Commodities

Commodities are the substances used to manufacture the products bought and used by consumers. Oil, gold, and sugar are examples of commodities commonly traded for use in industry.

Commodities Versus Stocks

Whereas the value of a stock is fundamentally determined by a company’s potential earnings growth, commodities are actual, tangible goods. If you buy one hundred shares of stock in a company, you get certificates that stand in place of something abstract. If you buy one hundred barrels of oil, you get one hundred barrels of oil that you can then sell or even use yourself. The perceived value of holding real goods can give you a feeling of security.

Realistically, there will always be a need for commodities of some kind. People need to eat, and machines need fuel. Commodities are a relatively low-risk investment compared to stocks, but their values do change. Commodity value tends to increase with inflation, unlike most other investments. This is because as the price of produced goods increases, so does the cost of the commodities used to produce them. There are, of course, many other factors that influence commodity pricing, differing for each type of commodity. As always, ask your investment planner for advice on commodities investments.

Hard and Soft Commodities

Commodities can be a double-edged sword. While stock certificates may not be tangible goods, they also don’t spoil (unless, of course, the company that issued the stock goes out of business). Perishables like coffee and fruit are called soft commodities. A disadvantage of trading soft commodities is that they allow you very little time to wait for your preferred market price, but the advantage to that is that there’s always someone looking to buy. Trading soft commodities is often fast-paced as a result.

Hard commodities are basically anything that is mined from the earth, especially metals such as copper and gold. Hard commodities can be stored indefinitely, thus allowing you greater control over your trading, but there is of course the problem of storing them. Keeping two tons of aluminum in a warehouse for six months while you wait for demand to rise may very well end up costing you more than you’d make selling it sooner