Commodities are everyday, common raw physical goods bought and sold in bulk, and have no appreciable difference in quality between the companies that sell it. They encompass a wide variety of items, from agricultural goods like wheat, rice, cocoa, sugar and livestock, to energy and metals. There are over 100 commodities traded in the market today.

The traditional thinking states that commodity investing is a very risky endeavor. The commodity market is highly volatile and prices often swing wildly. While there is the potential for making huge gains, the flip side is that you can also incur huge losses in a short period of time. It is often compared to buying lottery tickets or gambling; the Commodity Futures Trading Commission (CFTC) describes commodities trading as a "volatile, complex, and risky business."

The most logical and practical strategy to follow is to not invest all your money in commodity markets, but to make it a part of a diversified investment portfolio.

While investing in commodities is not for everyone, there are various ways that an individual investor can take part in commodities trading. There are a number of investment vehicles to access and trade in the commodities market.

Futures and Options

Commodities are typically traded in options and futures contracts. A futures contract is an agreement that guarantees the delivery of a certain commodity at a predetermined price on a future date.

To invest in a futures contract, a brokerage account that also trades in futures is necessary. Depending on the brokerage, each commodity contract will require a different minimum deposit. The account value will increase or decrease based on the contract’s value. If the value goes down, more money will be needed to add to the account to keep the position open. Even small price movements can affect an investment—driving it into either loss or huge profits.

The Commodity Research Bureau (CRB) Index is the most popular index used to follow movements in the global commodities market and is considered the most reliable benchmark. It provides market information for some of the most closely followed commodities in the world.

Options, which are generally associated with futures contracts, are less expensive than futures. They allow you to invest in the futures contract but limit your loss to the cost of the option. Options are derivatives that can buy or sell the underlying commodities.

Individual Stocks

An individual investor can choose the option of investing in companies that participate in commodities trade. Taking the commodity energy as an example, the investor can choose from drillers, refiners, tanker companies, or oil companies that are directly related to the actual commodity, in this case, oil. The advantage is that stocks are easy to buy, hold, and trade, and the investment is not exposed to the volatile futures market conditions.

Exchange-Traded Funds

One of the easiest ways for individual investors to participate in the commodities market is by investing in commodity ETFs. Exchange-Traded Funds, or ETFs as they are more commonly known, are index funds that trade like stocks in the stock exchange. Unlike mutual funds, ETFs can be traded all day long and allow an investor to lock in a price for the underlying stocks immediately.

ETFs are not very expensive and can be bought and sold at current market prices at any time during a trading day. They can be used as part of a long-term investment for asset allocation purposes.

Two of the most popular commodity ETFs are USO (United States Oil Fund) and GLD (SPDR Gold Shares). USO tracks the commodity oil and GLD tracks the precious metal gold. Other popular ETFs include the S&P SPDRs, Barclays iShares, and Dow Jones Diamonds.

Mutual Funds

Another easy way to play the commodities market is to invest in a mutual fund that buys and sells commodity futures or stocks in companies that process commodities. An investment in a fund like this has the advantage of being professionally managed and limits the losses to only the investment amounts.

Two of the major funds that trade in the commodities market are the Pimco Commodity Real Return Strategy D (PCRDX) at http://www.pimco.com/LeftNav/ProductsServices/CommodityRealReturn.htm and the Oppenheimer Real Asset fund (QRAAX) at https://www.oppenheimerfunds.com/commonJhtml/fund_info/profile_base.jhtml?fundcode=735&catId=1&view=facts.

Managed Funds

These funds are managed either as an individual, Commodity Pool Operator (CPO) or as a Limited Partnership. A group of investors is gathered into a pool to invest in futures contracts and options. A Commodity Trading Advisor (CTA), registered with the Commodity Futures Trading Commission (CFTC), is employed to advise the pool. The advantage in this type of a fund is professional advice, a structure that provides more money for a manager to work with, and all investors have to put in the same amount of money.

Additional Resources:

- CNN Money Web site for current commodity prices: http://money.cnn.com/data/commodities/

- Commodity Futures Trading Commission (CFTC) Web site: http://www.cftc.gov/index.htm

- Forbes.com Web site about commodities: http://www.forbes.com/commodities/