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Commodities are an important aspect of most American's daily life. A commodity is a basic good used in commerce that is interchangeable with other goods of the same type. Traditional examples of commodities include grains, gold, beef, oil, and natural gas.
For investors, commodities can be an important way to diversify their portfolios beyond traditional securities. Because the prices of commodities tend to move in opposition to stocks, some investors also rely on commodities during periods of market volatility.
In the past, commodities trading required significant amounts of time, money, and expertise, and was primarily limited to professional traders. Today, there are more options for participating in the commodity markets.
Commodities that are traded are typically sorted into four categories broad categories: metal, energy, livestock and meat, and agricultural.
Metals: Metals commodities include gold, silver, platinum, and copper. During periods of market volatility or bear markets, some investors may decide to invest in precious metals, particularly gold—because of its status as a reliable, dependable metal with real, conveyable value. Investors may also decide to invest in precious metals as a hedge against periods of high inflation or currency devaluation. Energy commodities include crude oil, heating oil, natural gas, and gasoline. Global economic developments and reduced oil outputs from established oil wells around the world have historically led to rising oil prices, as demand for energy-related products has gone up at the same time that oil supplies have dwindled.
Energy: Investors who are interested in entering the commodities market in the energy sector should also be aware of how economic downturns, any shifts in production enforced by the Organization of the Petroleum Exporting Countries (OPEC), and new technological advances in alternative energy sources (wind power, solar energy, biofuel, etc.) that aim to replace crude oil as a primary source of energy, can all have a huge impact on the market prices for commodities in the energy sector.
Agriculture: Agricultural commodities include corn, soybeans, wheat, rice, cocoa, coffee, cotton, and sugar. In the agricultural sector, grains can be very volatile during the summer months or during any period of weather-related transitions. For investors interested in the agricultural sector, population growth—combined with limited agricultural supply—can provide opportunities for profiting from rising agricultural commodity prices.
Crude oil is typically obtained through drilling, where it is usually found alongside other resources, such as natural gas (which is lighter and therefore sits above the crude oil) and saline water (which is denser and sinks below).
After its extraction, crude oil is refined and processed into a variety of forms, such as gasoline, kerosene, and asphalt, for sale to consumers. Although it is often called "black gold," crude oil has a range of viscosity and can vary in color from black to yellow depending on its hydrocarbon composition. Distillation, the process by which oil is heated and separated into different components, is the first stage in refining.
Although fossil fuels like coal have been harvested for centuries, crude oil was first discovered and developed during the Industrial Revolution, and its industrial uses were developed in the 19th century. Newly invented machines revolutionized the way we do work, and they depended on these resources to run.
Today, the world's economy is largely dependent on fossil fuels such as crude oil, and the demand for these resources often sparks political unrest, as a small number of countries control the largest reservoirs. Like any industry, supply and demand heavily affect the prices and profitability of crude oil. The United States, Saudi Arabia, and Russia are the leading producers of oil in the world.
Investors may purchase two types of oil contracts: futures contracts and spot contracts. To the individual investor, oil can be a speculative asset, a portfolio diversifier, or a hedge against related positions.
Futures prices for crude oil can be higher, lower, or equal to spot prices. The price difference between the spot market and the futures market says something about the overall state of the oil market and expectations for it. If the futures prices are higher than the spot prices, this usually means that purchasers anticipate the market will improve, so they are willing to pay a premium for oil to be delivered at a future date. If the futures prices are lower than the spot prices, this means that buyers expect the market to deteriorate.
To qualify as a REIT, the entity must pay out 90% of its taxable profits in the form of dividends to shareholders. By doing this, REITs avoid paying corporate income tax, whereas a regular company would be taxed on its profits, thus eating into the returns it could distribute to its shareholders.
Much like regular dividend-paying stocks, REITs are appropriate for investors who want regular income, though they offer the opportunity for appreciation, too. REITs invest in a variety of properties such as malls (about a quarter of all REITs specialize in these), healthcare facilities, mortgages, and office buildings. In comparison to other types of real estate investments, REITs have the benefit of being highly liquid..
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