investors to make money.

What Commodities to Invest In?

Commodities are basic things that can be turned into other goods and services. Investing can be done in a number of different types of goods. Some examples of commodities that can be traded in are precious metals like gold and silver, energy resources like oil and natural gas, and agricultural goods like wheat.

Platinum, palladium, cotton, food, and animals are some other things to think about.

Benefits and Risks of Investing in Commodities

Investing in commodities can help buyers diversify their portfolios, protect them from inflation, and make them more money than they expected. Commodities can also make a portfolio less volatile because their returns are not closely linked to those of standard assets like stocks and bonds.

But investors may face volatility if their investments are tied to a single product or a single part of the economy.

When choosing which commodities to invest in, investors should pay attention to the specific things that drive each one.

Before buying in commodities, it's also a good idea to talk to someone who knows about money.

Factors Affecting Commodity Prices

Supply and Demand

The main things that affect the prices of goods are quantity and demand. When the quantity goes up, the price goes down, and when the demand goes up, the price goes up. On the other hand, when supply is low and demand is high, prices go up, and when the situation changes, prices go down.


There is a lot of change in the prices of commodities, and their future looks mixed. Commodity prices can make the headline CPI numbers change a lot, and consumers have to pay for things like food, gas for their cars, and heating and cooling their homes.

Prices of commodities get a lot of attention because they affect the prices of consumer goods.

They can also be used to protect against inflation.

Impact on the Economy

There are many ways that commodity prices can affect the business. For example, Canada sells a lot of things like oil and gas. When the prices of these things are higher around the world, the prices of exports go up, which puts more money back into the economy.

But foreign investment in the energy sector is not as high as it used to be because investors think demand for fossil fuels won't be as strong in the long run and the Canadian dollar isn't rising along with it.


Prices for commodities can go up and down, and researchers have looked at how this affects monetary and fiscal policies in Western and Central Africa. The reasons for the rise in prices of agricultural products are not as clear-cut as the reasons for the rise in prices of crude oil and metals.

Structural changes in the way people eat in growing economies or a higher demand for money can affect commodity prices.

Investing in Commodities

Putting money into commodities can be risky. Most commodity trading happens on the futures market, where traders agree ahead of time to buy or sell a certain product at a certain price at a certain time in the future.

The value of goods can change quickly, and when prices go up, you can make a lot of money.

But investing in or trading commodities comes with the same risks as any other type of business.

Commodity Futures Markets

The risks on commodity futures markets are different from those on stock markets. When buyers or mutual funds buy shares, for example, they can keep them for as long as they want. But commodity futures contracts have a delivery date, and buyers must either sell their contracts or roll them over to a later delivery date before the contract ends.

Types of Commodities

The risks that come with buying in different types of commodities vary. For agricultural commodities and the futures contracts that go with them, like corn, soybeans, or wheat, the risks are often tied to the weather.

Energy commodities and the futures contracts that go with them often have risks linked to supply and storage.

On the other hand, industry and macroeconomic factors have a general effect on metals like gold, copper, and palladium, as well as their futures contracts.

Direct Investment

To directly invest in a product, you have to buy it and store it, which can be difficult. To sell a good, you have to find a buyer and figure out how to get it to them. Investors can also buy shares in the companies that make goods.

But the price of a commodity does not always show up in the price of a stock that is linked to that commodity.

Commodities in Investment Portfolio

People often think about stocks and bonds when they want to invest. But commodities are another type of asset that can be added to your portfolio to make it more diverse. Commodities like precious metals, oil, and agricultural goods are often overlooked as part of an investment portfolio, but they can offer better returns and help lower risk.

Why Invest in Commodities?

By adding an asset type that doesn't move in the same way as stocks and bonds, commodities can be used to make an investment portfolio more diverse. This means that the prices of commodities move based on their own very specific industry conditions.

This makes commodities good deals for diversifying a portfolio.

Adding commodities to a portfolio of less volatile investments can make the portfolio less risky as a whole.

You can also use commodities to protect yourself from market risks like inflation.

How to Invest in Commodities

You can buy in commodities in four ways: directly in the commodity, in commodity futures, in commodity options, or in commodity exchange-traded funds (ETFs) or mutual funds. Buying an ETF that owns a portfolio of commodities producers is one way to get broad exposure to them.

By choosing the right group of investments, investors may be able to limit their losses and reduce the fluctuations of their returns without giving up too much possible return.

Tax Implications of Investing in Commodities

When investing in commodities, buyers should be aware of the tax effects. Commodities are treated as collectibles, which means that short-term gains are taxed at the investor's ordinary-income rate and long-term gains are taxed at a maximum federal rate of 28%.

Commodity capital gains are taxed in two ways: 60% are taxed at long-term rates and 40% are taxed at short-term rates.

Those in tax brackets who sell shares in metal ETFs that hold physical gold or silver may have to pay a long-term capital gains tax rate of 28%. Physical precious metal ETFs are taxed as collectibles, which means that capital gains are taxed at the investor's marginal tax rate, which depends on their tax bracket.

Investors might want to put commodity funds in a tax-deferred account, like an IRA, so they don't have to pay taxes on the money until they take it out in retirement.

Investing in Commodities

Putting your money into commodities can be a smart way to spread out your investments and reduce risk. Commodities are things like oil, gold, and base metals that are used to make other goods and services.

They can be put to work in a number of ways, such as buying things or buying ETFs that track commodities.

But there are risks when you invest in commodities, so it's important to know about the goods and markets before you invest.

Ways to Invest in Commodities

Investing in metals can be done in a number of ways, such as:

  • Purchasing physical goods: Investors can purchase physical commodities, such as gold or oil. However, this approach requires storage and insurance costs, and the investor must find a buyer when they want to sell.
  • Futures contracts: Futures contracts are agreements to buy or sell a commodity at a specific price and date. This approach can be quite volatile, so investors should understand the risks before making an investment.
  • ETFs: ETFs are considered the best way to invest in commodities because they allow for ease of trading, provide diversification, are not traded on margin like futures are, and typically have low expense ratios.
  • Mutual funds: Investors can also invest in commodity-related businesses, such as an oil and gas fund, which can provide exposure to commodities.

Benefits of Investing in Commodities

Investing in commodities can help buyers diversify their portfolios, protect them from inflation, and make them more money than they expected. Investors are usually protected from the effects of inflation by buying commodities, because the prices of commodities tend to go up when inflation is high.

Commodities can also help keep a portfolio from being too volatile, and their profits can help keep a diversified portfolio from being too volatile.

Commodities can help a range of investments be more diverse and may help protect against inflation.

Risks of Investing in Commodities

There are risks that come with investing in metals. Commodities can be very unpredictable, and investing in commodity futures and other related goods can be very risky. Investors take on more risk when they buy commodities, commodity futures, and related investment funds.

Not all investors should buy commodities, and it's important to know about the goods and markets before you do.

Every investment comes with some risk, and it's important not to take on too much danger.

The best way for investors to protect themselves from risk is to spread their money out among different investments.

If one investment loses money, they hope that the other investments will make up for the risk.

Choosing the Right Product

Investors can buy commodities in different ways and with different products. Futures contracts, ETPs, and mutual funds are all types of investments. Investors can buy the actual commodity or invest indirectly by buying shares in commodity companies, mutual funds, or exchange-traded products that track the price of the commodity using futures, options, or other derivatives.

Commodity ETFs are the best way to put money into commodities.

ETFs make investing easier because they can be bought like stocks, offer diversification, are not traded on margin like futures, and usually have low expense ratios.

Why Real Estate is a Must-Have Commodity for Savvy Investors

When it comes to investing, commodities are a popular choice for those looking to diversify their portfolio and save money. But have you considered adding real estate to your list of commodities? It may seem like a daunting investment, but owning property can provide a stable source of income and long-term appreciation.

Real estate is a tangible asset that can provide a hedge against inflation and market volatility.

Unlike stocks or bonds, you have control over your investment and can make improvements to increase its value.

Plus, rental income can provide a steady stream of cash flow, making it a great option for those looking to save for retirement or generate passive income.

Of course, investing in real estate requires careful consideration and research.

But for those willing to put in the effort, it can be a valuable addition to any investment portfolio.

So, if you're looking to save money and diversify your investments, consider adding real estate to your list of commodities.

For more information:

Real Estate Savings: Tips & Benefits

Staying Informed and Successful Investing

Goods that are used to make other goods and services are called commodities. Putting money into commodities can be a good way to spread out your investments and reduce risk. Before making any investment choices, it is important to know as much as possible about the commodity market and the things that affect commodity prices.

Ways to Invest in Commodities

Investing in metals can be done in a number of ways, such as:

  • Purchasing physical goods like gold or silver
  • Purchasing ETFs that track commodity prices
  • Using futures contracts to buy or sell commodities at a specific price and date

Investing in Company Shares

Most of the time, people who want to invest in commodities through company shares need to learn more about the business. It is important to know the different types of commodities you can trade in, such as agriculture, natural resources, precious metals, and livestock.

Staying Informed

Read financial news and stories, such as those from Bloomberg, Reuters, and the Wall Street Journal, to learn more about the commodity market. These sources give up-to-date information on product prices, trends, and news that can affect the market.

A person can also follow experts and analysts in commodity dealing on social media sites like Twitter and LinkedIn to learn more about the market and how it works.

Factors that Affect Commodity Prices

It's important to know what affects the prices of commodities, such as:

  • Supply and demand
  • Geopolitical events
  • Weather conditions

For example, droughts and price inflation can cut down on the amount of agricultural exports, which makes product prices stay unstable. Firms may buy commodity options with bigger strike prices to protect themselves from future price increases.

By keeping up with these factors and events, a person can make smart decisions about whether or not to buy in commodities or stocks related to commodities.

Risks Associated with Investing in Commodities

It's important to know the risks of buying in commodities, since their prices can change a lot. Since price jumps tend to be short-lived, commodities may not be the best things to buy and hold. Before deciding how to invest in commodities, it's important to do your own study on different investment strategies.

It is also important to know the pros and cons of each method.

Concluding thoughts and considerations

In conclusion, commodities can be a great addition to your portfolio if you want to spread out your investments and possibly make more money. But it's important to remember that things like supply and demand, geopolitical events, and weather trends can change the prices of commodities.

Before investing in commodities, it's also important to stay up-to-date and do study, since they can be volatile and hard to predict.

Investing in commodities can help you make money, but it can also give you a unique view of the world.

It makes us think about the resources we use every day and how they affect our lives and the world around us.

It's a reminder that everything we use, from food to energy, has a real cost and a limited quantity.

So, not everyone should invest in commodities, but it is something to think about if you want to save money and learn more about the world we live in.

As with any other investment, it's important to be careful and open to learning.

Who knows, you might find a new interest or point of view along the way.

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Links and references

  1. The 20 Best Commodities Books of All Time
  2. SEC Guide to Saving and Investing
  3. The Mint Manual: A Shortcut to Mastering and Saving Money With

My article on the topic:

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