Commodity stocks are stocks of the companies involved in manufacturing, processing, or selling certain commodities like oil, gold, silver, and steel. Thus, commodity stocks give investors exposure to the commodities, without investing in them directly through the future contracts route.
Commodity stocks follow the price movement of the related commodities. For instance, when gold prices go up, the revenues and operating margin increase, and so does the related gold companies’ stock price. The reverse also stands true, making commodity stocks a double-edged sword, with a high-risk high-reward potential.
Factors to Consider Before Investing in Commodity Stocks
As discussed above, the performance of commodity stocks is directly proportional to the related commodity. However, commodity prices and performance are not the only factors that impact commodity stocks. Investors must conduct an in-depth analysis of the commodity companies to gauge their inherent strengths and weaknesses before investing in them.
Therefore, in addition to tracking the related commodity, investors must also consider capacity utilization, valuation, price-to-earnings ratio, and a debt-equity ratio of commodity companies before investing in commodity stocks. Moreover, macroeconomic factors like corporate governance, tariffs, regulations, and government policies also affect the performance of commodity stocks.
Which Commodity Stocks Should I Buy?
A variety of commodity stocks trade on the stock exchanges. They include stocks of companies engaged in metal mining, metal production, coal companies, and oil and gas companies. We have compiled a list of the best commodity stocks for you to choose from.
Commodity stocks provide diversification to investors’ portfolios, in addition to high returns and hedge against inflation. Therefore, despite the volatility and risks associated with investing in commodity stocks, they are suitable modes of investment for investors looking at high returns without too much exposure to commodities and markets.