What is A Commodity?

What is a commodity? What is it and how can people actually invest into it to make money or hedge against inflation?

Well if you are looking for a simple definition of commodity here it is. A commodity is simply something that has a limited supply, but has a growing demand.

For example water is the ultimate commodity because it has a limited supply but an ever increasing demand. Investing in water therefore could be a great way to save for the long term or hedge against inflation.

How To Invest in Commodities

There are 3 ways to invest into a commodity. You can choose to.

1. Buy The Commodity itself

For example if you want to invest into gold you can always go out and buy a block of gold then hold onto it as the value of gold increases. The advantage of doing this is that you will physically hold the commodity and you can keep it safe.

Of course the disadvantage of doing this is that you have to physically hold the commodity and you have to keep it safe and store it somewhere. This can work on the small scale if you don’t mind keeping the commodity and if you do not mind that it will take some time to sell however many pounds of wheat you have or barrels of oil you have, or whatever.

But there are other easier ways to invest into the commodity market without having to keep the commodity in your back yard.

2. Buy ETFs

What are ETFs? They are simply investments that can be bought on the open market and are backed by other investments. For example GLD is an ETF that holds gold, anyone who buys GLD buys a piece of that gold and as the price of gold goes up or down they either make or lose money.

There are ETFs that are more loosely based on the price of a certain commodity because they track companies that would benefit from a rise in the price of a commodity. For instance gas stations and oil drilling companies would benefit as the price of oil goes up.

3. Futures Contract

This allows an investor to buy a commodity in the future. The commodity futures market is a popular way to not buy the commodity directly, but to buy the right to buy it in the future.

Like everything else investing into a commodity can either be good or bad, so doing your research is normally the best situation.

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