AN INVESTOR'S GUIDE TO
COMMODITY STOCKS

Purchasing commodity stocks is one of the most popular ways of gaining exposure to the commodities sector. Learn what commodity stocks are and how they compare to other commodity investments.

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Commodity stocks offer a convenient and cost-effective way of gaining exposure to the commodity sector. Investors that want to achieve their investment aims by buying stocks, while also diversifying their portfolio, often turn to commodity stocks to help them do so. The volatile nature of commodity stocks can add additional risk to a trading strategy, which should always be taken into consideration before investing.

What are commodity stocks?

Commodity stocks are shares of publicly traded companies that are involved in the production, exploration or distribution of commodities. These companies are listed on stock exchanges and can have business interests in various sectors such as energy, agriculture, metals and mining.

Investing in commodity stocks allows investors to gain exposure to the price movements of commodities, without directly owning the physical assets.

Some companies, such as BHP Group, have diversified operations that offer exposure to multiple sectors of the commodity market. Others, such as B2Gold Corp, are more closely associated with one particular commodity. 

It is also possible for investors to broaden their strategy by investing in shares of firms that provide support services to out-and-out commodity stocks. For example, companies such as Caterpillar, which produces heavy-duty machinery used by mining companies, can see their share price benefit from a boom in commodity prices.

How to identify and find commodity-related stocks

Investor interest in the commodity sector has led to the development of a clear pathway for those wanting to buy into commodity stocks. Stock listings at exchanges and brokers are categorised by industrial sector, making it possible to identify stocks as part of a particular sector, such as “basic materials.” 

In addition, there is a substantial amount of research available in this area. Price trends in commodity markets can be long-lasting due to economic cycles typically lasting for years, rather than months. Logistical challenges in adjusting the supply of commodities to meet changes in demand can also contribute to the sustained nature of these trends.

Why buy commodity stocks?

There are several advantages to commodity stocks. They can offer investors a way to tap into two sectors at once: commodities and equities as an asset class. Increased investor interest in either of those two sectors can potentially be good news for commodity stock prices.

Investing in the commodity sector also offers investors a way to diversify the structure of their portfolio and hedge against falls in the value of the “mainstream” stocks they might hold. 

For example, the price of shares and oil have traditionally been inversely correlated, but shareholders in a large oil giant such as BP will typically expect to see that position outperform the rest of the stock market, should an upwards oil price shock occur.

Certain functionality features of stocks can also explain why many investors use them instead of futures, options or other financial instruments. 

• Stocks that are listed on regulated exchanges have to comply with strict conditions, such as providing clear and transparent reports to investors on a regular basis. 
• Stocks are also arguably easier to understand than some other assets and can provide an entry-level route into investing; trading stocks usually just requires setting up a brokerage account. 
• High trade volumes in stock markets mean that markets are highly liquid and trading fees are low. 
• Some commodity stocks pay dividends, which can form a source of passive income for shareholders.

Commodity stocks vs other commodity investments

Buying stocks is a relatively user-friendly and cost-effective way of gaining exposure to any sector. Commodity stocks in particular can offer a convenient way of investing in the commodity markets without needing to trade commodity futures.

It is important to factor in the fact that the correlation between commodity stock prices and the underlying commodity will be less than if you were to buy a futures instrument.

In addition, if the stock market sentiment turns bearish at the same time as commodity prices rally, then commodity share prices can get caught up in the broader market sell-off.

Final thoughts

Commodity stocks can provide exposure to price movements in commodities markets, although it is also possible for commodity stocks to correlate closely with the broader stock market as well. Regardless, many investors find that the functionality of stocks makes them a convenient and cost-effective way of investing in commodities.

Visit the eToro Academy to learn more about how to invest in commodities.

Quiz

FAQs

How long do commodity price cycles last?

Commodity price cycles often align with the natural economic cycles of the broader economy. These cycles are typically multi-year events, with historical data demonstrating that some commodity price cycles can last between 15 and 20 years.

Should I buy commodity stocks outright or in CFD format?

Contracts for Difference (CFDs) offer investors greater functionality than traditional shares. They allow investors to use leverage to increase the risk-return on a position, or to sell short. 

However, it is important to note that CFDs involve daily financing fees, which can eat into overall returns. Because of this, buy-and-hold investors with a longer investment time horizon tend to favour buying stocks outright.

How can I build a well-diversified portfolio of commodity stocks?

Exchange-traded funds (ETFs) allow you to buy a basket of commodity assets, including stocks, with just one trade. They offer built-in diversification, all while being cost-effective to buy and hold.