Understanding the Types of Commodities

Invest in all types of commodities with Interactive Brokers.

Investors can make money with various assets, not just stocks and real estate. Expanding to different asset classes helps investors diversify their portfolios and capitalize on more opportunities. Commodities are vital resources that society values, and it is possible to earn money by trading these assets. This guide will explore the different types of commodities, how they compare to the stock market and how to get started.

What are Commodities?

Commodities are essential resources that get exchanged. Some examples of commodities include gas, crops, livestock and precious metals. These assets hold intrinsic value because of how society values them. This intrinsic value, combined with limited supply, helps commodity prices rise with inflation. They are inflation hedges that have attracted many investors.

What is the Commodities Market?

The commodities market is a centralized hub where buyers and sellers exchange commodities. Both groups aim to profit from commodities by selling at higher prices than what they paid for their assets. A third party maintains the commodities market to ensure fair trade between buyers and sellers.

4 Popular Types of Commodities

The commodities market gives individuals exposure to many types of commodities. The type of commodities you trade impacts the liquidity, as it is easier to buy and sell more popular assets. These four popular types of commodities can serve as excellent starting points for your commodities trading journey.

Agriculture Commodities

People need food to survive. Centralized food sources enable the steady production of agricultural crops and livestock. Sugar, coffee and cattle are some of the types of agricultural commodities. The agriculture commodities market helps farmers make profits and secure prices on their assets. The agriculture commodities market enhances worldwide food distribution.

Energy Commodities

People use fuel to get from location to location every time they get in cars. These commutes involve gas, one of the many energy commodities. These commodities aren’t just for transportation. Consumers rely on energy for stoves, heating, drying clothing and other activities. The need for energy will not go away, allowing the asset to act as an inflation hedge.

Metal Commodities

Metal commodities like gold and silver have been integral to civilization for thousands of years. These precious metals are more than just resources that make for fine jewelry. Semiconductors need precious metals to operate. These valuable resources go into many products, from computers and cars to refrigerators and LED bulbs. Gold is also a unit of exchange that has functioned like a currency for thousands of years.

Livestock and Meat Commodities

Livestock and meat commodities are a subsection of agriculture commodities. Cattle and hogs are popular commodities in this sector. These commodities feed the world and are essential for civilizations.

Different Ways to Trade Commodities

Investors who want exposure to commodities have several ways to initiate positions and get started. Here are some of their choices.

• Exchange-traded funds (ETFs): Some ETFs specialize in the commodities market. You can trade these funds and get instant exposure to various commodities.
• Futures: These contracts let you lock in a price for a specific commodity. At the end of the contract, a person holding on to the futures contract can receive the assets at the agreed-upon price. Unlike options contracts, futures contracts involve the physical delivery of the commodity. If you want to hold a cattle futures contract at expiration on closing, make sure you have a ranch or similar place to store the cattle.
• Options: You can use options to get exposure to commodities without having to receive a shipment.
• Direct purchases: You can buy precious metals from a company that sells these resources. These direct purchases allow you to own the commodity yourself instead of trading on an exchange. If you want to sell your commodity, you can list it in a marketplace. 

Commodities vs. the Stock Market

Wondering if you should trade commodities or stocks? There’s no problem with trading both assets, but knowing the differences can help you decide which one to prioritize.

• Supply: Commodities can go through more dramatic supply swings than stocks. Corporations can issue more shares at will, while commodities sellers can’t create new resources out of thin air.
• Inflation: Commodities are inflation hedges that may see their prices go up during inflationary environments. Stocks don’t perform as well during inflation, but some stocks are inflation resistant, depending on the industry.
• Liquidity: Stocks are more liquid than commodities. You can trade stocks within seconds, but it can take days or weeks to exchange some commodities.
• Cash flow: Commodities do not provide cash flow, while some corporations pay quarterly dividends to their shareholders.
• Ownership: You have complete ownership of a commodity, but shares only give you partial ownership of a company.

Brokers for Investing in Commodity Markets

Want to get started with your commodities trading journey? These are some of the top brokers to consider for investing in the commodities market.

Beat Inflation with Commodities Trading

Commodity prices adjust to inflation and can help investors earn higher returns. Commodities also enable you to diversify your holdings across a wider range of asset classes. These assets are essential for society, and chances are that you interact with them every day. Investors should assess their financial goals to determine how to spread their money into commodities and other assets.

Frequently Asked Questions