How to Trade Commodities

Commodities are goods that are sold by more than one company and are a natural resource. Petroleum is a commodity, however a specific brand of clothing is not because it is significantly different from any other given brand of clothing. Commodities are especially important during times of inflation as they can protect purchasing power.

Instructions

Difficulty: Challenging

1. Open an individual trading account with a futures commission merchant, managed account, commodity trading adviser or an introducing broker. New to commodities take advantage of expert advice.
2. Understand the seasonal variations for differing commodities. Livestock, grain and energy vary in value depending on the time of year, while metals do not rely on seasonal change.
3. Familiarize yourself with the Dow Jones AIG Commodity Index and the Goldman Sachs Commodities Index. The GSCI is based on economic demand while the DJ-AIGCI is based on production and liquidity. Use both indexes together to get the clearest picture of the commodity's future.
4. Invest in a mutual fund purchased through a natural resource fund or a raw-commodity fund to learn the ropes of the commodity trade. Use this basic of commodities as a way to figure out the right investments for you.
5. Find funds with "direct commodity investments since buying a natural-resources fund typically adds more stock holdings to your portfolio."
6. Watch your investments closely, but be willing to ride out some rough patches.

Tips & Warnings

• Research the exact commodity you're interested in is a must. Your work doesn't end here.
• Straight commodity investing is difficult. Don't rush. Understand the risks versus rewards.