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Although most people think of stocks and bonds as the only investment options, if you’re learning about investing in commodities, you may know that they provide an option for diversifying a portfolio.
Although most people are accustomed to purchasing physical gold or other precious metals, today’s market offers a variety of options ranging from exchange-traded funds (ETFs) to futures contracts.
Steps to Invest in Commodities
- Decide on the type of investment
- Determine the size of your investment
- Choose the right brokerage account
- Buy the merchandise
Investing in commodities can be done in a few simple steps.
1. Decide on the type of investment
Investing in raw materials can be done through several options:
Each type of investment vehicle has different risks, transactions, margin requirements and contractual parameters. Futures contracts require margin and carry additional risk than you might find in a commodities ETF.
Additionally, futures products feature what is known as backwardation and contango, in which current prices may present a discount or premium to the expected spot price in the future. This graphic shows how these concepts manifest.
2. Determine the size of your investment
Determine the amount you want to allocate to the investment, then determine how much of the commodity investment you will purchase based on the price plus fees associated with that particular commodity and investment vehicle.
Keep in mind that leveraged products, such as futures or leveraged funds, will move more than a regularly traded index and will not need as much capital to achieve returns similar. However, due to borrowing costs associated with leverage, they will provide lower returns on a like-for-like basis.
3. Choose the right brokerage account
Depending on the type of investment and vehicle you choose, you may need to open a futures account or a stock market account. Most major brokers, from Fidelity to Schwab, allow trading stocks, ETFs, and mutual funds within the same account.
Futures accounts will require additional setup and are not offered by all brokers. When purchasing physical assets, separate traders buy and sell commodities. Need help selecting the best brokerage account for you? Visit Benzinga’s Picks for the best online brokerage.
4. Buy the product
Once you have created the right investment account with the broker, you can trade online, over the phone, or through one of their remote offices. Commodity ETFs, mutual funds, and commodity supplier companies all trade and act like common stocks.
Futures contracts require a specific exercise date, as well as the choice between lots of different sizes. Physical commodity brokers may have different requirements from broker to broker, similar to purchasing any other physical commodity.
Commodities are becoming so homogenous across suppliers that there can be slight differences in quality, with products differing primarily on price. Most commodity prices are in dollars, which allows some of them to be used as a hedge by investors.
What are raw materials?
Goods are basic goods that can be replaced by other equivalent goods of the same variety. These include:
- Precious metals, such as gold and silver
- Energy such as crude oil and natural gas
- Industrial metals such as copper and tin
- Food products, including wheat and livestock
The chart below shows how there is generally an inverse relationship between the US dollar and the commodities gold and oil. Some products are differentiated based on where they are supplied, such as West Texas Crude and London Brent Crude. Raw materials also play a role in inflation because they are direct input costs for many industries and uses, such as steel for buildings and gas for automobiles.
As the cost of raw materials increases, consumers spend more money to purchase the same amount of raw materials, leaving them with less money to purchase other goods and services.
Create your investment account via the commodities market
Commodities offer a unique way to invest in an asset class other than stocks. Although commodity prices can be relatively stable for long periods of time, technological advances such as hydraulic fracturing for oil can cause rapid changes in the price of a commodity. Additionally, raw materials may be influenced by natural events and supply disruptions.
IQcent is an all-in-one trading platform with the ability to help you trade cryptocurrencies, other digital assets, indices, stocks, commodity investments, and more. This platform is a powerful tool for international traders who want to diversify their portfolios and succeed. easier to access a range of financial markets. Because it provides access to commodities, you can further expand your portfolio beyond the range of other online brokerage account options.
With IQcent you also get:
- A wide range of tradable assets
- High leverage options
- Small minimum order sizes
- Multiple (and instant) financing options
IQcent offers a proprietary trading platform compatible with a range of devices, and there is no software or apps to download. Simple and easy to navigate, experienced or novice traders can jump into IQcent and get started today.
Frequently asked questions
Yes, you can lose money on commodity investments. Like any investment, there is no guarantee of profit and you should only invest money that you are willing to lose.
Investing in commodities can be profitable, but you must research and monitor each position carefully to ensure success.
Yes, any investor can invest in the commodities market. However, you should research these investments and only invest in commodities that you understand.