How to Invest in Commodities
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Commodities are one of the oldest asset classes in the financial markets, offering investors a way to diversify their portfolios beyond traditional stocks and bonds. Commodities refer to raw materials and primary agricultural products that are traded in global markets, such as oil, gold, wheat, and natural gas. However, please note diversification does not eliminate the risk.
Investing in commodities may potentially provide several benefits, including potential protection against inflation, portfolio diversification, and exposure to global supply and demand trends. However, it also comes with unique risks, such as price volatility, geopolitical uncertainties, and regulatory changes.
This guide explores various ways to invest in commodities, from direct ownership of physical assets to trading futures contracts and investing in commodity-related ETFs. Whether you're a beginner looking to understand the basics or an experienced investor exploring advanced strategies, this article will help you navigate the commodity markets effectively.
What Are Commodities in Investing?
In investing, commodities refer to basic raw materials or primary goods that are bought and sold in global markets. These goods are typically interchangeable (fungible), meaning that a unit of a commodity from one producer is essentially the same as that from another. This standardization allows commodities to be traded on exchanges without concern for brand differences.
Categories of Commodities
Commodities are broadly classified into two main categories:
- Hard Commodities (Extracted or Mined)
These are natural resources that must be extracted from the earth. They include:
- Metals – Gold, silver, platinum, copper
- Energy – Crude oil, natural gas, coal, uranium
- Soft Commodities (Grown or Cultivated)
These are agricultural or livestock products that are cultivated for consumption. They include:
- Agriculture – Wheat, corn, soybeans, rice, coffee, cotton
- Livestock – Cattle, hogs, poultry
Why Do Investors Trade Commodities?
Investors turn to commodities for several reasons:
- Inflation Hedge – Commodities often rise in price when inflation increases, preserving purchasing power.
- Diversification – Since commodity prices don’t always move in sync with stocks and bonds, they might help with potential portfolio risk. However, please note diversification does not eliminate the risk.
- Supply & Demand Trends – Prices fluctuate based on global demand, geopolitical events, and natural disasters, offering trading opportunities.
- Speculation & Leverage – Commodity markets provide opportunities for traders to profit from short-term price movements through futures and derivatives.
How Are Commodities Traded?
Commodities are primarily traded on specialized exchanges, such as:
- Chicago Mercantile Exchange (CME) – One of the largest commodity futures exchanges
- New York Mercantile Exchange (NYMEX) – Specializes in energy and metal commodities
- Intercontinental Exchange (ICE) – Global platform for trading agricultural and energy commodities
Please note: Investors cannot directly invest in the above-mentioned exchanges directly. Also GraniteShares and ALPS are not affiliated with them
Commodities can be invested in through physical purchases, futures contracts, ETFs, stocks of commodity companies, and mutual funds. Each method carries different risks and potential rewards, which we’ll explore in the following sections.
Ways to Invest in Commodities
Investors have several options when it comes to gaining exposure to commodities. Whether through direct ownership, financial instruments, or commodity-related equities, each method has its own risks and benefits.
1. Direct Investment in Physical Commodities
Some investors choose to buy and hold physical commodities, such as gold, silver, or platinum. This method provides direct exposure to the asset but comes with challenges such as storage, security, and liquidity. Precious metals like gold and silver are often stored in vaults or acquired through trusts, such as the GraniteShares Platinum Trust, which allows investors to gain exposure to platinum without handling the physical metal.
2. Commodity Futures and Options
Futures contracts allow investors to speculate on commodity prices by agreeing to buy or sell an asset at a predetermined price in the future. While this method offers significant profit potential, it also involves high risk due to leverage and price volatility. Options on commodity futures provide additional flexibility by allowing traders to profit from price movements without owning the underlying contract.
Options grant the right, not the obligation, to buy or sell an asset at a set price by a deadline.
3. Commodity Exchange-Traded Funds (ETFs) and Exchange-Traded Notes (ETNs)
ETFs provide a convenient way to invest in commodities without the complexity of futures trading. Some ETFs track individual commodities, while others track a basket of commodities. For example, the GraniteShares Bloomberg Commodity Broad Strategy No K-1 ETF (COMB) offers exposure to a diversified mix of commodities, including energy, metals, and agricultural products. One key advantage of COMB is that it avoids the tax complexities of K-1 forms, making it a more accessible choice for investors.
4. Investing in Commodity Stocks
Another indirect way to invest in commodities is through stocks of companies involved in commodity production. Mining companies, oil producers, and agricultural firms often benefit from rising commodity prices. However, stock prices are influenced by factors beyond commodity prices, such as company management, geopolitical risks, and operational efficiency.
5. Commodity-Focused Mutual Funds and Index Funds
Mutual funds and Commodity index funds offer diversified exposure to commodities by investing in futures contracts, commodity-related stocks, or both. These funds are actively or passively managed and provide a way to gain exposure to commodities with professional management.
However, please note diversification does not eliminate the risk.
6. Trading Commodities Through CFDs and Online Platforms
Contracts for Difference (CFDs) allow traders to speculate on commodity price movements without owning the asset. These are typically short-term instruments that require careful risk management due to leverage. Online platforms and brokerage accounts provide access to commodity trading with varying levels of complexity.
Each method of investing in commodities comes with distinct advantages and risks. Investors should consider their risk tolerance, investment horizon, and market knowledge before choosing the right investment strategy.
How to Trade Commodities Online
Trading commodities online has become more accessible than ever, thanks to electronic trading platforms and brokerage accounts. Here’s a step-by-step guide to getting started:
1. Choose a Trading Platform or Brokerage
To trade commodities, you’ll need to open an account with a broker that offers access to commodity markets. Some popular platforms include:
- Traditional brokers like TD Ameritrade, Interactive Brokers, and Charles Schwab
- Futures-specific platforms like NinjaTrader and CME Direct
- CFD brokers such as eToro and Plus500 for speculative trading
(GraniteShares is not affiliated with any other referenced entity above)
2. Select Your Commodity and Trading Instrument
Traders can choose from various commodities, such as crude oil, gold, wheat, or natural gas. You also need to decide on the trading instrument:
- Futures contracts – Standardized agreements to buy or sell a commodity at a future date
- Options on futures – Provides the right (but not obligation) to trade futures contracts
- ETFs and ETNs – Commodity ETFs hold physical assets or futures, while commodity ETNs track prices via unsecured debt.
- CFDs (Contracts for Difference) – Speculative instruments that track commodity price movements
3. Analyze the Market
Before placing a trade, it’s crucial to conduct research using:
- Fundamental analysis – Examining supply and demand factors, geopolitical events, and economic reports
- Technical analysis – Studying price charts, trends, and indicators such as moving averages and RSI
4. Place a Trade and Understand Risk
Once your analysis is complete, you can execute a trade using your platform’s order system. Common order types include:
- Market orders (executed immediately at the current price)
- Limit orders (executed at a specified price or better)
- Stop-loss orders (automatically closing a trade to limit losses)
Risk management is crucial in commodity trading due to high volatility. Use position sizing, stop-loss orders, and hedging strategies to protect your capital.
5. Monitor and Adjust Your Trades
Commodity markets can be highly dynamic, requiring ongoing monitoring. Stay updated on news, economic data, and market trends to make necessary adjustments to your positions.
How Much Money Is Required for Commodity Trading?
The amount of money needed to trade commodities depends on the trading method and the specific market. Below are estimated capital requirements for different approaches:
1. Trading Commodity Futures
- Minimum account balance: $1,000–$5,000 for most brokers
- Margin requirements: Varies by commodity (e.g., crude oil futures may require $3,000+ per contract)
- Leverage considerations: Futures trading allows for leverage, meaning a small deposit controls a larger position, but this also increases risk
2. Trading Commodity Options
- Minimum capital: As low as $500–$1,000
- Options premiums: Costs depend on the underlying commodity, strike price, and expiration date
- Risk factor: Options can expire worthless, leading to a total loss of the premium paid
3. Investing in Commodity ETFs and ETNs
- Minimum investment: The price of one ETF share (e.g., GraniteShares Bloomberg Commodity Broad Strategy No K-1 ETF (COMB) trades like a stock)
- Liquidity and diversification: Lower capital requirement compared to direct futures trading, with exposure to a broad range of commodities
4. Trading Commodities via CFDs
- Minimum deposit: $100–$500 for most CFD brokers
- Leverage: Some platforms offer 10:1 or higher leverage, amplifying potential gains and losses
- Costs: Includes spreads, commissions, and overnight financing fees
5. Buying Physical Commodities (e.g., Gold, Silver, Oil)
- Minimum capital: Varies based on commodity price (e.g., 1 oz of gold may cost around $2,000)
- Storage costs: Applies to metals and other physical assets requiring secure storage
Where to Buy Commodities?
Investors and traders can buy commodities through various platforms and financial instruments, depending on their investment goals and risk tolerance. Here are the primary ways to access commodities:
1. Commodity Exchanges
Most commodities are traded on regulated exchanges that facilitate futures contracts and options. Some of the major exchanges include:
- Chicago Mercantile Exchange (CME) – Covers energy, metals, and agricultural commodities
- New York Mercantile Exchange (NYMEX) – Specializes in oil, natural gas, and precious metals
- Intercontinental Exchange (ICE) – Trades energy, agricultural, and financial commodities
- London Metal Exchange (LME) – Focuses on base metals like copper, aluminum, and zinc
2. Online Brokerages and Trading Platforms
Retail investors can access commodities through brokerages that offer:
- Futures and options trading
- CFD trading
- Commodity ETFs and ETNs
3. Buying Physical Commodities
For investors interested in owning tangible assets, commodities can be purchased through:
- Precious metals dealers – Gold, silver, and platinum can be bought from dealers
- Agricultural cooperatives and suppliers – For direct agricultural commodity purchases
- Oil and gas suppliers – Investors can purchase crude oil through specialized investment funds, but direct ownership is impractical due to storage requirements
4. Commodity-Focused Investment Funds
- Mutual funds and index funds – Offer exposure to a diversified basket of commodities
However, please note diversification does not eliminate the risk.
- Commodity trusts – Funds like the GraniteShares Platinum Trust (PLTM) allow investors to gain exposure to platinum without physical storage concerns
The best method for buying commodities depends on whether the goal is speculation, long-term investment, or hedging against inflation.
Risks and Considerations in Commodity Investing
While commodity investing offers diversification and inflation protection, it comes with unique risks that investors must consider:
1. Price Volatility
Commodity prices can be highly volatile due to supply and demand imbalances, geopolitical events, and weather conditions. For example, oil prices can swing dramatically due to OPEC decisions or geopolitical tensions.
2. Leverage and Margin Risks
Futures and CFD trading involve leverage, meaning a small investment can control a larger position. While leverage magnifies gains, it also increases losses, potentially leading to margin calls or liquidation.
3. Geopolitical and Regulatory Risks
Governments and regulatory bodies can impose trade restrictions, export bans, or tariffs that affect commodity prices. For example, sanctions on oil-producing nations can lead to sharp price spikes.
4. Inflation and Interest Rate Impact
Commodity investing faces storage challenges like costs, perishability, and security, along with liquidity constraints such as low trading volume and price volatility.
5. Storage and Liquidity Challenges
Commodity investing faces storage challenges like costs, perishability, and security, along with liquidity constraints such as low trading volume and price volatility.
6. Market Cycles and Demand Fluctuations
Commodity markets follow boom-and-bust cycles based on economic conditions. During economic downturns, demand for industrial metals and energy commodities may decline, leading to lower prices.
Conclusion
Investing in commodities can be a valuable strategy for portfolio diversification, inflation protection, and capitalizing on global supply and demand trends. Whether through physical assets, futures contracts, ETFs, or commodity-related stocks, each investment method carries unique risks and benefits. While commodities offer profit opportunities, they also come with volatility, leverage risks, and geopolitical uncertainties. Understanding these factors and employing sound risk management strategies can help investors navigate the commodity markets effectively and make informed investment decisions.
Commodities ETFs by GraniteShares
| Product name | Ticker |
|---|---|
| US | |
Disclaimer
IMPORTANT INFORMATION
Investors should consider the investment objectives, risks, charges and expenses carefully before investing. For a prospectus or summary prospectus with this and other information about the Fund, please call (844) 476 8747, email info@graniteshares.com, or visit the website at www.graniteshares.com. Read the prospectus or summary prospectus carefully before investing.
Shares of the ETFs may be sold throughout the day on the exchange through any brokerage account. Shares are not individually redeem-able, and may only be redeemed directly fro the ETF by Authorized Participants. There can be no assurance that an active trading market for shares of an ETF will develop or be maintained. Shares my trade above or below NAV. Brokerage commissions will apply.
Index performance does not represent the ETF’s performance. It is not possible to invest directly in an index. The funds are distributed by ALPS Distributors, Inc, which is not affiliated with GraniteShares.
You could lose money by investing in the ETFs. There can be no assurance that the investment objective of the Funds will be achieved. None of the Funds should be relied upon as a complete investment program. The investment program of the funds are speculative, entails sub-stantial risks and include asset classes and investment techniques not employed by more traditional mutual funds.
Investments in the ETFs are not bank deposits and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The investment program of the Fund is speculative, entails substantial risks and includes asset classes and investment techniques not employed by more traditional mutual funds. Investing in physical commodities, including through commodity-linked derivative instruments such as Commodity Futures, Commodity Swaps, as well as other commodity-linked instruments, is speculative and can be extremely volatile and may not be suitable for all investors. Market prices of commodities may fluctuate rapidly based on numerous factors, including: changes in supply and demand relationships (whether actual, perceived, anticipated, unanticipated or unrealized); weather; agriculture; trade; domestic and foreign political and economic events and policies; diseases; pestilence; technological developments; currency exchange rate fluctuations; and monetary and other governmental policies, action and inaction. A liquid secondary market may not exist for the types of commodity-linked derivative instruments the Fund buys, which may make it difficult for the Fund to sell them at an acceptable price. The Fund is new with no operating history. As a result, there can be no assurance that the Fund will grow to or maintain an economically viable size, in which case it could ultimately liquidate.
Derivatives may be more sensitive to changes in market conditions and may amplify risks and losses.
“Bloomberg®” and “Bloomberg Commodity Index”SM are service marks of Bloomberg Finance L.P. and its affiliates (collectively, “Bloomberg”) and have been licensed for use for certain purposes by GraniteShares Inc. Neither Bloomberg nor UBS Securities LLC and its affiliates (collectively, “UBS”) are affiliated with GraniteShares Inc., and Bloomberg and UBS do not approve, endorse, review, or recommend any GraniteShares ETF. Neither Bloomberg nor UBS guarantees the timeliness, accurateness, or completeness of any data or information relating to Bloomberg Commodity IndexSM.
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GraniteShares Inc. and ALPS Distributors, Inc, is not affiliated with any other referenced entity above.
