Commodities, irrespective of whether they are related to metals, food or energy, are an important part of everyday life.  Likewise, investing in commodities can be an important way for investors to diversify beyond traditional investments in stocks and bonds, or to profit from a conviction about price movements.

Even a few years ago, most people did not invest in commodities because investing in commodity market goods required significant amounts of time, money and expertise.  Today, it has become much easier and simpler to  invest in commodity futures.  An investment in commodities, whether it is  investing in oil commodities, investing in agricultural commodities or any other commodity for that matter, has boomed due to the advent of efficient trading software that can be utilized online.

Futures Market in Commodities

A popular way of investing in commodities is through a futures contract, which is an agreement to buy or sell in the future a specific quantity of a commodity at a specific price.  Futures are available on commodities such as crude oil, gold and natural gas, as well as agricultural products such as cattle or corn.

Most of the participants in the futures markets are commercial or institutional users of the commodities they trade.  Their primary objective is hedging and they use the commodity markets to take a position that will reduce the risk of financial loss due to a change in price.  Other participants are mostly individual speculators who typically close out their positions before the contract is executed so that they do not have to take possession of the underlying commodity.  Some speculators even consider this as a form of lucrative work from home jobs.

Most futures contracts will also have options associated with them.  Options on futures contracts allow you to invest in the futures contract, but limit your losses to the cost of the option.  Options are derivatives and usually do not move point-for-point with the futures contract.

Advantages of Futures Trading:

1.   It’s a pure play on the underlying commodity.
2.   Leverage allows for big profits if you are on the right side of the trade.
3.   Minimum-deposit accounts control full-size contracts you would normally not be able to afford.
4.   You can go long or short easily.

Disadvantages:

1.  The futures markets can be very volatile and direct investment in these markets can be very risky, especially so for the inexperienced investors.
2.   Leverage can greatly increase your profit, but likewise can greatly increase your losses.
3.    You can lose your initial deposit and more before you are able to close your position if your trade turns and begins to lose money.

Indirect Means of Investment in Commodities

There are several indirect means to invest in commodities.  Some of these include:

•   Stocks:  Many investors looking for a commodity play use stocks, which are less prone to volatile price swings than the futures market.  You need select stocks that are good investments as well as good commodity plays.

•   Exchange-Traded Funds (ETFs) and Exchange-Traded Notes (ETNs): ETFs and ETNs, which trade like stocks, allow investors to participate in commodity price fluctuations without investing directly in futures contracts.  Commodity ETFs usually track the price of a particular commodity or group of commodities that comprise an index by using futures contracts.  ETNs are unsecured debt designed to mimic the price fluctuation of a particular commodity or commodity index, and are backed by the issuer.

• Mutual Funds and Index Funds:  While mutual funds cannot invest directly in commodities, they can invest in stocks of companies involved in commodity-related industries, such as energy, agriculture or mining.  Like the stocks they invest in, the fund shares may be affected by factors other than commodity prices, including stock market fluctuations and company-specific risks.  Mutual funds investing in commodities can occur indirectly as commodity index mutual funds invest in futures contracts and commodity-linked derivative investments.

Investing in the commodities markets is not for the faint of heart.  You can incur both huge gains and losses.  If you want to invest in commodity futures, make sure you understand the basic trading terminology, and then sign up with a commodities broker that offers demo or virtual trading.

Investing in Commodities 2010

In 2010, it was suggested to keep 5-10 percent of your portfolio in commodites.  To reduce the risk, the commodity index funds, such as PowerShares DB Commodity Index ETF (DBC) and Credit Suisse Commodity Return Strategy Fund (CRSOX) were good options.

Investing in Commodities for Dummies Book

For beginning investors, their are several “investing in commodities for dummies” books available at Amazon.  With five customer reviews, the Commodites for Dummies book has almost a perfect rating from customers.  Priced at $16.49, this is a minimal cost for the trading insights you can learn from this book.

Some of the topics covered include:

• How commodities stack up against other investment vehicles
• How to identify, manage, and overcome risk
• The pros and cons of futures, equities, ETFs and mutual funds
• Specific techniques for analyzing and trading in commodities
• Powerful profits in energy—crude oil, natural gas, coal, nuclear, and alternatives
• What you need to know about trading in metals—precious and not-so-precious
• How to grow your portfolio with farm products