Commodity vs. Security

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Commodities are physical goods traded on markets, while securities are financial instruments representing ownership or a debt obligation.

Investors who expand their horizons can capitalize on more opportunities. Each asset has strengths and weaknesses and some act as hedges when the rest of the market experiences weakness.

Commodities and securities are two popular assets. Adding both investments to your portfolio reduces the correlation between your portfolio’s performance and the performance of financial markets. For instance, many equities lose their value during inflation as the dollar loses its purchasing power. However, some commodities like gold gain value during inflation because of their fixed supply and intrinsic value.

This guide will cover different types of commodities and securities and what to consider before getting started. 

What are Commodities?

Commodities are raw materials and other useful resources. Many commodities are essential for civilizations. Precious metals like gold, copper and cobalt are commodities, but this branch of investing also includes livestock, crops, oil, water and other essentials. Every asset’s value depends on supply and demand, but investors have to consider what outside forces impact supply and demand.

For instance, a drought can reduce the supply of water, livestock and crops. A supply reduction can raise the prices of these commodities. A higher supply of these resources can decrease prices, but rising demand for certain livestock and crops can compensate for a supply increase.

Rising demand for smartphones and other electronic devices can lead to higher cobalt prices. Cobalt is an essential mineral that goes into smartphones and similar devices. However, declining demand for these products can lead to lower cobalt prices. Consumer preferences and weather changes are two of the many factors that impact commodity prices.

What are Securities?

Securities are intangible assets that give an investor exposure to a company’s performance. Stocks, bonds and options are three common securities that reward investors based on how well a company performs. Each security has different levels of risk.

Securities that give investors partial ownership of a company have a higher level of risk than corporate debt. Stocks give you partial ownership of a company and rise or fall based on a company’s financial performance. Bonds do not give you partial ownership of a company, but you receive interest payments until the bond matures. Once a bond matures, you receive your principal back.

If a company goes bankrupt, the bondholders get prioritized. These investors have a chance at recouping some or all of their principal. Stockholders are at the bottom of the pecking order and often end up losing their entire investment if the company goes bankrupt.

However, stocks can gain more value than bonds. Bonds have capped returns based on the interest payments. However, some stocks double within five years and significantly reward long-term investors.

Investors can also trade derivatives like options. These securities depend on an underlying asset for their value. Stock options have expiration dates and give investors leverage. These assets can provide the highest gains, but if they go wrong, you can quickly lose your entire investment. 

Differences Between Commodities and Securities

Commodities are tangible resources that have held value for thousands of years. Gold, water, crops and livestock have been essential and are likely to retain that status. Securities don’t have that same level of value. They are intangible, and an investor depends on a company’s performance, good macroeconomic conditions and other factors. Securities can see their prices run well beyond their valuations while commodities don’t feature dramatic run-ups as often.

Investors can make more money with securities than commodities, but securities tend to be riskier than commodities. A gold mining company can go out of business and hurt investors in the process, but if you invest in gold bullion, you still have gold.

While securities tend to have more risk, they are also more liquid. Securities trade on financial markets that allow investors to buy and sell assets within seconds. However, if you buy physical gold, crops, livestock or another commodity, it can take longer to convert your asset into cash.

Similarities Between Commodities and Securities

Commodities and securities can reward long-term investors but aren’t guaranteed to generate positive returns. While different forces impact the prices of these assets, they have some overlap. Macroeconomic factors influence the values of securities and commodities. For instance, rising unemployment can hurt securities and commodities. Fewer people working leads to declining consumer demand. Consumers have to be more careful about how they use their money.

Essential staples like water and crops still see demand. However, some crops, luxury precious metals and various securities can lose value if consumer demand dries up. The mentality for investors is the same: make money by purchasing at a good price and then exit at a higher price. Some of the market forces that influence commodities and securities are similar. Sometimes, commodities and securities move in opposite directions due to the same news. For instance, commodities can gain value during inflation, while securities tend to lose value. However, there is also some overlap, such as declining consumer demand hurting both assets.

Investment Considerations

Investors should consider the strengths and weaknesses of any asset before investing their money. Commodities can help you realize profits and act as useful hedges against inflation. However, these investments can be volatile, and factors like climate and macroeconomic conditions impact their value.

A major strength securities have over commodities is the ability to generate passive income. You can buy dividend stocks and receive quarterly cash distributions just for holding onto your shares. You can also sell covered calls and cash-secured puts to realize additional cash flow from your portfolio. Commodity traders do not have this choice.

However, securities can experience sharp price changes. Many securities are riskier than commodities but also present greater potential. However, you have to consider your risk tolerance and financial goals in spreading your money across assets.

Invest in Commodities and Securities With Benzinga’s Top Brokers

Some brokers let you buy securities and commodities. This flexibility allows you to conduct all of your trades in one place. These are some of the top brokers to consider.

Diversify Your Portfolio for Long-Term Gains

Portfolio diversification can help you achieve higher returns while minimizing your risk. You can get exposure to more asset classes and hedge against inflation and other obstacles. Securities and commodities are two asset classes that can help investors generate higher returns on their capital than if they left it in the bank.

Frequently Asked Questions 

The post Commodity vs. Security by Marc Guberti appeared first on Benzinga. Visit Benzinga to get more great content like this.