When it comes to making your fortune or just having a stockpile for when retirement rolls around, investing over the long-term is a reliable strategy to get you there. 

Unlike short-term, high-risk market bets that deliver rapid profits or losses, long-term investing provides you with the benefit of slow, low-risk, incremental compounding over years. 

Some of the most significant vehicles for investors are stocks and commodities. Knowing the difference between the two is the first step in creating a bullet-proof strategy for wealth building.

What Are Stocks?

Stocks should be thought of as ownership in a company. They’re commonly referred to as shares in the investing world. When you purchase shares, you’re purchasing a percentage of ownership of a specific company.

Each corporation has a specific number of shares that compile together to create full-ownership. Each share is treated the same, regardless of who owns it. The shareholder will receive assets and profits from the corporation in the amount equal to the proportion of shares they have in the company.

For example, let’s say you own 10 shares in a company that has 100 available shares. If the quarterly profit for shareholders is $100, you will receive $10.

What Are Commodities?

Commodities are the raw materials of the economy. They are traditionally divided into three categories:

  • Agricultural (e.g., corn, sugar, cattle)
  • Metals (e.g., gold, copper, aluminum)
  • Energy (e.g., crude oil, natural gas, uranium)

About Futures

You can invest in commodities via the futures market but this requires knowledge, skill, and considerable resources. 

Regarding futures, these contracts may be cash-settled or settled via delivery of the underlying asset, such as barrels of crude oil or frozen orange juice concentrate. Each commodity futures contract has a fixed price, sell or buy date, and amount of product. 

Those who trade futures are usually speculating or hedging. The latter is done by producers and manufacturers to protect against volatility in the market. For example, if you manufacture chocolate, you may get a sugar futures contract to lock in a price.

Investors normally “roll over” futures contracts before they expire. Thus, they are seeking to benefit from price movements and have no intention to actually take delivery of the commodity.

Consider the following example. You believe that the price of crude oil will increase faster than expectations over the next few months. So you purchase a futures commodity to be executed two months from today to purchase 100 barrels of oil for $45 per barrel.

After two months, you can purchase 100 barrels of oil for $45 each, even though the market rate might be at $55. (Or it might be at $35!)

Investing in Commodities via the Stock Market

So we’ve seen how futures work. But more commonly, consumers choose to invest in commodities via funds that trade on the stock market. 

These funds might be in the form of ETFs (exchange-traded funds), CEFs (closed-end funds), mutual funds, or trusts. 

Depending on the type of fund, you might be investing in a financial product designed to mirror the price movement of one or more commodities, but buying shares doesn’t necessarily mean you own the underlying asset(s).

To understand this, let’s consider an exception: if you want to invest in gold you could buy shares in the Sprott Physical Gold Trust (PHYS). When you buy these shares you own the underlying gold. You can also redeem that gold (get it shipped to your home) if you own enough of it to at least equal one full “good delivery” bar and meet the fund’s other requirements. 

If by contrast, you buy SPDR Gold Shares (GLD), you will not own the underlying gold that your shares represent.

How Are They Different From Each Other?

To assist you in better understanding stocks and commodities, we’re going to examine some of the major differences between the two. Stocks give you partial ownership in a company, whereas commodities are natural resources that are grown, cultivated, or mined.  

Stocks may be affected by economic indicators like GDP, payroll and jobs reports, and inflation. 

The price of commodities varies mainly depending on:

  • Supply and demand
  • Geopolitics, including tariffs, lockdowns, unrest, and labor strikes

In addition, agricultural commodities are impacted by weather patterns including rainfall, drought, and hurricanes. 

Both stocks and commodities may be impacted by natural disasters or terrorist attacks and currency wars. 

The commodities markets may be more volatile over the short-term but can provide an important part of portfolio diversification, as they are stable long-term. 

The price of stock shares is going to vary depending on the specific financial health of the business. Therefore, those trading shares will evaluate the financial health of a company before purchasing the shares.

Which Should You Invest In?

As with most types of investing, choosing the right strategy is going to depend on the goals of the investor. To determine whether stocks shares or commodities contracts are going to be the best investment strategy for you, you’ll need to consider the following questions:

  • Are you looking for short-term or long-term trades?
  • How much risk do you want to take?
  • What type of specific knowledge do you have regarding fundamental market drivers?

As long-term commodities trade Jim Rogers notes, you should avoid trading or investing in anything you don’t understand. 

The good news is that you don’t need to choose between stocks or commodities though. 

For most long-term investors, both stocks and commodities are important elements in a balanced portfolio. 

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