Making money from commodities comes down to supply and demand, which is why you’ve likely been hearing a lot of buzz about it since the pandemic. Commodities like gold surged in 2020, increasing over 16% in August alone.
That said, buying commodities is a riskier trading method than others since the success of your trade depends on the ever-changing global economics and supply chains.
However, diversification is what makes the trading world go around. So, if you’d like to try your hand at trading commodities, we’re here to make the journey easier for you.
Read on to learn about where to buy commodities so that you can (hopefully!) be on your way to a commodities success story.
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Types of Commodities You Can Purchase
Before we talk about where to buy commodities, you first need to determine the type of commodity you want to purchase.
The most significant commodity sectors include:
- Energy
- Metal
- Meat
- Agriculture
There are hundreds of commodities you can purchase within these categories. So, once you choose the sector you’re interested in, you’ll need to narrow down your preference.
Some commonly traded commodities include brent crude oil, steel, soybeans, corn, and gold. From there, it’s up to you to do your research so you can move on to deciding where you want to purchase your commodity.
The Best Places to Buy Commodities
Commodities are fixed assets, but the good news is that you can use many places and methods to buy them.
Get your investing money ready because, by the time you finish this, we bet you’ll be eager to purchase your first commodity.
1. The Stock Market
If you’re new to trading commodities but not to trading itself and wonder where to buy commodities, the stock market is an excellent place to start.
The advantages of buying commodities on the stock market include:
- You’ll have access to tons of information on the company you’re thinking about investing in.
- The stock market is highly liquid, so it’s unlikely you’ll get stuck waiting to buy or sell your commodity stock.
- You don’t have to set up a separate account for trading commodities if you already have a brokerage account.
That said, buying commodities on the stock market isn’t all sunshine and roses.
For starters, you’ll be purchasing a stock with a company that works with the commodity you’re interested in—you won’t be buying the commodity itself.
So, that means that your trade may be susceptible to company events unrelated to your commodity. That may be good if the company does something such as making efforts to become more environmentally friendly. However, other situations, such as a scandal, could hurt your investment.
Nevertheless, an advantage of investing in commodities through the stock market is that stocks tend to experience less severe drops than futures contracts.
2. Futures Contracts
Futures contracts are the most popular way to buy commodities, but we put them second on this list because they’re a riskier choice for new investors.
To set up a futures contract, you’ll need to decide whether you want to buy or sell the commodities asset you’re trading and determine, or guess, the future price of that asset. If it sounds a bit like gambling, that’s how some people see it.
However, the more experience you gain in the commodities field, the less it becomes a guessing game, and the more it evolves into an educated guess on future prices.
Using futures contracts to buy commodities is an excellent choice for speculative investors and people or businesses who use the commodity they set up a futures contract with.
Because you’ll potentially be having a direct influence on the future price of a commodity, coupled with the risk this type of trading involves, there’s a higher chance of earning more money—and losing more money—than any of the other purchasing methods we’re covering here.
To be fair, it’s worth mentioning that you can trade options on commodity stocks, which opens the opportunity for more significant gains—and losses—much like commodity futures contracts.
3. Mutual Funds
You’re likely no stranger to the term mutual funds. They’re an old-school investment that finance experts deem safer than trading options and futures contracts.
While there’s always risk in any investment, you’ll have access to a professional brokerage that will directly manage your money within the commodity sector you invest in. Like stocks, you can’t purchase a commodity fund directly with mutual funds.
Instead, you’ll be investing in companies that work in a specific commodity sector. For this reason, you need to be aware that your mutual fund’s success depends not only on the commodity increasing in value but also on positive, non-commodity-related news of that company.
Suppose you want to expose yourself to more risk (and potentially more gain) while still enjoying the benefits of a professionally managed mutual fund. In that case, there are a few mutual funds that deal with futures contracts.
One of the most significant downsides to mutual funds is the fees they incur. Since financial professionals actively manage the fund, the management fees are often some of the highest in the industry. Furthermore, you should check if the fund you want to invest in requires an additional sales charge.
Although mutual funds no doubt have their place when you’re working on deciding where to buy commodities, a lower fee choice to consider is dipping your toes in the commodities world via ETFs and ENTs.
4. ETFs and ENTs
ETFs and ENTs, which stand for “Exchange-Traded Funds” and “Exchange-Traded Notes,” are other places where you can buy commodities. If you’re risk-averse, investing in commodities via ETFs or ENTs is an excellent choice.
These trading methods work similarly to purchasing a stock, and most brokerage companies offer them to their customers. The difference is that instead of buying one stock, ETFs and ENTs group many similar stocks within various commodity sectors.
Therefore, bad non-commodity-related news for a company won’t have the same potentially devastating impact on your ETF or ENT investment compared to owning that single stock. Similarly, positive information from one company won’t have as big of a positive impact.
However, you can expect your commodity ETF or ENT to follow the general trend of the market of the commodity you invest in. Therefore, it’s a relatively safer investment in a trading sector that often comes with higher risks.
The difference between ETFs and ENTs is that issuers always back ENTs and imitate a commodity’s price fluctuations. In contrast, ETFs use futures contracts to follow the price of a commodity. Of the two, ENTs carry a greater risk than ETFs because they’re unsecured debt.
5. Commodity Pools
Commodity pools operate similar to mutual funds but on a smaller, more personal level.
The way it works is that a CPO (commodity pool operator), who is either an individual or a limited partnership, finds investors interested in investing in their commodity pool.
The CPO then uses the money to invest in options and futures contracts. If you need a refresher, those are the riskiest but potentially most lucrative places to buy commodities.
It is crucial to choose to invest in a commodity pool led by a CPO that you trust. To identify a legit commodity pool, look for one that has a CPO who collaborates with a CTA (commodity trading advisor).
Commodity pools are highly regulated investing vessels. That’s good news for you, as it means you’ll receive periodic account statements. In addition, your CPO will send you an annual financial report.
CPOs must keep a detailed account of every transaction made and received, so you can ask for this information to better understand how the pool operates.
The two biggest reasons investors choose to participate in a commodity pool are due to the CTA and a more significant potential to profit than trading commodities as an individual investor.
Getting Back to the Basics: Brokerages
If you’re brand new to trading, congratulations! It’s never too late to get started on building your financial future.
To buy commodities through many of the ways we’ve discussed above, you have to open an account with a brokerage company.
Some of the most prominent brokerage names in the industry include:
- Fidelity Investments
- Charles Schwab
- TD Ameritrade
- E*TRADE
- Vanguard
Fees are a major determining factor for investors that are researching brokerage companies. So, make sure to read the fine print so that you understand when and how much they’ll charge you for commissions and account fees.
Some brokerage companies also have account minimums, while others cater to newer investors, offering a wealth of free educational trading tools.
Are You Ready to Buy Commodities?
Learning about where to buy commodities is a big step in your journey to becoming a commodities investor. Our recommendation is to start with a small amount of capital until you become confident in your commodities trading capabilities.
Staying on top of current events is also crucial. Whether you want to play it safer or open up a futures contract, methods are available for traders of all levels.