Commodities is a term that refers to raw materials, such as gold, silver, copper, or crops such as grains and corn.
While it’s not super easy to make money with commodities, there are a number of ways you can do so. You just need to understand the market and what these different ways are.
This article will outline and discuss the primary ways that you can make money with commodities, such as buying and selling physical commodities or the stocks of commodity companies.
Here are the top four ways you can make money with commodities:
1. Buy and Sell Actual Commodities
There are websites where you can purchase and then sell physical commodities. These are commodities that you cannot buy and sell through a standard brokerage. You will need to store your physical commodities in a secure location until the time comes to sell it. You would also be wise to invest in insurance to protect you from a loss in the event that your commodities are damaged or stolen.
2. Trade Commodity Stocks
You can also use commodities to earn money by buying and selling commodity stocks, or stocks where the prices move according to the underlying prices of commodities. You would need to invest in the stocks of companies that have something to do with commodities (such as companies that mine aluminum, for example).
Commodity stocks are very easy to buy and sell, and they are also much less volatile in comparison to futures, which we will talk about next.
3. Trade Commodity Futures
A commodity future is simply a contract that makes a specified amount of a particular commodity at a predetermined price, and at a future date. Commodity futures will trade on a specialized financial market, and they are available for a wide variety of different commodities including ethanol, crude oil, wheat, and corn.
4. Trade Commodity Futures Options
Finally, you can also trade commodity futures option. A futures option is simply your right to assume a futures position at a strike price and a for a specced time period. The strike price is set at the underlying price of the commodity. The option will give you (the holder) the right to buy or sell a single futures contract. You can exercise this right at any time before it is set to expire (which usually is at the end of the month before the delivery month of the contract).
To put this into perspective, if the price of corn is $3.50, and the futures prices is $4.00 (the spot price in addition to a $0.50 premium), then the price of the option will be $0.75, or $4.00 minus $3.25.
Making Money With Commodities
Hopefully this article has given you some insight into what commodities are and how you can earn money with them. Making money with commodities is not easy, and most people who do it lose money rather than earn it, so be sure that you fully understand the market and seek professional guidance before investing.