What are Commodities?
Commodities are basic goods which are the foundation of the global economy. This includes things we take out the ground, or things we grow or raise in order to go on and serve some other purpose in the global economy. Examples of commodities include fossil fuels, metals and agricultural produce.
What makes a commodity a commodity?
All units of a commodity are virtually indistinguishable from each other: a kilogram of copper is for the most part the same as any other kilogram of copper. Because of this interchangeability, commodities can be traded globally, as long as they meet a minimum standard.
Commodities are usually an input used in producing other goods or serve another purpose: think of oil being used to make plastic or refined for use as a fuel. Or lithium being used to create the battery which probably powers the device you’re looking at right now!
How can you invest in commodities?
Institutional investors usually gain exposure to commodities by trading on the spot or derivatives markets. The quantities traded on these markets tend to be large, making it difficult for the average retail investor to access.
Don’t worry - there are other options available to us individual investors:
You can invest in commodity stocks such as oil and mining companies (depending on how you might feel about the ethics of that, of course)
There are also commodity strategy funds available from some of the worlds biggest asset managers, which take care of investing in commodities on your behalf, so you don’t need to research and form a view on a host of commodity markets. As always, read the fund’s KIID before investing as some funds invest directly in physical commodities whereas others invest in commodity stocks.
Why do I need to invest in commodities, anyway?
While it isn’t an absolute must to own, some exposure to commodities in your portfolio can be a helpful way to diversify away from traditional asset classes such as stocks and bonds. Something worth considering!
Please know, the value of investments can go up as well as down and you may receive back less than your original investment, meaning, when investing your capital is at risk.
Disclaimer: At Evarvest we believe in making investing and investment education more accessible, but we don’t provide investment advice and individual investors should make their own decisions. While we try our best, we cannot ensure the accuracy of the information we provide.
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