A commodity is not a word that is frequently used in speech. Yes, you might have read news articles in a commodity conversation regarding the price of gold and oil. It may appear glamorous, daunting, and the domain of financial gurus to invest in commodities markets, but if you so want, it is actually a viable option for both novice and seasoned investors.

If you don’t truly work in finance, you’ve likely only heard the phrase a few times on the news. The truth is that just because you may not currently be familiar with all of the details of commodity investment, doesn’t mean that it is difficult to understand; rather the opposite, in fact. Commodity investing can be simple and successful with a little forethought and research.

What Is a Commodity?

Raw materials and other essential things are referred to as commodities because they can be used interchangeably with other items of the same kind. Every economy depends on commodities, which are also utilized in the production of the majority of goods. Commodities like oil, gold, corn, cotton, and meat are examples.

Usually, a number of suppliers manufacture commodities in large quantities with quality that is quite consistent. A commodity generally sells at the same price regardless of who produced it. For businesses that buy or sell commodities, this is crucial. Additionally, it implies that uniform quantities of goods can be exchanged on stock markets, with price fluctuations dependent on supply and demand.

Why Invest in Commodities?

Commodity investing has a number of possible benefits and drawbacks. Because they are influenced by different causes, commodities prices frequently differ from the prices of other financial assets like stocks. While commodities can help investors diversify their investments, their prices can be unpredictable and occasionally lag behind the stock market.

3 Types of Commodities

Agriculture, energy, and metals are the three primary divisions of commodities. Crops and livestock are two other subcategories of agriculture that can occasionally be seen.

  • Agricultural – Some of the most significant crops in the world are agricultural commodities, such as corn, wheat, rice, soybeans, canola oil, and sugar. These products are turned into raw ingredients for a huge range of culinary and non-food items. Livestock like hogs and cattle are included in this category as well.
  • Energy – Energy commodities include crude oil, used in transportation and the production of other goods like plastics, natural gas, used for heating and electricity production, and gasoline.
  • Metals – Steel is one type of metal that is utilized to create countless other items, including automobiles, machines, appliances, and many others. The group also contains precious metals like gold, silver, and platinum as well as less commonly used materials like aluminum and copper.

Some Benefits of Investment in Commodity

  • Potential Revenue – Individual commodity prices can change depending on a number of variables, including supply and demand, inflation, and the state of the general economy. Large-scale international infrastructure projects have raised demand in recent years, which has in turn affected commodities prices. Due to the favorable effect on corporate stocks, allied industries have seen an increase in commodity prices.
  • Diversified Investment Portfolio – A diversified portfolio indicates the best asset allocation strategy. In order to have a varied financial portfolio, commodities are essential. If you already invest in stocks and bonds, it is advised to do so along with raw material investments.
  • Effective Returns – When there is a lot of liquidity, commodities as investments are riskier. Either a significant profit or significant loss is likely for businesses. Therefore, if you invest wisely, you can reap significant rewards from the commodity market.
  • Cushioning against market fluctuations – If the value of the rupees drops, you will need more cash to purchase commodities from different regions of the world. Price increases for commodities are mostly caused by investors selling their equities and bonds to invest in commodities during periods of inflation. So, the only commodities that will be profitable for you are those that will serve as a hedge against market risks.
  • Potential Hedge Against Inflation – Commodity prices can rise as a result of inflation, which has the power to change bond and stock prices. Despite the fact that commodities have performed well during high inflation periods, investors should be aware that they are far more volatile than other kinds of investments.