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How to buy commodities

Commodities can generate high returns and add diversification to a portfolio. In this beginner-friendly guide, learn how to buy commodities.

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Updated: Jan 21, 2022

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This page teaches you how to buy commodities. We explain what commodities are, the different types available, and the range of methods you can use to buy them. Scroll down to learn more.

Compare the best platforms to buy commodities

If you’re looking to buy or trade commodities, the first thing you’ll need to do is register with an online broker. Listed below, our experts have selected some of the top-rated platforms around offering easy access to a whole range of commodities. Simply click the links to register in a few minutes.

What are commodities?

Commodities are tangible assets, natural resources, or agricultural products that are used in human activity. Many are naturally occurring such as gold, oil, and coffee, while some are processed goods such as orange juice and chemicals. Commodities impact the global economy and have a broad range of uses including food production, energy, and transport.

They are popular among both long term investors and short term traders and are fungible assets, which means they are freely interchangeable. An ounce of gold mined in Australia is worth the same as an ounce of gold mined in Brazil for example.

What commodities can I buy?

There are different kinds of commodities and all of them are available to buy, but only precious metals are a realistic option to physically purchase for investment.

Commodities generally fall into two categories; hard and soft. Hard commodities include assets that are mined from the earth like gold and silver, while soft commodities are grown and harvested including wheat and corn. Below, we’ve listed the main commodity asset classes and explained what they include.

Agriculture. These are commodities grown for human consumption and include things like wheat, corn, soybeans, sugar, coffee, and cocoa.
Energy. Commodities belonging to this asset class are extracted and used for energy production. The most popular include, oil, natural gas, heating oil, and coal.
Metals. Assets including gold, silver, platinum, copper, and lithium are known as metal commodities. They are mined from the earth and have a range of uses.

Cheap commodities to buy

Commodities vary in price due to a number of factors and some are considerably cheaper than others. For example, the difference in price between one ounce of gold and silver is vast. Below we’ve listed a handful of cheap commodities to help get you started investing.

Silver

Precious metals are one of the best ways to diversify your portfolio while also acting as a hedge against inflation. Two of the most common metals are gold and silver. Gold is considerably more expensive than silver, making silver a cheap way to gain exposure to precious metals. Silver has a range of uses including in jewelry, electronic components, and medical products. Its diverse and in-demand uses make silver a cheap commodity to buy.

Copper

Another cheap commodity is copper. Like silver, it is a metal and gives investors portfolio diversification and a hedge against inflation. Copper isn’t classed as a precious metal but is known as a base metal. It has multiple uses including water pipes but is predominantly used in electrical wiring. It’s one of the most imported commodities by China making it an in-demand asset. Investing in copper is an easy way to access a cheap commodity.

Cotton

Cotton is one of the most versatile and widely used agricultural commodities and is very cheap in comparison to other assets in the agricultural sector. Investors in cotton also have the added benefit of correlated price movements with oil. As oil is much more expensive, buying cotton is a good way to gain exposure to two markets for as cheap as possible. Like all commodities, cotton offers an easy way to diversify a portfolio, while protecting against inflation.

Trading or investing in commodities

Rather than buying physical commodities, trading or investing in stocks are the most common ways to speculate on their price. Investing in and trading commodities offers a more practical approach for most people.

The different ways to invest and trade

There are a lot of ways in which you can trade or invest in commodities and below we’ve highlighted the main ones.

CFDs. By using an online broker platform you are able to speculate on the short term price of a range of commodities using a contract for differences. CFDs are a contract between the buyer and seller and are especially popular with retail traders due to the high margin offered by brokers. One crucial thing to be aware of is when using a CFD, you do not own the underlying asset.
Futures. Another way to speculate on short term commodity price movements is to use futures contracts. These are simply an agreement to make a trade in the future at a pre-agreed price. Futures trading requires an in-depth understanding of what impacts the market and are best suited to experienced investors and traders.
Options. Similar to futures contracts above, options are a way to speculate on future prices movements however differ in their mechanics. Options represent a right to buy or sell at a future date, rather than an obligation as with futures. They can be used to mitigate risk, however are best suited to investors or traders with detailed knowledge of how they work.
Stocks. One of the easiest ways to invest in commodities is by buying individual stocks that have exposure to a particular industry. For example, rather than investing directly into the oil market, you could purchase shares in well-known companies such as BP or Shell. It’s possible to gain exposure to a range of commodities through individual stocks including, gold, silver, and agricultural businesses.
ETFs. For long term investors wanting to get exposure to a certain commodity, ETFs offer the easiest way forward. Exchange-traded funds are funds that track the performance of a particular sector or industry. ETFs work in a similar way to individual stocks, in that investors can buy shares in the fund. It is possible to invest in ETFs covering a broad range of commodities including, gold, oil, and agriculture.
Mutual funds. Similar to ETFs, mutual funds allow investors to buy shares in them. However, their main difference is that a professional fund manager has control over what the fund buys and sells. Mutual funds cover a wide range of sectors and industries and invest mainly in individual stocks.

Which method is right for me?

There are three main methods of speculating on the price of commodities and depending on your goals, one may be more suitable than the others. Below, we’ve explained each approach.

Buying. It is possible to buy physical commodities, although it’s realistically only feasible to buy metals. Using this approach has added costs such as storage fees. Buying gold and silver bullion is what many investors who want to own an asset usually do. This method is most suited to someone with a long term goal who is unfazed by market volatility.
Trading. For anyone looking to speculate on short term movements in commodities, trading is the most suitable method. Trading requires a lot of knowledge and expertise although offers the ability to make money very quickly.
Investing. If you have a longer-term outlook or are using commodities as a way to hedge against inflation, then investing is the way forward. As we’ve explained above, there is a range of investment options available and it often offers a hands-off approach.

How to buy commodity stocks

The easiest way to start investing in commodities is to buy stocks in the industry you’re interested in. Below is a step-by-step guide on how to buy commodity stocks.

Find a broker. The first step is to find a broker that offers a variety of stocks in the industry you want to invest in. Choosing one with an easy to use platform and low fees will also be helpful while making your investments.
Create an account and deposit money. Once you’ve chosen your broker, you’ll need to register an online account with them and deposit money. Most brokers offer many different ways to deposit.
Choose which stocks to buy. Conducting balanced fundamental analysis of the industry and stocks you want to invest in will be the next step to take. Once you know which stock you want to buy, you can use its ticker symbol and find it at your broker.
Decide how much to invest. Having a budget before you purchase a stock is always a good idea. You may want to allocate a small amount of your portfolio to one specific stock. It goes without saying to never risk more than you can afford to lose.
Make the trade. The final step is to buy the stock. After you have found it on your broker account, you simply choose how many shares you want to purchase and click the buy button. Brokers offer different ways to buy, including limit orders and market orders. You can also set a stop loss to protect your investment.

Should I buy commodities now?

It is rarely a bad time to buy commodities and it’s a good idea to include some in a well-balanced portfolio. One of the best times to buy is when inflation is on the rise. Commodities are often used as a way to hedge or protect against inflation as they tend to rise in value at the same time. Whatever you decide to do, you’ll need a top broker before buying. Clicking the button below will take you to our expertly selected platforms.

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Sources & references

Risk disclaimer

Prash Raval

Financial Writer

When not researching stocks or trading, Prash can be found either on the golf course, walking his dog or teaching his son how to kick a… read more.