Accounting for your life: the basics of trading commodities

Credit: Madeline Kim /Forum Editor Credit: Madeline Kim /Forum Editor
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Through different eras of human civilization, gold has been considered a precious commodity, a word synonymous with wealth and used to symbolize status and power. Thousands of years later, nothing has changed, and people continue to seek out gold along with other precious resources like silver and oil.

It’s often the case that physical assets become imbued with incredible value, and where there’s value, there’s trade. Although we no longer trade gold the old-fashioned way by directly exchanging gold bars or bullion, most people obtain gold in the context of buying jewelry or commemorative items. Investing in physical jewelry is a common way to become involved, but the process of doing so is self-explanatory. Instead, we’ll focus on trading gold and other important assets like oil and silver on the stock market.

Buying things like gold, oil, and silver is considered trading in commodities, a very popular option when the market is taking a downturn. The reason is simple: precious resources are wanted the world over, and as a result, they maintain their value more consistently over time. So even if the market is dropping, your assets will not suffer significantly.

Precious resources tend to fluctuate in the short term since their valuation is likely to change. The price of oil, for instance, jumps up and down, as does the price of gold. If you’re thinking about getting rich off dramatic jumps in the market, commodities usually don’t spike nearly enough to make a meaningful difference, but if you’re looking for a slow, low-risk investment that’s capable of guarding against ailing markets, then you might want to consider commodities as a serious option.

There are many ways of trading commodities on the market, and with modern online systems for trading, buying into commodities is just as easy as buying stocks or funds. One of the easiest ways to become invested in commodities is to buy into commodity-related ETFs, or Exchange Traded Funds. As we’ve discussed before, ETFs are baskets of different securities chopped up into tiny, low-price pieces that are then made available to consumers. ETFs that track commodities contain assets and perhaps physical ownerships relating to one specific precious resource, and shares of the ETFs are made available on the market. You might see a little more volatility in ETFs as compared to their underlying commodity, but ETFs tend to track their targets.

Another option is to buy the stocks of the companies. This is a more indirect way of investing in the resources, but it makes sense since if the commodity is doing well, then the company making the resources is probably doing well too. Of course, company valuations depend on more than the commodity itself, and it’s entirely possible that a company fails out of a profitable industry.

There are other options such as buying certificates or timed investments that operate based on future returns, but these are slightly more complicated than obtaining the usual investments on the market. And while investing in commodities is considered less risky than purchasing stocks, there is still the risk of losing money on an investment.

Next time, we will talk about the all-important topic of how to best invest in stocks and what indicators to look at while choosing your investments.