Stocks are not the only type of investment that people can buy. Some investors also purchase bonds and commodities. For the casual follower of investing, the commodities market is probably the least well understood. The following information explains what commodities are and how one can invest in them.
What Are Commodities?
Commodities, simply put, are goods. These include coffee, gold, oil, corn, and just about everything else that comes out of the ground for which there is a market.
How Do I Invest in Commodities?
One way to invest in commodities is through mutual funds that act as proxies for commodities. An example would be the Vanguard Precious Metals and Mining Fund (VGPMX). Mutual funds can be purchased through your stock broker or at online trading sites like etrade.com and scottrade.com. Commodity mutual funds contain a mix of different commodities, just like any stock mutual fund would do. Another option is investing in exchange-traded funds. These funds duplicate a commodity index, again giving an investor exposure to a number of commodities. Exposure to multiple commodities in a single fund allows an investor to diversify, preventing large losses if a single commodity loses value.
What Happens After I Invest in Commodities?
Consider corn, a regularly traded commodity, as an example. Investing in corn is not as simple as going to the store and buying a few ears of corn. When you buy a commodity you are basically betting on whether the price will go up or down. Unlike stocks, commodities do not actually gain value. A company can create a new product, increase marketing, and become more profitable. Commodities don’t change like that. Although commodities don’t gain value, they do fluctuate wildly in price, and that is where investors can make money. Considering the example of corn again, if massive Midwest flooding threatened to wipe out a large portion of the corn crop, speculators might buy corn, hoping the price goes up because of a drop in supply.
Are Commodities a Good Investment for Me?
In a way, all investing is a bit like gambling. However, the commodities market is even more of a bet. The market is risky because of its rapid and unpredictable price moves. If you are unwilling to lose your entire investment, then investing in commodities is not for you. However, at least some exposure to commodities is considered advisable by investment professionals. The aforementioned commodity mutual funds allow exposure while lowering (but not removing) risk.
