What is the difference between a stock and a commodity?
Stocks denote company ownership, while commodities represent goods that include agricultural products, metals, oil, etc. Both these asset classes reserve sizeable profit-making potential.
Stock markets are considered risky investments. However, compared to commodity markets, they are said to be less risky since stock investing is more long-term.
Stock market | Commodities market |
---|---|
Often more long-term investment (buy & hold etc) | Commonly shorter-term trading |
Price based largely on business's financial health | Price based largely on supply and demand |
8-hour markets | Round the clock markets (closed weekends) |
Because the supply and demand characteristics change frequently, volatility in commodities tends to be higher than for stocks, bonds, and other types of assets. Some commodities show more stability than others, such as gold, which also serves as a reserve asset for central banks to buffer against volatility.
What are Commodities? Commodities are raw materials used to create the products consumers buy, from food to furniture to gasoline or petrol. Commodities include agricultural products such as wheat and cattle, energy products such as oil and natural gas, and metals such as gold, silver and aluminum.
Three of the most commonly traded commodities include oil, gold, and base metals.
Popular commodities for investment
Of these, oil has the biggest market, but gold is the most popular commodity for holding long term because of its role as a risk hedge, according to Minter.
The most traded commodity is crude oil. Crude oil is used in many products, from petrochemicals to petroleum to lubricants to diesel.
1. Brent Crude Oil. Brent Crude oil is the most traded global commodity.
Cons. The downsides to commodity investing are a lack of income, high volatility, and external risks. Lack of income: Investing in commodities doesn't generate yield income like a bond or a dividend-paying stock. All of the return on a commodities investment depends on correctly predicting the price movements.
What is the safest investment with the highest return?
Commodities do not pay dividends or interest, so an investor is dependent solely on capital gains for investment performance.
- Money market funds.
- Mutual funds.
- Index Funds.
- Exchange-traded funds.
- Stocks.
- Alternative investments.
- Cryptocurrencies.
- Real estate.
What happens to commodities in a recession? As a general rule, when economies slow, industrial outputs decline due to fewer infrastructure projects and house building, causing the demand for commodities to fall and prices to decline.
A commodity is any useful or valuable thing, especially something that is bought and sold. Grain, coffee, and precious metals are all commodities. The word commodity is usually used in an economic context, as in importing commodities from other countries or trading in the stocks and commodities markets.
What About Crude Oil? Crude oil is by far the biggest commodity market, and oil prices were the talk of the town for much of 2022.
Crude oil ranks as one of the most traded commodities in the world. Commodity traders who had taken long positions on crude oil last year made a lot of money. Crude oil prices decreased in 2020 as a result of COVID-19 and the consequent global lockdowns. However, the rate of immunisations increased in 2021.
1. Crude oil: Brent crude. Crude oil is one the world's most in-demand commodities as it can be refined into products including petrol, diesel and lubricants, along with many petrochemicals that are used to make plastics.
- Brent Crude Oil. The first two entries on our list of the most traded commodities in the world should come as little surprise. ...
- WTI Crude Oil. ...
- Natural Gas. ...
- Gold. ...
- Silver. ...
- Copper. ...
- Coffee. ...
- Sugar.
Commodities such as precious metals, agriculture goods, and oil & gas have often been touted as a portfolio diversifier that serves as a hedge against inflation.
What commodities should I own?
In terms of commodities, gold and oil tend to lead the way judging by their inflation-busting track records. But you can get access to agricultural materials and industrial metals too, through broad commodity ETFs like iShares Diversified Commodity Swap or Lyxor CoreCommodity.
- Gold. Foreign central banks continue to be significant buyers of gold to diversify foreign exchange holdings. ...
- Oil. ...
- Copper. ...
- Platinum and palladium.
Coffee is one of the most traded commodities in the world, with massive global consumption rates and rising demands for luxury coffee exports, such as the renowned Jamaican Blue Mountain beans.
- Vitol. The company engages in the extraction, trade, refining, storage, and transport of energy. ...
- Glencore. ...
- Cargill. ...
- Koch Industries. ...
- Archer Daniels Midland. ...
- Gunvor International. ...
- Trafigura. ...
- Mercuria.
Like gold and oil, water is a commodity—and it happens to be rather scarce nowadays. So, as with any other scarcity, the water shortage creates investment opportunities.