What makes up the commodities market

For example, investors interested in the oil industry can invest in oil drilling companies, refineries, tanker companies, or diversified oil companies. For those interested in the gold sector, some options are purchasing stocks of mining companies, smelters, refineries, or any firm that deals with bullion.

Stocks are typically thought to be less prone to volatile price swings than futures contracts. Stocks can be easier to buy, hold, trade, and track. Plus, it is possible to narrow investments to a particular sector. Of course, investors need to do some research to help ensure that a particular company is both a good investment and commodity play.

Investors can also purchase options on stocks. Similar to options on futures contracts, options on stocks require a smaller investment than buying stocks directly. So, while your risk when investing in a stock option may be limited to the cost of the option, the price movement of a commodity may not directly mirror the price movement of the stock of a company with a related investment. An advantage of investing in stocks in order to enter the commodities market is that trading is easier because most investors already have a brokerage account.

Public information about a company's financial situation is readily available for investors to access, and stocks are often highly liquid. There are some relative disadvantages to investing in stocks as a way of gaining access to the commodities market.

Stocks are never a pure play on commodity prices. In addition, the price of a stock may be influenced by company-related factors that have nothing to do with the value of the related commodity that the investor is trying to track. Exchange traded funds ETFs and exchange-traded notes ETNs are an additional option for investors who are interested in entering the commodities market. ETFs and ETNs trade like stocks and allow investors to potentially profit from fluctuations in commodity prices 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.

Sometimes investors will back the ETF with the actual commodity held in storage. ETNs are unsecured debt securities designed to mimic the price fluctuation of a particular commodity or commodity index.

ETNs are backed by the issuer. ETFs and ETNs allow investors to participate in the price fluctuation of a commodity or basket of commodities, but they typically do not require a special brokerage account. Another downside for investors is that a big move in the price of the commodity may not be reflected point-for-point by the underlying ETF or ETN. In addition, ETNs specifically have credit risk associated with them since they are backed by the issuer.

While you cannot use mutual funds to invest directly in commodities, mutual funds can be invested in stocks of companies involved in commodity-related industries, such as energy, agriculture, or mining. Like the stocks they invest in, the shares of the mutual fund may be impacted by factors other than the fluctuating prices of the commodity, including general stock market fluctuations and company-specific factors.

However, there are a small number of commodity index mutual funds that invest in futures contracts and commodity-linked derivative investments, and therefore provide investors with more direct exposure to commodity prices. By investing in mutual funds, investors get the benefit of professional money management, added diversification, and liquidity. Unfortunately, sometimes management fees are high, and some of the funds may have sale charges.

A commodity pool operator CPO is a person or limited partnership that gathers money from investors and then combines it into one pool in order to invest that money in futures contracts and options. CPOs distribute periodic account statements, as well as annual financial reports.

They are also required to keep strict records of all investors, transactions, and any additional pools they may be operating. CPOs will usually employ a commodity trading advisor CTA to advise them on trading decisions for the pool. Investors may decide to participate in a CPO because they have the added benefit of receiving professional advice from a CTA.

In addition, a pooled structure provides more money and more opportunities for the manager to invest. If investors choose a closed fund, all investors will be required to contribute the same amount of money. Both novice and experienced traders have a variety of different options for investing in financial instruments that give them access to the commodity markets.

While commodity futures contracts provide the most direct way to participate in the price movements of the industry, there are additional types of investments with less risk that also provide sufficient opportunities for commodities exposure. In the most basic sense, commodities are known to be risky investment propositions because they can be affected by uncertainties that are difficult, if not impossible, to predict, such as unusual weather patterns, epidemics, and disasters both natural and human-made.

Commodity Futures Trading Commission. Commodity Futures Trading Association. National Futures Association. Energy Trading. ETF Essentials. Actively scan device characteristics for identification.

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