Commodities are any natural resource that is sold and traded. They are generally raw materials that are eventually used to produce other goods, such as crude oil, precious metals and agricultural products such as wheat and corn.
There are a number of ways to invest in commodities, including purchasing and physically owning the commodity, investing in shares of commodity producing companies, or holding futures contracts that are linked to the commodity.
Commodities offer diversification benefits because their returns have historically had low or negative correlations with the returns of other types of securities. However, commodities are considered a riskier type of investment relative to traditional asset classes, with potentially large wide price fluctuations based on seasonal and cyclical factors. The main benefit of investing in commodities is as a part of a large and diversified portfolio that also includes other forms of investment.
Portfolio diversification benefits
Low correlation with other asset classes
Potential for capital growth
Protection against inflation