© 2015 Shmoop University, Inc. All rights reserved.
Financial Literacy

Financial Literacy

Home Finance Investing Commodities

Commodities

Your aunt might call Matthew McConaughey a "hot commodity," but she wouldn't be exactly right—and not just because you prefer Ryan Gosling.

Commodities are basically things that can be sold, bought, and traded. They're, uh, stuff (usually raw materials) that are made in high volume and have low margins for brokers. You know the markets for oil, coffee beans, gold, copper, coal, and sugar? Those are all commodities.

Another way to look at it? Commodities are the agriculture, energy, and metals we need to create our world. Since they're considered essential and are often reliant on production, they're affected by world events (also called "macro" events or incidents).

A tornado in Florida, for example, might hurt orange crops, and since there are fewer oranges, the costs of oranges and orange products (like your morning OJ) go up. Conflict in the Middle East can cause oil prices to soar because war can damage oil production or can keep oil from being transported to other markets, creating a shortage.

The opposite is true, too. A sudden boom year for coffee beans (caused by perfect coffee growing weather) can cause prices to drop because there's suddenly lots of coffee. That may be good news for you and your pumpkin spice latte habit, but it's bad news for someone who has invested in coffee and now finds their investment dropping in value.

Inflation can also affect the price of commodities. When it looks like prices are about to go up, investors, companies, and others tend to buy the commodity before it becomes more expensive. Suddenly, there's less of the product because everyone has snapped it up and prices go up—temporarily. Once there's no more demand (because prices are low or because everyone has their share of copper or sugar, thanks for asking) the prices plunge again.

Investing in Commodities: For Those With Teflon Stomachs

Since commodities prices go up and down faster than Johnny Depp's hair, investing in this market is not for the faint of heart.

Commodities might be an option if you're looking for something that has a potentially high resale value and an investment that can grow fast and high. Many investors also like commodities because they feel that there will always be a demand for them. (Are you really going to give up M&Ms? Yeah, neither will we, which is why sugar will always be a big thing.)

Before you invest, though, you'll need to

  • find commodities that interest you.
  • find out how much of the commodity is made and where.
  • find out about where the commodity is made or grown—is the area stable?
  • understand the seasonal production cycles of the commodity.
  • research if there are alternatives to this commodity and how much of a threat they might be (for example, do you think green fuels will replace oil soon?).
  • look into who uses the commodity and how much of it they use.

You're looking for something that's in demand and has fairly reliable buyers and production. Once you find that investment, you can buy from a futures commission merchant (FCM) or commodities broker. You can also buy through the Chicago Mercantile Exchange (CME), the Intercontinental Exchange (ICE), or the Shanghai Futures Exchange (SHFE).

Have fun.

People who Shmooped this also Shmooped...

Advertisement
Advertisement
Advertisement