How to Invest in Commodities

Commodities are raw materials used to make other products. These range from agricultural (wheat, corn, soy) to metals (gold, silver, copper) to energy (crude, natural gas, heating oil) and more. 1. Determine how much money you are ready to invest: - The commodities market is a very risky place to invest your money, with potentially large gains balanced by equally large potential losses; commodities should therefore be a portion of your long-term holdings. Investing in commodities is safest as a part of a large and diversified portfolio that also includes other forms of investments. rnCommodities can actually reduce overall risk as a part of a diversified portfolio because their movements often are uncorrelated with the fluctuations of other types of securities. rnBefore you invest in commodities, it is recommended that you first get involved in the more elementary areas of investing in the stock market. rn2. Open a brokerage account. In order to trade any securities, including commodities-based ones, you will need the help of a stockbroker to establish an account in which to hold and trade such securities. A brokerage account will allow you to deposit money that can then be invested in securities on your behalf by the brokerage firm. rnNote that this is not the case if you are planning on simply investing in physical commodities. For example, you can simply buy and store gold on your own as an investment, without entering the securities market at all. However, it is not realistic for most investors to take delivery of larger or more perishable commodities like oil or wheat, this may be more difficult. Investing in securities instead will spare you costs of shipping and storage that can be incurred while trading physical commodities.rnAs with any investment plan, first make sure you have enough saved in your emergency fund (3-6 months of expenses) for unexpected costs, such as job loss, illness, injury, etc. Also set aside in cash any amount needed for upcoming planned short-term expenses (automobile purchase, down-payment on a home, for example) in the next 1, 3 or even 5 years. rn3. Deposit money into your brokerage account. Be conservative with your first commodities investment; there's no need to put large sums of money into a market unknown to you. It's best to gradually build up your position in the commodities market, as this lowers risk.Alternately, you can sell off shares of stock of mutual funds that you already own to finance your commodity investment.