What is a commodity?
A commodity is a raw material or a product that has investment value and can easily be bought and sold. Some examples of commodities are oil, natural gas, precious metals like gold, etc.
How can I invest in commodities?
There are 3 main ways to invest in commodities. One, you can Invest directly in a commodity, like buying a bar of gold or a barrel of oil. Two, you can buy shares of exchange-traded funds (ETFs) that specialize in commodities, like the iShares gold trust for gold, or U.S. oil fund for oil. And three, you can buy stocks of the companies that produce commodities, like Barrick gold for gold, and Exxon Mobil for oil.
Where are commodities bought and sold?
Just like stock exchanges, there are many commodity exchanges around the world. Some of the popular ones are Chicago Mercantile Exchange, London commodity exchange, Dubai mercantile exchange and the East Africa exchange.
What are the advantages of investing in commodities?
The main advantage of investing in commodities is they help diversify your portfolio – especially since the price movement of commodities isn’t linked to the movement in the stock and bond market. Another benefit of commodities is that they are essentially a hedge against inflation. If inflation rises, commodity prices also tend to go up, unlike dividend yielding stocks.
Are there any disadvantages of commodities?
The main disadvantage of commodities is that their price can be very volatile, which means it can increase or decrease sharply. This is something you need to be careful about when investing in commodities.
Furthermore, commodity prices heavily correlate to the world economy, so during an economic downturn, it is likely that commodity prices will go down too. However, this can also be an advantage, as commodity prices are likely to go up during an economic boom.