Commodities Broken Down
One of the most established alternative investments, commodities, has been a staple of many portfolios for centuries. Trading against the current and expected price of tangible goods is as old as the markets themselves, and can offer a unique advantage in a portfolio that might otherwise be saturated with stocks and funds.
Not every investor knows exactly what commodities are, however. This is particularly true for newcomers to alternative investing who might only be learning the ropes for the first time. If so, commodities offer a unique entry point into the financial world outside of the usual confines of conventional Wall Street investing. If you’re approaching commodities for the first time, or even looking for alternatives to commodities, here’s what you need to know to get started.
What are Commodities?
Commodities is a fairly broad category of investments in real, tangible goods. This differs from stocks and bonds, which are shares of a company or an entity’s existing debt. Essentially, buying commodities is akin to owning a certain, real amount of whatever the good in question is. As a result, commodities trading predates stock markets, and have been an integral part of societies across the world since the advent of farming.
Today, commodities are traded on specific exchanges and follow a set of rules designed to standardize the way in which people purchase or trade commodities holdings. There are also several categories of commodities:
- Natural Gas
- Precious metals (gold, silver, platinum)
Each of these commodities come with different factors that affect their sale price, as well as its fluctuations on a daily, monthly, quarterly, and yearly basis. As an investor, you can either buy commodities at their current price via the cash (or spot) market in the hopes that their value will rise as you hold them in your portfolio.
You can also trade futures (buying or selling when a commodity hits a certain price) as well as options (buying contracts to buy or sell at a predetermined price within a certain timeframe). The latter two options are more complex, but can offer bigger returns in a shorter period of time—they’re also far more volatile and come with a much greater degree of risk.
What Makes Commodities Unique
Commodities are unique for several reasons: the first, most obvious point of differentiation is the very nature of the item purchased. A commodities purchase is unlike stock ownership, which fluctuates primarily based on the market’s perception of a company’s worth, performance, and other characteristics (overall state of the industry and economy). Commodity prices are affected primarily through scarcity and demand: if coffee is in high demand and crop volume is low, the price of coffee on the commodities market rises. Alternatively, if there is a glut of oil across the globe, the price of oil drops on commodities marketplaces.
Because the commodities market is affected mostly by these factors, these fluctuations tend to move independent of broader stock market phenomena. The demand for coffee, for example, remains steady even when the Dow Jones Industrial Average drops. Crops always have a certain amount of demand, and supply is generally stable.
Investors tend to incorporate commodities into a balanced portfolio because they serve as a hedge against the fluctuations of the market. The demand for commodities tends to stay stable, even when Wall Street doesn’t. In fact, many investors increase their gold holdings when markets are rocky, as the precious metal tends to stay steady in terms of price despite the movement of the markets.
Where Commodities Fit in Your Portfolio
Commodities can fill several roles in a balanced portfolio, depending on your individual investing strategy and goals. At minimum, incorporating commodities in your assets can serve as an offset against market volatility. When the stock markets become turbulent, many opt to move at least some of their holdings into stable commodities—be they precious metals or oil—that are known to keep their value.
That’s not all commodities can do for your portfolio, however. Exploring the world of commodities trading and alternatives can help you branch out into new financial strategies. Options and futures trading may offer an opportunity to build your assets in short order. Bear in mind that this comes with significantly more risk than more conventional holdings, however, and may not be for the faint of heart.
Last but not least, commodities can also help you learn more about segments of the economy that you may not otherwise have exposure to. Knowing more about the price of grains, livestock, and other durable goods can serve as a way into a more varied world of investing.
Alternatives to Commodities
Commodities offer plenty of upside in most portfolios, particularly for those who are looking to hedge against market volatility. These investments are far from the only (or even best) alternative investing options out there. The truth is, the world of alternative investments is vast, and there may be more upside with less competition depending on where you look.
Take farmland investing, for example. Farmland investing offers exposure to a reliably stable investment type, as farmland real estate has a longstanding history of retaining value in spite of other market conditions. Further, while gold has proven itself as a hedge against inflation, farmland has historically tracked inflation slightly better; since the price of goods tends to either increase or stay flat during inflationary periods, investing in farmland can help hedge against inflation by retaining value.
Plus, if you’re looking to have some stake in the commodities market, farmland investing can provide you with dividends by way of harvest-time sales in addition to the value of the farmland itself.
Better still, FarmTogether makes it easy to get started with farmland investing by providing investors with an array of opportunities, all driven by a team of financial professionals who understand the market and have already done the due diligence required to find the best options for their investors.
How to Know if Commodities are Right for You
Commodities come with their pros and cons. These assets can offer diversification in a stock and fund-heavy portfolio, particularly during a turbulent economic period or when inflation seems likely. At the same time, however, commodities trading can still pose a learning curve for investors who might be new to the practice—or downright inconvenient for people who don’t have the time to learn the ropes.
That’s where finding another option that blends the upside of commodities with the expertise of an investing team that can do the heavy lifting.
FarmTogether’s investment portfolio offers a suite of vetted and trusted opportunities for investors who want to diversify their portfolio without the onerous task of learning how to execute. With FarmTogether, farmland investing is easy and designed to maximize upsides.
You can learn more about how FarmTogether's investment offerings help you get a foothold in the commodities market without the hassle. Or, you can get started today and dive into the world of farmland investing.
Disclaimer: FarmTogether is not a registered broker-dealer, investment adviser or investment manager. FarmTogether does not provide tax, legal or investment advice. This material has been prepared for informational and educational purposes only. You should consult your own tax, legal and investment advisors before engaging in any transaction.