Types of commodities and their role in a diversified portfolio

A diversified portfolio is necessary for any trader looking to minimise risk and maximise returns. While stocks and bonds are the most commonly known assets, adding commodities to your trading plan can provide additional benefits. 

Commodities are tangible goods that can be bought and sold, such as grains, oils, precious metals, etc. This article will examine the various types of commodities you must know and their benefits when put up in a diversified portfolio.

3 main types of commodities

Commodities are classified into three main categories: agricultural, energy, and metals. 

Each commodity type encompasses mixed products and resources, offering traders distinct funding prospects. Including commodities in your portfolio can help broaden your trading strategy and mitigate risk.

1. Agricultural types of commodities 

Alt Image Text: A small bag with a logo of money printed on it, with a plantation in the background.

Agricultural commodities include products such as grains, livestock, and soft commodities. 

Grains like corn, wheat, and soybeans are staple crops traded in commodity markets. Weather conditions, global demand, and government policies often affect these commodities. 

Livestock commodities, including cattle and hogs, are also popular trading options. These commodities are also affected by consumer demand, disease outbreaks, and feed costs. 

If you trade in livestock commodities, it can be more volatile than other agricultural commodities but can also yield higher returns for traders who understand the market dynamics.

Soft commodities, such as coffee, cocoa, and sugar, are also part of the agricultural commodities category. Aspects like weather conditions, disease outbreaks, and global demand influence these types of commodities. 

Soft commodities are commonly used in everyday products, making them an attractive trading option for diversifying your portfolio.

2. Energy types of commodities 

Energy commodities are essential resources that power our modern world. Crude oil, natural gas, and gasoline are examples of this commodity. 

As the most widely traded energy commodity, crude oil holds a significant role in the global energy landscape. Its price is heavily influenced by production levels, geopolitical tensions, and economic growth. 

Crude oil can hedge against inflation and geopolitical risks, making it a popular choice for individual and institutional traders seeking diversification.

Natural gas is a versatile energy commodity for heating, cooling, and electricity generation. Its price is subject to various factors, including weather conditions affecting demand, production levels, and storage capacity. 

As clean energy becomes increasingly essential, trading in natural gas can be seen as a long-term strategy for those who believe in its role in the future of sustainable energy solutions.

Gasoline, derived from crude oil, is another popular energy commodity in the market. A combination of factors, such as fluctuations in crude oil prices, refining capacity, and seasonal demand patterns, influences gasoline prices. 

For investors, gasoline can offer exposure to the transportation industry and serve as a hedge against rising fuel prices, making it a valuable component in commodity portfolios.

3. Metal types of commodities 

Metals commodities offer a unique trading opportunity for investors looking for a stable asset and a hedge against inflation. Gold, silver, and copper are some popular metal commodities.

• Gold’s historic role as a store of value, limited supply, diversification benefits, and ability to perform well during economic turmoil and geopolitical uncertainty contribute to its reputation as a safe-haven asset during economic uncertainty. Investors and individuals often trade gold to protect their wealth and mitigate risks when traditional financial markets are unstable or unpredictable.
• Silver, often called “poor man’s gold,” is another popular metal commodity. Like gold, it also tends to perform well during economic uncertainty, and it has its own unique set of characteristics, such as industrial applications, affordability, and price volatility, making it a versatile and attractive commodity for a diverse range of traders and industrial users.
• Copper is an industrial metal used in construction, electronics, and manufacturing. Its exceptional electrical and thermal conductivity, corrosion resistance, and malleability make it indispensable for various applications across various industries. 

Benefits of including various types of commodities in your portfolio

First and foremost, commodities have a low correlation with traditional assets like stocks and bonds. It means that when the value of stocks and bonds decreases, the value of commodities may increase, and vice versa. This low correlation can help reduce the overall risk of your portfolio.

Second, commodities can act as a hedge against inflation. During periods of rising prices, the value of commodities tends to increase. Commodities can help protect the purchasing power of your portfolio and maintain its value over time.

Additionally, commodities offer the potential for high returns. While commodities’ volatility can be higher than traditional assets, they can also provide significant upside for traders who understand the market dynamics and can capitalise on price movements. The key to success in trading commodities lies in having a deep understanding of the market dynamics and being able to capitalise on price movements. With the right knowledge and skills, traders can reap significant rewards from investing in commodities.
 

3 best ways to trade all types of commodities 

There are several ways to trade in commodities, depending on your risk tolerance and investment goals. 

Three typical methods include trading in contract for difference (CFD), traditional exchange-traded funds (ETFs), and mutual funds.

1. Contract for differences (CFDs)

This form of trading is an agreement formed by traders and CFD brokers to buy or sell a commodity at a predetermined price and date in the future. It allows you to gain exposure to commodities without owning the physical asset. However, trading in CFDs can be complex and requires a deep understanding of the commodity markets.

2. Traditional ETFs

ETFs are a popular financial asset that exposes you to a basket of commodities. These funds are traded on stock exchanges and offer diversification across multiple commodities. ETFs are relatively easy to buy and sell, making them a convenient option for traders.

3. Mutual funds

This trading method pools money from multiple traders to support a diversified portfolio of commodities. Managed by professional fund managers, mutual funds offer a more hands-off approach to investing, making them an attractive option for traders who may not have the time or expertise to manage their investments. With a wide range of mutual fund options, traders can choose funds that align with their investment goals and risk tolerance. 

Additionally, mutual funds offer diversification benefits, which can help spread risk and minimise losses in times of market volatility.

Trade various types of commodities at markets.com

Commodities in a diversified portfolio can provide several benefits, including diversification, inflation protection, and the potential for high returns. 

You can trade the commodities through CFDs, traditional ETFs, or mutual funds. These trading methods may be complex for beginner traders. It would be helpful if you conduct thorough research and consult with a financial advisor before trading. 

Commodities can be valuable to your trading portfolio with the right approach and knowledge. It is important to understand that commodity prices fluctuate due to several factors, such as supply and demand, geopolitical events and weather conditions. Therefore, staying up-to-date with market trends and news is crucial to make informed decisions when trading commodities.

If you are looking for a trading platform with various commodities, markets.com offers a selection of more than 20 popular commodities you can add to your financial portfolio. 

Join markets.com today and start trading like a pro!

When considering "Commodity CFDs" for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.