Commodities trading: What is it and how to start

Commodity stocks allow access to just one company involved in the sector. An oil stock could be BP or Shell or a mining stock Rio Tinto or Anglo American, for example.

As a shareholder, you will own a slice of the company and if the company performs well, you should receive an income in the form of dividend payouts as well as see the share price rise, and along with it the value of your original investment.

Instead of trying to work out which individual commodities companies to back, you might find it easier to let the professionals do the leg work and buy units or shares in a fund, which invests in raw materials or primary agricultural products.

By choosing a commodities fund you can invest in a whole basket of companies, or associated businesses which are involved in commodities production.

For exposure to agriculture you could consider a fund such as Barings Global Agriculture which holds Kubota Corporation, an agricultural machinery manufacturer, and Nutrien, a crops services provider in its top 10 holdings. For exposure to precious metals, Blackrock World Mining Trust holds Rio Tinto and Anglo American in its 10 largest holdings.

• What are the best commodities to trade?

Choosing which type of commodity you want to invest in depends on your personal goals and attitude to risk. It’s usually recommended that investors should allocate no more than 5-10pc of their portfolio to commodities.

If you’re unsure which sector is right, you could consider a broad commodities fund where the manager will select the commodities they believe will perform best.

Investors who hold UK trackers will already have a level of exposure to oil and mining stocks, which should be factored in.

• Is commodity trading difficult?

The mechanism of buying and selling in the commodity sector is the same as any other. But timing the trading can be challenging as prices depend on unpredictable economic cycles, political uncertainties, and the weather to name but a few.

This is why many people turn to using funds where a manager can make these difficult decisions.

• How much do I need to start trading commodities?

The amount of money you need to start trading commodities depends on the route you take to invest. If you choose to invest in a fund via a stockbroker it will be around the £100 mark, and from £25 if you agree to a regular monthly investment. But if you’re planning on snapping up some gold coins, it’s going to be a much bigger outlay of around £1,000.