The Best Commodities Stocks to Buy
A commodity is a product that is basic and sold by companies. It can include gold, silver, copper, corn, or oil. There are many other types of commodities. The best way to know if something is a commodity is to ask yourself if it matters who produced it. For example, commodities are products that are basic and sold by companies. Another example is gold. We’re not talking about who sells it, but who originally produced it.
When inflation goes up, the prices of commodities also go up. Because people still have to buy these goods, even though there is less supply. The prices keep rising because there is insufficient supply to meet the demand. But this can change if the producers can increase the amount of available goods.
When commodity prices go up, the stocks for companies that produce these goods also go up. It happens along the entire supply chain. Below, we’ve listed a dozen of the best stores to watch and buy if you want to invest in this trend.
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Commodity Stocks to Buy
1. LyondellBasell Industries NV
This commodity stock has its headquarters in the Netherlands. There, it licenses technologies for making polyethylene and polypropylene. Fortune has named it one of the “World’s Most Admired Companies.” So, this company’s vision of being the most valuable company in its industry has come true.
2. Vale SA
Vale SA works worldwide and makes iron ore, nickel, and other things. Plus, they have over 120K employees, which makes them a huge company. They offer logistics such as shipping. Vale SA is also engaged in the energy sector. This company was founded in 1942, so it has a long history and a strong foundation for success.
3. Freeport McMoRan Inc.
Freeport McMoRan is a commodity stock that produces copper, gold, and other minerals in North and South America. They also own a mine in Indonesia. Recently, they appointed Hugh Grant to their Board of Directors. He is the CEO of Monsanto Company.
4. Alcoa Corporation
This commodity stock only sells aluminum. Aluminum seems to be something that people are always trying to use and improve in new ways. Plus, they want to have net-zero emissions soon. And this company is also proud of the fact that it started this business in 1886. Charles Hall came up with a cheap way to make aluminum, and then he started a company called Alcoa.
5. Barrick Gold Corporation
This commodity stock is a resource stock that is based in Canada. This company produces gold and copper, which is unsurprising because some of the world’s best resource stocks come from Canada. Additionally, this company operates in thirteen other countries worldwide.
6. Rio Tinto Limited
This commodity stock began in Spain in 1873. It is very ambitious and does business in 35 countries worldwide. It produces a lot of different commodities, such as aluminum, copper, boron, iron, and diamonds. The company also protects any wildlife affected by its business operations.
7. Cleveland- Cliffs Inc.
This commodity stock is an oil company that also produces iron ore. It takes care of the whole supply chain, from production to stamping to creating machines. Plus, it is the largest producer of flat-rolled steel in the entire U.S.
8. Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF
This ETF and commodity stock are heavily exposed to the energy sector. That’s why it has done so well in the past year. But you may still be able to ride this wave into next year. If oil and gas prices keep increasing, this stock will probably do well. However, if there are any alternative energy stocks in the mix, they may also do well. So investors could continue to see good returns.
9. Newmont Corporation
This commodity stock mines gold all over the world. It has mines in the United States, Dominican Republic, and Suriname.
10. Southern Copper Corp.
This commodity stock has been around for a long time and has a lot of history. That means it is likely to do well in the future. It is also significant and pays out dividends, which means it is doing well.
11. Schweitzer- Mauduit International, Inc.
This commodity stock produces a lot of materials and products that people use daily. Recently, it partnered with a company that makes glass for autonomous vehicles. It is a big deal because other companies have been working on making this type of glass in large quantities.
12. SunCoke Energy, Inc.
Suncoke is a commodity stock that is doing well. They don’t produce the commodities but handle logistics and processing. They also make coke which is an ingredient used to blast steel. SunCoke can make 5.9 million tons of coke annually, so they are set regarding processing and logistics.
The Best Commodity Stocks
People imagine a futures exchange trading floor to be quite hectic. It is where buyers and sellers come together to trade an ever-expanding list of commodities. This list consists of agricultural items, metals, petroleum, financial instruments, foreign currencies, and stock indexes that change on a commodities market.
Some products offer a way to protect yourself from inflation. Inflation increases prices, and these products usually go up in price too. It happens because commodities (like metals and foods) get more expensive when there is more inflation.
The price of products and services goes up directly to their demand level. The cost of the commodities used to produce those goods and services also grows. That is why futures markets are used as continuous auction markets and clearinghouses for information on supply and demand.
What Are Commodities?
Commodities are essentially identical in quality and utility, regardless of their origin. For instance, when purchasing an ear of corn or a bag of wheat flour at a store, most consumers pay little attention to where they were farmed or milled. By this expansive definition, a vast array of products for which consumers do not place a premium on the brand could potentially qualify as commodities.
Investors tend to assume a narrower perspective, typically referring to a restricted group of globally in-demand essential items. Many of the commodities on which investors concentrate are raw materials for manufactured items.
Hard and soft commodities are divided into two categories by investors. Mineral ores, such as gold, copper, and aluminum, and energy products, such as crude oil, natural gas, and unleaded gasoline, are hard commodities. Soft commodities, such as corn, wheat, soybeans, and cattle, include products produced or ranched.
Why Commodities Add Value
Typically, commodities do not follow the same trend as equities and bonds. A correlation coefficient is a number between -1 and 1 representing the degree of covariation between two variables. If a linear relationship is perfect, the correlation coefficient will equal 1. A positive correlation indicates that when one variable increases (decreases), so does the other. The correlation coefficient will be -1 if there is a perfect negative association between the two factors.
As demand grows, the price of products and services rises. A correlation value of zero indicates that there is no linear relationship between the variables.
Usually, stocks and mutual funds in the U.S. go up or down together. They typically rise and fall at the same time. However, commodities are different. They bet that inflation will happen soon, even if not expected. So they do not always move in the same direction as other investments.
Commodities can offer good returns but are riskier than most other investments. They have a higher standard deviation, which means there is a greater chance that you could lose money if you invest in them. However, suppose you add commodities to a portfolio of less risky assets. In that case, the portfolio’s overall risk decreases because the different investments correlate negatively.
The History of Commodity Trading
People have been trading different types of goods for a long time. The first formal commodity exchanges were in Amsterdam and Osaka in the 16th and 17th centuries.
Only in the mid-19th century did people start trading goods that would be delivered in the future. They did this at the Chicago Board of Trade and the predecessor to what eventually became known as the New York Mercantile Exchange.
Producers who came together to trade commodities had a common interest. It helped create orderly markets where competition was not as fierce. Initially, these markets traded one type of good but grew to include multiple commodities over time.
Five Ways to Invest in Commodities
Those interested in investing in commodities can acquire genuine products, futures contracts, shares of the companies that manufacture the commodities, or exchange-traded funds (ETFs).
Buying commodities through the futures market is one way to invest in them. Investing in commodities through the futures market is one method. Futures are a high-risk, high-reward method of speculating on a particular commodity. Some people trade commodities because of the potential for high rewards.
Futures contracts allow you to spend a small amount of money to open a contract. If the trade goes your way, you will not have to put in more money. It makes it a cost-effective way to speculate on the future.
If the trade moves in your favor, everything is fine. But if the trade starts to move against you (below your maintenance margin), you’ll have to add more money to keep the business open. It attracts traders – the chance to make a lot of money quickly. But they also risk losing it just as quickly.
2. Physical Commodities
You can also own physical commodities. However, you might not want to own some of them, like pigs, cows, and oil. Precious metals are a popular choice for people who wish to acknowledge the metals themselves as a hedge against inflation.
You can purchase bullion in several ways. You can buy it online, at a pawn shop, or from a coin dealer. Be careful to get close to the spot price when you purchase.
The most significant risk of owning precious metals is that someone could steal them. Therefore, you need to ensure that they are protected. If you have to sell them quickly, you may not get as much money for them as you would like. You may have to sell them to a dealer and not contact the total market value.
3. ETFs of Physical Commodities
Suppose you want to invest in physical commodities without the hassle of owning them or trading on the futures market. In that case, you can do so through ETFs.
ETFs offer a handy option to invest in a commodity or group of commodities.
You could, for example, invest in an ETF that holds gold, oil, or a combination of commodities. This way, you would have “pure play” exposure to the commodity and market-based pricing. It would mean that you would be able to get the best price for your holdings when it comes time to sell them.
ETFs, give you a way to be involved in the prices of commodities, which can be very volatile. The cost of the ETF is usually less than the price of the commodity it holds. As a result, it’s critical to consider how much you’re spending to participate. Owning physical commodities can be risky because they can be stolen, so using an ETF is one way to avoid that risk.
4. Shares of Companies That Manufacture Commodities
If you do not wish to own physical commodities, you can invest in commodity-producing enterprises. When commodities prices rise, these companies will make more money, and so will you.
There are two ways that stockholders can benefit from a producer. The first is if the price of the commodity rises. It usually means that the underlying company makes more money, and its profitability increases. The second way to benefit is if the company produces more over time. It increases profit for the stockholder.
Commodity producers can be risky investments. The boom and bust cycles in the commodities industry can affect companies a lot. They also need a lot of money to operate. Buying stocks in individual companies is more work. It takes more risk than buying stocks in a bunch of different companies. So if you like to do this, you must understand the company and the industry well.
5. ETFs of Commodities Producers
You can gain exposure to some different commodities producers by buying an ETF. It will give you the benefit of diversification. Additionally, you may be able to focus on a specific type of producer, like gold miners. This way, you can enjoy the benefits of cash-flowing producers and bet on the price of gold going up.
Suppose you invest in ETFs that focus on a specific commodity, like oil producers. In that case, you are diversified but not as much as if you had a broader range of companies. It means that if oil prices fall, you won’t lose as much money as if you only had investments in oil producers. But this also comes with the risk of not having as much protection if the price of oil falls.
Why Commodities Are Popular Investment
People invest in commodities because they don’t produce cash flow and the price spikes are usually short-lived. There are some reasons why they’re so popular:
- Inflation protection. Investing in commodities can help protect your portfolio from inflation. The prices of commodities, such as “hard assets,” often rise along with inflation.
- Low correlation to other assets. The prices of different commodities often move for various reasons than the overall economy. Their performance is not as closely related to stocks and bonds. Since commodities are less correlated with other types of investments, they can be used to diversify a portfolio, which reduces risk and makes the returns more consistent.
- Hedge against other investments. Suppose you own a company that may be heavily exposed to the price of oil, for example, an airline, and oil prices rise. In that case, your company may decline in value. If you own oil directly, this can help offset that risk in your portfolio.
Risks of Commodity Investing
- Volatility – The prices of commodities can change a lot, which can cause your portfolio to be exposed to large price swings. This volatility can be an opportunity but also a significant risk.
- Speculative – If you’re hoping to make money only by the price of a commodity, you’re speculating, not investing. Your asset won’t produce any cash flows, which means your profit depends entirely on the commodity’s price.
- Geopolitical events – Commodities can be affected by geopolitical events around the world. For example, oil and natural gas prices increased after Russia invaded Ukraine in 2022.
- Weather – Weather conditions around the globe can impact commodity prices. If bad weather affects the growth of a commodity, the supply may decrease, causing prices to go up.
- Concentration – When you invest in commodities, it usually means that you are betting on the price of a specific asset, such as oil or gold. While there are ways to protect yourself from price changes somewhat, you won’t be entirely safe if the commodity’s price falls.
Adding commodities to your investment portfolio can help to diversify it, but this is not necessary for most people. If you are looking to trade commodities, there are many ways to do so. But remember that prices often go up and down quickly, so commodities may not be suitable long-term investments.
Frequently Asked Questions About Commodities Stocks
A commodity is a good that is used in trade. It is an essential item that can be replaced with another of the same type. Some examples of commodities are grains, gold, beef, oil, and natural gas. For investors, commodities can be a way to protect their investments from changes in the market by spreading their money into different types of goods.
According to the most recent predictions, prices for non-energy commodities such as agricultural and metals will rise by about 20% by 2022. Prices will continue to grow in the following years, but at a slower rate. Even so, commodity prices will remain much higher than in the past five years.
There are many different ways to invest in commodities. You can buy physical goods, like gold or stocks in companies that produce or mine commodities. You can also buy ETFs that track indexes of commodities.
Commodities may help reduce the volatility of a portfolio. The returns from things are not always related to traditional assets, so they can help reduce the ups and downs of a portfolio.
Vehicles are the most traded items in the world. In 2016, cars accounted for about $1.35 trillion in world trade. The top car exporter was Germany which contributed about 22% of the traded vehicles after exporting cars worth $150 billion.
Some traditional commodities include grains, gold, beef, oil, and natural gas. More recently, the definition of a commodity has expanded to include financial products such as foreign currencies and indexes.
Compared to other securities that can generate income for their investors, commodities do not pay dividends or interest.
Crude oil is one of the most popular commodities in the world because it can be refined into many products, including petrol, diesel, and lubricants. It is also used to create many plastics that are popular today.