After a decade in the doldrums, commodity prices are once again outperforming other asset classes. Commodity prices typically follow very long cycles, sometimes lasting as long as 30 years. So, it’s entirely possible that commodity prices will provide good returns over the next decade or longer.
This is a guide on how to invest in commodities, UK commodity brokers to consider, and the best instruments to choose.
- 1 How to Invest in Commodities UK Quick Tutorial
- 2 Choose a Commodities Investment Platform
- 3 Research Commodities Investment
- 4 How to Invest in Commodities on eToro
- 5 Conclusion
- 6 eToro – Best Broker to Invest in Commodities
- 7 FAQs
- 8 Should I invest in commodities in 2021?
- 9 What Commodities Can You Trade in the UK?
- 10 What is the best commodity to invest in?
- 11 When is the best time to invest in commodities?
- 12 How do you short sell a commodity online?
- 13 What affects the price of commodities?
- 14 What is the best way to invest in commodities?
How to Invest in Commodities UK Quick Tutorial
These days investing in commodities, UK commodity shares, and ETFs is a lot easier than it used to be. In fact, with the following steps you can learn how invest in commodities UK in a few minutes:
- Choose a Commodities Broker: First, you need to choose a broker with a good range of commodities. We recommend eToro as they have a very wide range of commodities. eToro is also well regulated and you can make your first investment with just $100.
- Open an Account: You can set up your account in a few minutes by entering a few personal details.
- Fund your account: There are several ways to fund your trading account, including credit/debit card, e-wallet, and bank transfer.
- Invest in commodities: Once your account is funded you can select any of the commodities on the platform. Then simply click on ‘Buy’ and enter the amount you want to invest. eToro charges zero commission on commodity trades.
Choose a Commodities Investment Platform
Choosing the right trading platform is the first decision you will need to make before you can invest in oil, gold and other commodities. It’s a particularly important step when it comes to commodities as the range of commodity markets available varies considerably from one platform to the next. These are two of the best platforms we have found for to invest in commodities in the UK.
1. eToro – Overall Best Commodity Broker in the UK
eToro is a multi-asset trading platform. You can trade stocks, currencies, cryptocurrencies and of course commodities. The platform is unique in that you can opt to trade underlying instruments or CFDs on those instruments. eToro is a zero-commission broker, and instead charges via the bid-offer spread.
A lot of trading platforms have a focus on forex and list just a few commodities. If you want to invest in commodities you will be looking for a wider range, which eToro provides. In fact you can choose from at least seven metals, two energy products and six soft commodities. In the case of commodities, the instruments are CFDs on the underlying commodity or on the price of the commodity futures contract.
eToro also offers share trading in the shares of commodity producing companies like gold miners and oil producers. In addition, the platform offers several ETFs that hold physical commodities and mining shares. If you invest in shares and the best commodity ETFs, you have the choice of buying the underlying share, or to make use of leverage and sort selling, you can trade CFDs on the underlying shares.
eToro is well known for its social trading tools. You can learn from other traders, share ideas and even copy the trades of experienced traders, after reviewing their performance, by using the Copy Trading tool.
If you are buying shares or ETFs you can start trading with as little as $50. For commodity investments, the minimum value for a each trade is $1,000. This would require margin of between $100 and $1,000 depending on the amount of leverage you choose.
- More than 10 different commodity products to trade.
- Zero commission on all products.
- Also offers shares of commodity producers and commodity ETFs.
- eToro is regulated by regulatory the FCA, the main UK regulatory body.
- You can copy the trades of experienced traders.
- The website provides a seamless and intuitive user experience.
- The minimum exposure for physical commodities is $1,000.
67% of retail investor accounts lose money when trading CFDs with this provider. Your capital is at risk.
2. Capital.com – Commodity CFD Broker With Competitive Spreads
Capital.com is trading platform and provides CFDs on all major asset classes. This includes stocks, indices, forex, cryptocurrencies, and of course, commodities. Looking specifically at commodities, this broker offers one of the widest ranges of energy, metal and soft commodity products when compared to similar platforms. The platform also offers CFDs on over 2,700 stocks listed around the world, including the stocks of commodity producers.
In terms of fees, Capital.com does not charge commission, and is known for its competitive spreads. There are also no fees for deposits and withdrawals. Capital.com is registered with, and regulated by, the FCA in the UK and CySEC in Cyprus. These are the leading regulatory bodies in each country.
Capital.com has a proprietary browser-based web platform and apps for mobile devices. You can also connect to the broker using the popular Metatrader4 platform. If you want to learn more about trading and investing, Capital.com also offers an extensive number of tutorials. In addition there’s a mobile app, Investmate, to help you learn more about investing wherever you are.
As a purely CFD broker, Capital.com does not offer the option of investing in underlying assets. However, for anyone wanting to trade commodities using CFDs, Capital.com is a solid choice. Remember, CFDs allow you to go long and short, and to use leverage – so they give you great flexibility.
- Minimum deposit is just $20.
- Offers most of the best commodities to invest in.
- Known for competitive spreads.
- Over 2,700 different instruments to trade.
- Competitive overnight fees.
- Regulated by the FCA.
- Can’t buy underlying shares of commodity companies.
Research Commodities Investment
When we define a commodity, we are talking about an asset class with two unique characteristics. Firstly, commodities are naturally occurring or agriculturally produced products. And secondly, commodities are fungible, meaning one quantity of a commodity is the same as another quantity of the same commodity.
Commodities, which are also known as resources are the raw materials used to manufacture almost any physical product. This means there is an ongoing demand for them, while supply is constrained in several ways. Commodities like metals and oil exist in finite quantities and become more expensive to extract as reserves are depleted. Agricultural commodities can be produced, but doing so requires land, water and other resources.
Types of Commodities
There are three types of commodities:
- Energy commodities include crude oil, natural gas, other types of oil, and coal.
- Hard commodities include precious metals like gold, ferrous metals, base metals like copper, and other minerals.
- Agricultural or soft commodities include crops like corn and cotton, livestock and timber.
Ways to Invest in Commodities
The commodity market is very diverse and there are lots of ways to invest in them. Commodity investments can be divided into three categories – physical commodities, financial products, and the shares of commodity producing companies.
Physical commodities are the actual commodities. Investing in physical commodities comes with a number of challenges like storage, transport and insurance.
Financial products and derivatives are based on the price of physical commodities. Examples are futures, CFDs, options, and exchange traded funds (ETFs). These products are relatively simple to invest in and provide direct exposure to the prices of commodities. Financial products are available on all the best commodities to invest in, and eliminate the hassle of dealing with physical commodities.
Commodity producers are companies that explore for new reserves, extract commodities from the earth, or process and distribute the commodities. Examples are BP shares and Rio Tinto shares. These companies tend to provide geared exposure to the underlying commodity price as their costs are fixed, while income is directly affected by commodity prices.
Are Commodities a Good Investment?
Commodities have some unique qualities that compliment other asset classes. It’s worth knowing these qualities when investing in commodities UK.
- Commodity prices are closely associated with economic growth. When the economy grows, more commodities are needed. So, commodity prices rise and fall with expectation for economic growth.
- Commodities are cyclical. While demand for commodities is closely linked to economic growth, the supply of commodities is closely related to their prices. When prices rise, producers increase their capacity to take advantage of the higher prices. This eventually leads to oversupply, causing prices to fall. Producers then reduce capacity and production, which ultimately results in cycle beginning again. These cycles result is strong trends which are good for momentum investors and trend followers. Some commodity trends can last for 15 years or more.
- Commodities are good hedges against inflation. Physical assets like commodities and real estate are less vulnerable to inflation than financial assets like currencies and shares. This makes commodities one of the best hedges against inflation. A portfolio of commodities can offset rising prices that affect your day-to-day life. Gold is a good hedge against inflation and stock market volatility as the gold price often rises when stocks fall.
These characteristics make commodities valuable tools for short term traders and long-term investors alike. Traders can follow short to medium term trends to make a profit. Long term investors use commodities to diversify portfolios.
Best Commodities to Invest In
The best commodities are those that are very liquid (i.e. lots of people trade them) and relatively easy to understand. Some commodities like livestock and certain crops require specialized knowledge, so it’s best to start out by investing in gold, oil, and other bigger markets.
Gold and Silver
Gold and silver are unique in that they are commodities but are sometimes viewed as currencies too. They are regarded as a store of value, and therefore a good hedge against inflation which causes other currencies to lose value over time. Gold is also a safe haven during periods of volatility and uncertainty.
Besides investing in physical gold, you can also invest in gold by buying shares of gold producing companies like Newmont Mining Corp or Barrick Gold. The best gold stocks often outperform the gold price by a substantial margin when the gold price rises. Similarly, you can also invest in silver via stocks and ETFs, as well as by trading the actual commodity itself.
Oil has fueled the global economy for the last 150 years, and while the world is looking to alternatives, oil is likely to remain important for some time to come. In 2020 the price of oil plummeted when travel restrictions and lockdowns. When investing in oil you will either be trading the Brent Crude price which is the UK benchmark, or the WTI (West Texas) price which is the US benchmark.
One of the factors that affects the oil price is the production levels set by OPEC, so traders need to keep a close eye on anything they have to say. Oil trading is closely linked to the futures market, and contracts with different expiry dates trade at different prices. The eToro platform allows you to trade the different expiry dates too.
The most widely traded soft commodities are grains like wheat, corn and soybeans. These crops have shorter cycles than metals and energy products, with the weather during each growing season playing an important role. Investing in soft commodities requires more specialized knowledge, but it’s worth spending some time researching these markets.
If you want to spread your commodity investments across a basket of different assets, there are several ETFs to consider. These funds which are al available on the eToro Platform, either hold physical commodities, commodity futures or the shares of commodity producers. These are four ETFs worth considering:
- The SPDR Gold ETF (GLD) only holds physical gold. This fund is a cost effective way for long term investors to own gold.
- The VanEck Vectors Gold Miners ETF (GDX) is fund that holds positions in the largest gold mining companies in the world. In total the fund holds 51 different stocks which are weighted according to their market capitalization.
- The iPath Bloomberg Commodity Index Total Return ETN (DJP) is an exchange traded note that holds most commodities. The largest holdings are oil, natural gas, soybeans and gold, and another 19 commodities are also included. As an ETN, the fund is exposed to futures contracts rather than physical commodities.
How to Make Money from Investing in Commodities
There are a few different way to make money in the commodity markets. As mentioned, there are different types of commodity instruments, namely, physical commodities, financial products and derivatives, and shares of commodity producers. There are also different ways to invest invest in commodities, depending on the timeframe you have in mind.
Investing in commodities is a long term approach that requires patience, rather than day to day decision making. As a long term investor, you would invest in commodities when you believe the fundamentals point to demand increasing steadily over time. As mentioned, commodity trends can last for years, so you will really be riding these long term trends. The best instruments for long term investing are ETFs that have exposure to a few different commodities.
Commodity trading is a more hands on approach that requires an understanding of the dynamics that affect supply and demand in the short to medium term. A commodity trading strategy would typically have a time horizon of days to months. The best instruments for commodity trading are CFDs, futures and options.
Commodities Investment Strategies
These are some of the popular methods people use to invest in commodities:
Dollar cost averaging is the easiest way to approach long term investing with any type of asset. You simply decide on the best commodities to invest in, and then invest the same amount in of those commodities each month or quarter regardless of the price. The advantage of this approach is that prices average out over time and you don’t have to worry about trying to ‘time the market.’
Trend following is another common way to invest in commodities due to their cyclical nature. The idea behind trend following is to only hold long positions when there is a clear bullish trend in place. Some traders also hold short positions when prices are in a downtrend. You can use moving averages or trendlines to identify trends.
Commodity Index investing is another approach that is possible with ETFs. The iPath Bloomberg Commodity Index ETN mentioned above is an index of 23 commodity prices. Components of the index are capped at 15% each, so risk is spread across the entire commodity market. You can also invest in ETFs that track indexes of commodity producers like the SPDR XLE (energy producers) and SPDR XLB (mining companies).
How to Invest in Commodities on eToro
Investing in commodities has never been easier thanks to investing platforms like eToro. If you follow these simple steps you can make your first commodity investment in less than 10 minutes.
Step 1: Open an Online Trading Account
To open an account, you need to provide a few personal details. Once you have navigated to eToro’s website, click on the ‘Join Now’ button, and you will be see the following page. Choose a username and a password and enter your email address.
Step 2: Verify Your Account
Now that you have registered an account, you will need to verify your email address, mobile number, and your identity. Firstly, you will need to answer some questions about your investing experience. You will also receive an email to verify the address, and then an SMS to verify your phone number.
To verify your identity, you will need to upload a copy of your passport or driver’s license and proof of your address. However, you can deposit up to £1,600 and begin investing before you do so. You will only be able to deposit more than this amount after you have uploaded these documents.
Step 3: Deposit Funds
In terms of funding your account, eToro gives you several options. Click on the ‘Deposit Funds’ button at the bottom of the menu on the left, and enter the amount you want to deposit and the currency.
Then select from the following options:
- Credit Card
- Bank Transfer
- E-Wallets: PayPal, Skrill, Neteller
Finally, follow the prompts to complete the deposit.
Step 4: Find your best commodities to invest in
There are a few different ways to find the find and select commodities on the eToro platform. You can use the search bar at the top of the home page to find any instrument.
Alternatively, you can click on ‘Trade Markets’ on the menu, and then click on ‘Commodities’ at the top of the page. This will bring up a list of all the commodity CFDs on the platform.
You can also set up a watchlist with all the commodities you want to keep an eye on.
Step 5: Enter your order
There are two ways to enter an order to buy or sell commodities. You can either trade at the current market rate, or you can enter an order with a limit price.
You can also specify either a cash amount or the number of units, and the leverage you want to apply to the trade. The minimum exposure for commodities on the eToro platform is $1,000. This would require margin of $1,000 if you aren’t using leverage, or as little as $100 if you are using the maximum leverage of 10X.
When you enter your order, you can set a stop loss level and a take profit level. These automated orders will help you manage risk and ensure that you exit when the price reaches a target level. They can either be based on price levels or on the maximum amount you are prepared to lose or the profit you be happy to exit with.
Finally, make sure you select ‘Buy’ before clicking ‘Set Order’ for a limit order, or ‘Open Trade’ for a market order.
Market conditions are suggesting a global economic recovery is starting to take shape and a new bullish trend is beginning for commodity markets. Stocks have enjoyed a 10 year bull market, and it may be a good time to consider diversifying into other asset classes, including commodities.
CFDs give you the flexibility to trade commodities on short timeframes, or to invest for the long term. With eToro you can find all the best commodities to invest in, and you won’t have to pay commission either. You can also learn how to invest in commodities UK from other traders on the platform.
eToro – Best Broker to Invest in Commodities
67% of retail investor accounts lose money when trading CFDs with this provider. Your capital is at risk.
Should I invest in commodities in 2021?
The commodity market fundamentals are looking better than they have for some time. Commodity prices can trend higher and lower for years at a time, and they have trended lower for the last decade. The world economy is now beginning to recover after the Coronavirus pandemic, and this appears to be kickstarting a new uptrend for commodity prices.
What Commodities Can You Trade in the UK?
Modern trading platforms make it possible to trade almost any instrument from any country. The important factor to remember is that the platform you use should be properly regulated in your country of residence.
What is the best commodity to invest in?
The best commodity to invest in at any given time may differ. Most traders start by learning about oil and gold and then consider copper, corn, wheat, and natural gas.
When is the best time to invest in commodities?
Commodities are cyclical, with the cycles reflecting the balance between demand and supply. Demand is affected by the economy, while supply depends on production capacity and inventories. The best time to invest is when the economy is growing, and productive capacity is tight.
How do you short sell a commodity online?
If you are trading physical commodities, short selling is a complicated process. However, if you trade commodity CFDs on a trading platform, all the hassle is taken care of automatically. To short sell commodity CFDs you simply sell the CFD, and then buy it back to close the position.
What affects the price of commodities?
Commodity prices represent the price where supply and demand are in equilibrium. Demand for a commodity is affected by the growth of the industries that use the commodity and by consumer trends. Supply is affected by productive capacity, inventories and logistical issues. The weather also plays a role in the supply side of agricultural commodities.
What is the best way to invest in commodities?
CFDs, ETFs, and shares are the best way to invest in commodities because you do not have to worry about storing, transporting, and insuring the underlying commodity..