Investing 101

Commodities rise and fall in response to economic activity and industrial demand - along of course with supply dynamics. 

Investing in commodities can add diversification in the portfolio whilst at the same time providing exposure to growth in the economy.

Commodities have long been considered a hedge against inflation. Evidence is mixed on this account, but the addition of some base materials can ensure investors against energy crises or other supply chain issues.

Generally speaking, commodities can be quite volatile (hence more risky) than equity investments. By adding commodities to a portfolio of less volatile assets, their negative correlation to other assets brings down the overall volatility of the portfolio, especially in times of rising prices. 
Methods of Investment

**Direct **

Investing in commodities directly requires physically acquiring and storing the asset. Selling a commodity means finding a buy and handling delivery. This might be easier to do with metal commodities but directly trading barrels of crude oil might be more complicated. 

**Futures**

Another way to directly expose yourself to commodity prices is futures contracts. This requires investors to buy or sell a given commodity at a specific price and time in the future. To trade futures contracts, investors require an appropriate brokerage or broker. These types of contracts are usually traded by institutional or advanced investors because of the large capital backing required. For example, trading 1 gold contract is equal to 100 troy ounces of gold, which equals ~150,000 USD commitment. Your average retail investor may not have 150 grand to blow on 1 contract…


So you're ready to invest in commodities - what should you know before investing? 

Investing in Commodities 

Commodities

Trading commodities predates stocks and bonds by many centuries as merchants would meet along trade routes (such as the Silk Road) to exchange agricultural and craft products. 

Just like stocks and bonds, commodities are one of the major asset classes. However, these assets are tangible - generally coming from the earth and used as raw materials for further manufacturing activities. They possess uniform characteristics, are produced in large quantities and come from many different sources around the world. 

Commodities can be grouped into three sub categories: agricultural, energy and metals. 

**Agricultural** commodities include corn (an important source of food for humans and livestock), soybeans (a byproduct for making bread and pastries) and wheat (one of the most important food crops). 

**Energy** commodities include crude oil (fuel to keep our lives moving), natural gas (used to keep our lives lit) and gasoline (which drives the global supply chain). 

**Metals** are not only used for luxury products like jewellery but copper is widely used as a conductor of electricity, and has especially become important in the highly-demanded semiconductor industry. 

Commodities can be traded on commodities exchanges, just like stocks are traded on stock exchanges. Examples of commodities exchanges include the New York Mercantile Exchange (NYMEX) and the Chicago Board of Options Exchange (CBOE). Investors can also gain indirect exposure to commodities by investing in stocks, ETFs and mutual funds. 


Introduction to Commodities

Investing in Commodities