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Commodities are raw materials used to make other products. These range from agricultural (wheat, corn, soy) to metals (gold, silver, copper) to energy (crude, natural gas, heating oil) and more. Importantly, commodities are standardized across producers with the use of minimum quality standards, called basic grades. This allows them to be interchangeable and grants each type of commodity a value that can fluctuate with the movements of the global market. Commodities investing is the way in which investors, from individuals to large banks, can make money trading commodities and commodity securities by taking advantage of these movements. This article provides a simple overview of the complex world of commodities investing.
The commodities market is a very risky place to invest your money, with potentially large gains balanced by equally large potential losses, commodities should therefore be a portion of your long-term holdings. Investing in commodities is safest as a part of a large and diversified portfolio that also includes other forms of investments.
Commodities can actually reduce overall risk as a part of a diversified portfolio because their movements often are uncorrelated with the fluctuations of other types of securities.