In this article, we discussed the meaning of commodities, the types, the benefits, we also talked about the ways of investing in commodities.
Definition
Commodities are raw materials used to create the products consumers buy, from food to furniture, to gasoline or petrol. Commodities include agricultural products such as wheat and cattle, energy products such as oil and natural gas, and metals such as gold, silver, and aluminum.
A commodity is any useful or valuable thing, especially something that is bought and sold. Grain, coffee, and precious metals are all commodities. The word commodity is usually used in an economic context, as in importing commodities from other countries or trading in the stocks and commodities markets.
Types of Commodities
Agricultural
Agricultural commodities are those such as coffee, corn – an important source of food for livestock and humans, sugar, soybeans – whose oil is used for making crackers, breads, cakes, and cookies, and wheat – one of the most important food crops in the world.
Energy
Energy commodities include crude oil used in transportation activities and production of plastics, natural gas used for electricity generation, and gasoline, which powers light-duty trucks and cars.
Metals
Metals include gold, used in making jewelry; silver, also used for jewelry and many other industrial uses as well; and copper, the most widely used form of electrical wiring.
Benefits of Investment in Commodity
Potential Returns
There are factors which make the prices of individual commodity alter such as supply and demand, inflation and the overall health of the economy. In the past few years, demand has increased due to massive global infrastructure projects in turn influencing commodity prices. The related industries have observed a rise in commodity prices because of the positive impact on the company stocks.
Potential Hedge Against Inflation
Inflation – which is capable of changing stock values and bonds, can result in price hike for the commodities. Although in the periods of high inflation commodities have shown strong performance, investors should understand that the commodities are much more volatile compared to other types of investments.
Diversified Investment Portfolio
Having a diversified portfolio means an ideal asset allocation plan. Commodities play a vital role in having a diversified investment portfolio. It is suggested to invest in raw materials at once if you are already investing in stocks and bonds.
Profitable Returns
If the liquidity is huge the commodities are riskier in form of investments. Companies are likely to have either a huge profit or they can experience heavy losses. Which means If you make investments right you can make huge profits in the commodity market.
Best bet for price safety and surety
At the time of inflation when the economy dips, prices of it usually go up; in turn the prices of raw material are also supposed to have a rise in prices. Hence there will be a few commodities which can bring you profit.
Transparency in the Process
Trading is supposed to be a transparent process in commodity futures. The action will lead you to have a fair price which in turn is controlled by large scale participation. In turn it reflects different outlooks and perspectives of a wider section of people who deal with it.
How to Invest in Commodities
Physical Ownership
Owning physical commodities mainly applies to precious metals. Gold and silver are two of the best-known commodities that are used as physical stores of value. Investors can purchase these metals formed into bullion, with standard size and purity. Bullion bars are the closest in value to the melt price (the market price for the metal if you melted it down).
Futures Contracts
Futures contracts are direct plays on commodity prices. Futures contracts are an agreement to buy or sell a specified amount of a commodity at a specified price and date in the future. Investors use leveraged margin accounts to allow them to take larger positions with their existing capital. In the vast majority of trades, the contracts are cash settled.
Individual Securities
Individual securities related to commodity processing or production can be accessed through a regular brokerage account. You can find the companies using a stock screener and looking for basic materials or energy sector companies. Investors looking for commodity exposure through company shares generally have to gain some industry-specific knowledge to be successful. For example, extraction companies in mining and energy have well-developed systems for possibility studies on reserves that, in turn, drive the stock value.
Conclusion
Commodities are basic goods and materials that are widely used and are not meaningfully differentiated from one another. Examples of commodities include barrels of oils, bushels of wheat, or megawatt-hours of electricity.it have long been an important part of commerce, but in recent decades, commodities trading has become increasingly standardized.