How to Invest in Commodities

There are many ways to profit on changing commodities prices. Whether directly through commodities trading or in stocks that produce raw materials, it is possible for any investor to expose their portfolio to commodity volatility.

Commodities Trading

Directly trading commodities is the best, and cheapest, way to get in on commodity price action. Trading commodities starts with a broker who can grant traders access to both the futures market and some spot commodities market. Commodity futures are more common though many brokers offer precious metals to be traded at spot prices rather than in future format. With spot prices, the price of the commodity is not reflected as a future value, but rather as a current value that will never expire. Futures are priced in month long intervals, thus November crude oil will trade at a higher or lower price than October crude oil, even though the same commodity is being traded. Spot prices are the same prices across the board.

Exchange Traded Funds

There are many exchange traded funds (ETFs) that are bought and sold on the stock markets, such as the NY Stock Exchange or NASDAQ rather than the commodities markets, such as the US CBOT exchange. ETFs are traded just like stocks but are backed in full by a balance of both futures and hard assets. One very popular ETF is the SPDR Gold Trust, which trades under the ticker GLD. One of the main benefits of ETFs is that of storage, the gold that backs the fund is held elsewhere and can be moved digitally through a stock exchange rather than a hand to hand transaction. Exchange traded funds often come with an expense ratio which is extrapolated from the current market value each year to cover storage and trading expenses for the fund, as well as reward the fund's creator.

Commodity Stocks

Rather than trade commodities, it is possible to produce similar returns with ordinary companies. For instance, if you thought the price of crude oil was set to explode, shorting the airline industry would be a smart move, as higher prices would cost the airlines more cash. Likewise, buying a gold mining company before a bull run in gold would produce a very nice return generally greater than the change in the commodity itself.

Leveraging investments in commodity stocks is easy simply due to the way corporations and balance sheets work. For example, a company that produces oil at a cost of $50 per barrel would make $1,000,000 if it sold 100,000 barrels for $60 per barrel. If the price were to rise to $75 per barrel, the company would make 150% more while the change in the price of oil was just 25%. Natural leverage in commodity stocks makes them a great alternative to the volatile commodities markets and provides a return that is worthwhile to the investor. Making money with commodity stocks is a lot less risky considering the stability of the business and the book value that is assigned to stocks, but never assumed in the world of commodities.