The commodities market involves the trading of raw products and primary materials. Mined materials and agricultural products serve as two examples. The stock market is not wholly separate from the commodities market, as shares in commodities can be purchased in the same manner as other stock. However, stock is not the only way to invest in commodities. Futures contracts and mutual funds serve as two other primary means of commodities investing.
Investing in commodities as well as other stocks will diversify your portfolio, which every investor should strive to do. It makes strong financial sense to invest in raw materials that serve as a staple in numerous industries or in the daily lives of consumers. Corn, for instance, is not likely to lose its popularity in the near future, and gold has remained a strong investment over time. Owning a range of stocks in addition to commodities allows you to assume riskier investments as well, which could lead to greater rewards.
Investing in commodities through a mutual fund provides a low-risk way of investing. In a mutual fund, people pool their money together and allow a financial expert to invest the funds collectively as she sees fit. Meanwhile, investing in commodities through futures contracts means speculating on the price a given commodity will hold in the future, as Peter Sander explains in "101 Things Everyone Should Know about Economics." Futures contracts are agreements to purchase a specific quantity of a commodity in the future at a specified rate. These contracts can be traded on specialized futures markets such as the Chicago Board of Trade.
Even the safest commodities investments carry some risk. Natural disasters, dry seasons, decrease in available resources and changes in international relations may cause the quality or availability of commodities to decline. However, as the economy rebounds from a recession, commodities tend to rise in value before other stocks, according to financial journalist James Picerno in CBS News. Their ability to rebound quickly stems from the fact that these raw materials are central to many finished products as well as people's daily lives.
Commodities investments require just as much research as stock investments in general. Just as with other investments, websites such as CNN Money and the Wall Street Journal provide timely information on changes in the commodities market.
- CBS News: Gold, Oil, and More: Five Rules for Investing in Commodities
- 101 Things Everyone Should Know about Economics; Peter Sander
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