The focus of this article will be on key considerations when investing in commodities, because it is essential to have a framework for what to do and what not to do to increase the chances of beating the market. It will also focus on introductory and general concepts of investing in commodities, with more specific discussions in the upcoming issues of this series.
As an asset class, investable commodities can be divided into hard commodities and soft commodities. Hard commodities are products extracted or mined and can be further grouped into energy and metals. Examples include crude oil, natural gas, coal and renewable energy; while gold, silver, and iron are examples of investable metal commodities. Soft commodities mainly cover products grown and cultivated. These can be further grouped into agricultural products and livestock. Examples of agricultural products include coffee, soybeans, corn and sugar; while cattle and poultry are examples of livestock.
For most retail investors, it is not practical to buy and sell actual physical commodities, though it is possible. Instead, investors can buy futures contracts, commodity exchange-traded funds (ETFs) or shares of companies whose primary business involves commodities. For commodity futures, the investor buys or sells a commodity at a specific time in the future at an agreed price. Through brokerage firms, retail investors can access and trade their chosen commodities without worrying about their physical delivery, storage or exchange.
