This article will provide a brief introduction to the world of commodities, looking at which ones are the most popular for people to trade and how they are regulated.
What are commodities?
To put it simply, commodities are natural resources, goods or products that are mined, processed or grown and play a critical role in the production of many sectors including food and energy. There are two different types of commodities:
Soft commodities: This refers to commodities that are grown or reared such as livestock, along with agricultural commodities such as cotton, corn and coffee.
Hard commodities: This refers to commodities that are mined or extracted such as natural gas, oil and coal, along with precious metals like gold, silver and copper.
These commodities are incredibly popular with investors and this popularity shows no signs of slowing down, despite economic and social change across the globe. Precious metals, such as gold, have continued to hold their value, and the same is true for energy-based commodities like oil and natural gas as the demand for them is always so high. More recently, the definition of commodities has changed and now includes financial products like indexes and foreign currencies.
Investing in commodities – what you need to know
It’s easy to see why so many people choose to invest in commodities. Although this is rare, some people choose to invest in physical forms of commodities, but to be able to make a solid investment it would be difficult to physically house large quantities of materials and goods.
An alternative option is for people to invest in commodity-based shares and funds, and this type of commodity trading has seen a surge in popularity in recent years. Investors can trade using exchange-traded funds (EFTs) and exchange-traded commodities (ETCs), which bring with them the opportunity to invest in commodities in a low-cost way.
As both EFTs and ETCs can be traded on the traditional stock market, you can buy, sell and trade with them just like you would with other stocks and shares.
Another option for investors is to invest in commodity-based funds which help to provide money to companies which are involved in the production of the commodities themselves. This could be across a wide range of sectors, including agriculture, clean energy and natural resources.
How are commodities regulated in the UK?
In the UK, the Commodity Futures Trading Commission Act of 1974 has implemented regulations on all commodities, goods and services that can be traded on the futures market. The sale and purchase of commodities that take place on commodity exchanges are governed by standard contracts which are issued by trade and exchange associations. However, these regulations can change and wider social and economical shifts, such as Brexit, can have an impact on how commodities can be bought and sold across the world.