Commodities refer to raw materials, agricultural products, and precious metals traded in international markets. Investing in commodities, on the other hand, is the art of buying and selling these products. These products can be traded physically but are mostly traded virtually in the form of futures contracts.
Today, rising global inflation, international conflicts, and climate change have stirred massive volatility in the commodities market. These raw materials have since become one of the most lucrative financial instruments. But just how do you invest in commodities today?
Read on to learn everything you need to know about investing in commodities, where to invest, how to find the best commodities to invest in, taxation, and everything in between.
How To Invest In Commodities – 5 Quick Steps
Investing in commodities today doesn’t have to be complicated. And if you are looking to jump straight to buying and selling commodities, follow this simplified guide. It will teach you how to invest in commodities in 5 quick steps:
- Step 1: Create An Account With A Regulated Broker – Start by finding the best commodities broker – like eToro or Capital.com – and creating a trader account with them. The registration process for most of these brokerages is quick and straightforward. They only ask basic personal questions and probably ask about your income status and trading experience.
- Step 2: Verify Your Identity – Note that regulated trading platforms are required to take their clients through identity verification processes. Your preferred broker will, therefore, ask that you furnish them with a copy of your government-issued identification document such as an ID, passport, or driver’s license.
- Step 3: Deposit Funds – Once the account is approved, make a deposit. Note that different brokerages maintain minimum deposit/trading minimums. They also support a widely varying range of payment options. Therefore, confirm that your broker supports your preferred deposit/withdrawal method before registering a commodity trader account with them.
- Step 4: Search For Commodities To Invest In – Check the commodities supported by your preferred brokerage and settle with the one that you wish to invest in. You may also consider engaging a finance expert for guidance on how to approach commodities trading or advice on the best commodities to trade.
- Step 5: Start Investing In Commodities – After identifying the commodity to invest in, proceed to place a buy order.
That’s it! By following these easy steps, you can invest in commodities in less than 10 minutes.
81% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
Where To Invest In Commodities In 2023
After deciding on the best commodity to invest in, the second most important decision you have to make is choosing the best commodity broker. It has a direct impact on your trading experience and the profitability of your investment.
There are a few critical considerations that you have to put into account when finding the best commodity broker. These include their reliability, number of listed commodities, user-friendliness, deposit/trading minimums, transaction processing speeds, trading fees/commissions, availability of a demo account, and supported deposit/withdrawal methods.
To help you arrive at the best decision with regard to commodity trading platforms, we introduce you to what we consider the best commodity traders today. Here is a brief overview outlining how each work:
Capital.com – Multi-Regulated Broker Offering Zero Commission On Trades
Several factors make Capital.com one of the best places to commodity CFDs today. The first is the fact that it provides traders with an extensive range of 20+ commodities – all of which can be margin traded as CFDs. These include agricultural, energy, metals, and environmental commodities. Additionally, it doesn’t maintain a broker commission for these trades, only highly variable but competitive spreads.
You need to deposit a minimum of $20 to start trading on Capitla.com – and this can be made via a wide range of supported payment options. And when trading commodity CFDs on Capital.com, you will have access to leverages of up to 1:10. Note, however, margined trades that remain open at the end of the day are subjected to a variable overnight fee.
Other factors that make Capital.com the best brokerage for commodity trading include the fact that it maintains a smooth client onboarding process. It also maintains one of the most intuitive trading interfaces. It is a multi-platform brokerage –available on the web and mobile app and integrates a wide range of research, analysis, and trading tools into its trading platforms.
But even more importantly, the Capital.com trading platform is AI-powered. This feature helps you eliminate bias when commodity trading by helping you understand your trading behaviour.
Pros of Commodity Trading on Capital.com:
- ✅ No deposit/withdrawal fees: The broker supports a wide range of payment options and doesn’t charge deposit/withdrawal processing fees.
- ✅ Multi-regulated: Capital.com has a solid reputation for reliability and is also regulated by virtually all the top-tier financial regulators in the world – from FCA, ASIC, FSA, and CySEC.
- ✅ Excellent support: Capital.com maintains a readily available and highly responsive customer support team online and on the phone.
- ✅ Beginner-friendly: The commodity broker runs one of the most beginner-friendly trading platforms – both the app and web trader.
Cons of Commodity Trading on Capital.com:
- ❌ Not available in the US: Capital.com brokerage and its commodity trading services are not available to US residents.
- ❌ Only CFD trading platform: Capital.com is a pure CFD trading platform. You can, therefore, never own the physical products you buy and sell on the platform.
81% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
eToro – Multi-regulated Commodities Broker with Zero commission and Social Trading
eToro is arguably the most popular and most regulated commodity broker in the world today. We must, however, observe that eToro is a multi-asset platform broker offering both CFDs and real financial instruments. The likes of commodities and indices are offered as CFD-only products, but traders from selected countries get to trade actual shares and cryptos.
Today, eToro gives you access to 23 commodity CFDs ranging from agricultural, energy, metal, and environmental products. To start trading any of these, you only need to create a trader account with eToro and make a deposit. You get to trade commodities with leverages of up 1:10 (1:20 for Gold), and the minimum trade amount is $1000 (including leverage).
Like most other brokerages, eToro doesn’t charge broker commissions for any of the financial instruments traded on its platform. You will only have variable but highly competitive spreads for the commodities and equally variable but competitive overnight fees for margined trades that remain open overnight.
It is interesting to note that eToro is currently available in 100+ countries, where it has attracted more than 29 million users. These are drawn not just by its reliability, reputation, and competitive fees but also by its copy and social trading features. Social trading provides a platform where both beginner and expert commodity traders can congregate, interact and learn from one another.
Copy trading, on the other hand, lets beginners earn passively by copying winning trade strategies of highly successful pro traders. And for every copied trade, the pro trader earns a commission of 20% of the profits made. And if you are looking to diversify your commodity trades, you can use copy the smart portfolios of highly successful traders.
Pros of Trading Commodities on eToro:
- ✅ Passive income generation: Copy trading creates a passive income-generating tool for both beginners and expert traders using the platform.
- ✅ Beginner-friendly: eToro maintains a smooth and straightforward client onboarding process and a highly intuitive trading interface that appeals to both beginner and expert traders.
- ✅ Large selection of commodities: eToro maintains one of the largest ranges of tradable commodities, which are complemented by smart portfolios.
- ✅ Wide range of funding methods: The commodity broker supports a wide range of deposit and withdrawal methods, including eWallets like PayPal and Skrill, bank wire and ACH checks, credit cards, and debit cards.
Cons of Commodity Trading on eToro:
- ❌ Withdrawal fees: eToro charges a fixed withdrawal fee of $5, and the minimum you withdraw here is $30.
- ❌ One base currency: eToro has only one base currency – the USD – and all non-USD deposits are charged a 2% currency conversion fee.
81% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
How Does Investing In Commodities Work?
Commodities trading is simply the art of buying and selling commodities. And there are five primary ways of investing in commodities. These include:
Investing in physical commodities
This strategy is preferred by long-term commodity traders and involves buying and holding physical commodities. Here you are simply buying and holding on to the physical commodity, e.g., bullion of such precious metals as Gold/silver/palladium, herds of cattle, ears of corn, bushels of wheat, or tons of crude oil. It is not quite popular because of the many and often high overhead costs involved in storing and securing the commodities.
Invest in commodities futures
This is one of the more popular forms of commodity trading. It involves buying and selling futures contracts for different commodities and is facilitated by commodities exchanges like the Chicago Mercantile Exchange (CME). It essentially involves betting on the future price of commodities.
These futures can also be traded online in the form of CFDs offered by the likes of Capital.com, eToro, and other online commodity brokers. You don’t get to own the physical commodity when investing in commodity CFDs.
Invest in physical commodity ETFs
If you are looking to invest in physical commodities but without the hustle of having them in your possession, you could simply result to investing in ETFs for physical commodities. These could be ETFs for a single commodity or a diversified portfolio.
Invest in stocks for commodity producers
Investing in stocks for companies dealing in commodities is one of the most common forms of indirect investment into commodities. It lets you enjoy the full advantages of a commodity’s price action without necessarily owning either product physically or virtually.
Here is an example; in place of buying Gold, you could choose to invest in stocks for gold mining or processing companies. And instead of trading crude oil, you may invest in stocks for oil drilling or distribution companies.
Invest in commodity ETFs/Mutual funds
Investing in commodity ETFs and mutual funds is yet another popular way of trading commodities indirectly. It is similar to investing or trading stocks for a commodity-producing company, with the only exception being that ETFs give you access to a wider range of indirect stocks.
It comes in handy for anyone looking to diversify their investment to different commodities in place of focusing on just one product or producing company.
81% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
How To Find The Best Commodities To Invest In
The answer to how to invest in commodities and even how to find the best commodity to invest in starts with self-reflection. You need to start by assessing your risk tolerance, confirming that you have enough to open the first position, confirming that you are adequately experienced and that you have access to adequate analysis, research, and risk management tools.
Then follow these steps when checking the viability of the commodity as an investment:
Volatility
Volatility is a double-edged sword when commodity trading. You only make money when the price moves, but it can also deal your investment a death blow if it is erratic. It is, therefore, important that you avoid commodities with unpredictable price action.
Liquidity
You will also want to only trade or invest in commodities that are in high demand and post sufficient trading volumes on all trading platforms. The last thing you need is to be left holding an unpopular commodity that no one wants to buy.
Economic moat
Competitive edge is as important to commodity investing as it is to stock trading. It is important that your preferred commodity have a competitive edge over its peers. Also, confirm that the commodity has the ability to sustain all it needs to sustain this competitive edge moving into the future.
5 Best Commodities To Watch Right Now
When the pandemic hit in 2020, the ensuing lockdowns disrupted the global supply chain and dented the commodities market. And before the markets recovered fully from this, Russia invaded Ukraine, causing a huge disruption to the commodities market. This saw most commodities, especially energies and some non-energy commodities, post record-setting volatilities in the first half of 2023. The World Bank even forecasts the price of energies and non-energies may rally by as much as 50% and 20% - respectively – before the end of 2023.
These sentiments inform our choices of the best commodities to invest in 2023, and they include:
Gold
Gold has, for the longest time, served as the safe haven for most investors during times of economic turmoil and high inflation. Today, the tension in world politics has disrupted commodity markets and sent inflation rates for most countries skyrocketing.
There even is a simmering realization that the world economy is headed for recession. All these are expected to increase the demand for gold and send its prices skyrocketing, which makes it a must-watch for every future-focused commodity investor.
Crude Oil
Russia is the second largest exporter of crude oil – the raw material for gasoline, fuels, and plastics. Therefore, when Russia invaded Ukraine, there was widespread panic about reduced demand for the all-important commodity, and this sent Brent Crude oil to record highs of $126 per barrel.
Today, however, the price has stabilized around $85 and was expected to go down further as the EU worked on a price cap for Russian oil. However, the recent agreement by OPEC+ countries to cut supply by more than 2 million barrels per day is expected to push the commodity’s price back to the early 2023 highs.
Wheat
Russia and Ukraine are the 1st and 5th largest wheat exporters in the world today. It was, therefore, inevitable that a conflict between the two countries and a compromised supply chain would have devastating effects on global wheat prices.
By mid-May 2023, Wheat prices had rallied by more than 45% to hit an all-time high of $1350 a bushel. Today, however, it has dropped to around $900, but experts warn that a sustained Russia-Ukraine conflict and accelerated global warming are expected to push its prices higher up.
Natural Gas
Again, Russia is the largest exporter of natural gas, much of which is directed to European countries. But several factors have slowed down the natural gas supply, which is expected to rally the demand and, subsequently, the price of the all-important raw material.
First was the Russia-Ukraine war, followed by the most recent sabotage of the Nord Stream 1 and 2 natural gas pipelines. In the first few months of the war, natural gas prices rallied by more than 300%, and now that supply has stopped altogether, experts warn that natural gas prices could rise to 2005 levels.
Palladium
Palladium is one of the rarest precious metals with widespread use cases in the industrial, medicine, and jewelry industries. It is thirty times rarer than Gold, and we believe it to be a must-watch for any commodity investor because its price has been on a sustained uptrend.
From trading at an average price of $175 per troy ounce in 2020, palladium hit an all-time high of $3440 in March 2023. Note that in addition to its scarce supply, much of the palladium production is handed by Russian companies. This implies that a sustained Russia-Ukraine conflict will have a significant impact on its future price.
81% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
Are Commodities A Good Investment?
Yes, commodities are a good investment and one of the preferred financial instruments by experienced traders. They are also good because they are a profitable investment.
In the 12 months leading to August 2023, for instance, commodities measured by the Dow Jones Commodity Index outperformed the all-popular S&P 500 Index – delivering a total return of 27.5% against S&P’s -3%.
Here are more reasons to invest in commodities today
Hedge against inflation
You may want to invest in commodities as a hedge against inflation. Some, like Gold, have a positive correlation to inflation – rising when inflation rises – which makes them the best investment vehicles to help preserve your capital during periods of uncontrolled inflation.
Portfolio diversification
You may also want to invest in commodities as a means of diversifying your portfolio. In fact, some finance and investing experts like Craig Turner – a senior commodities broker – advices investors to convert up to 20% of their portfolio to commodities.
Additional income stream
The majority of commodities have posted serious value gains over the last few months, with the likes of Palladium rallying by more than 100% in the first quarter of 2023. Commodity investing is, therefore, good for anyone looking to tap into extra income generation streams.
What Are The Risks Of Investing In Commodities?
Commodities have a higher risk profile than most other tradeable financial instruments. They are riskier than such popular tradable instruments as shares, bonds, and ETFs but less risky than such other tradable options as crypto.
Here are some of the risks associated with investing in commodities today:
Volatility risks: Commodities are subject to volatility and different market risks. Their prices have a tendency to change rapidly and at highly unpredictable rates.
Liquidity risks: Some commodities aren’t as easy to dispose of, especially in times of economic turmoil and you risk holding onto a lowly demanded product that you can’t dispose of without severely denting your investment.
Political instability: Political instability and equally disruptive social events have a significant impact on commodity markets. A case in point is the pandemic that wrecked the market by disrupting the supply chain or the ongoing Russia-Ukraine crisis that sent energy costs to record highs.
Are Commodities Taxed?
Yes, incomes from commodity trading and investing will be subject to tax in most jurisdictions. In most cases, it will be treated as capital income and subjected to a capital gains tax. Note, however, that taxation laws vary from one country to another.
In the US, for instance, commodity investments like precious metal IRAs attract different tax advantages. Similarly, in the UK, commodity investments made via ISA accounts – a stock investment into a commodity-producing company – will also carry preferential tax treatment.
Commodities vs Cryptos – Which Is The Better Investment?
Commodities are great investments for anyone looking to diversify their investment. Some, especially precious metals like Gold, come in handy during periods of market turmoil by serving as a hedge against inflation and market downturn. They, however, aren’t the best long-term investment.
But if you are looking for outsized gains over an extended period of time, cryptocurrencies blow commodities out of the waters. They are also vastly liquid and carry some of the lowest trading minimums. On such exchanges as eToro, for instance, you can start investing crypto with as little as $10. Not forgetting that there are 21000+ cryptos – creating room for portfolio diversification.
Conclusion – How To Invest In Commodities Today
Investing in commodities doesn’t have to be complicated. And in the how to invest in commodities guide above, we have told you everything you need to know about buying and selling commodities. We started by providing a step-by-step guide to investing commodities, told of the best brokerages to buy commodities, told you how to find the best commodities to trade, and introduced you to what we believe to be the best commodities to buy today.
Want to start investing in commodities right away? Register a commodity trader account with either eToro, verify your identity, make a deposit, and start buying and selling supported commodities.
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81% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
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FAQs About Investing In Commodities
What is the best commodity to invest in today?
In total, there are slightly over 20 commodities available for trading. And in the above guide, we have introduced o what we consider the best commodities to invest in 2023. These include crude oil, natural gas, wheat, gold, and palladium.
What is the best way to invest in commodities?
You are better off investing in commodity ETFs because they are easily accessible, provide diversification, and attract competitive trading fees. We have expounded on commodities ETF investing above and told the four other ways of investing commodities today.
Is trading commodities profitable?
Yes, commodity investing is profitable. To succeed in commodity trading, however, you will need adequate experience, a successful investing strategy, and access to advanced trading, market research, and risk management tools.
How do I start trading commodities?
It is simple. Start by registering a commodity trader account with a reputable broker like eToro or Capital.com, deposit funds therein, and start buying and selling your preferred commodities.