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Investing in raw materials – what do you need to know before your first investment?

Investing in raw materials is a beneficial option for investors. Do you want to start investing in raw materials? Check how to do it.

Investment raw materials are one of the available investment methods. Raw materials are materials used to produce consumer goods or other industrial products. Investing in them can be beneficial and attractive. Especially for investors who are looking for alternative ways to increase their investment portfolio. From this entry you will learn what such an investment is.

What are raw materials and what are their types?

Raw materials are raw materials of natural origin that are used to produce various types of goods and services. You certainly realize that raw materials are an important market for the economy of every country. For some of them, agricultural goods are a key source of income. Moreover, they constitute the basis of the food industry.

Investment raw materials are very diverse. Their choice depends primarily on investors’ preferences and the purpose of their investment. Taking into account their type, several groups of raw materials can be distinguished:

  • agricultural raw materials (cereals, e.g. wheat, corn, rice, potatoes, coffee or cocoa),
  • farm animals, i.e. the so-called livestock (cattle, pigs),
  • industrial metals (iron, copper, aluminum),
  • energy raw materials (coal, natural gas, crude oil),
  • precious metals (silver, gold, platinum).

Each of the mentioned types has its own specific features and risks. Therefore, before deciding to purchase a specific type of raw material, you should carefully analyze the market situation and forecasts related to its further development.

Are you planning an investment, but you are not convinced whether it is a good idea – due to the current situation in the world? Read our post in which we suggest what to invest in during a crisis.

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What is investing in raw materials?

Let’s start with the fact that this is one of the strategies for diversifying an investment portfolio. At the same time, it can also be one of the most effective methods of increasing wealth. Provided we know how to go about it. Commodity investing involves investing in different types of goods. These goods are often used to produce consumer goods or other industrial products.

Over recent years, interest in this type of investment has increased. Especially in the context of the war on the eastern border. However, it cannot be said that raw materials have become a popular way to invest money. Traditional forms of investment are still much more frequently chosen.

Raw materials are an investment that may be an interesting option for people looking for alternatives to traditional ways of investing money. Some of them, such as oil, gold or copper, are usually more stable than stocks or bonds. Their prices depend on global demand and supply, and not only on the situation on financial markets.

You’re probably wondering how it works? In short, investors look for commodities that have growth potential so that they can profit from their investments. For this reason, people purchasing raw materials must have well-developed analytical skills and the ability to predict market trends. This way, they will be able to achieve success in achieving their financial goals.

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Is it worth investing in raw materials?

This question is not easy to answer because everyone has a different point of view. The fact that one person managed to earn a lot does not mean that another person will experience a similar situation. Every investment is a complex topic that requires thought and a common sense approach.

However, if you are considering investing, we have one important piece of advice for you. It is worth remembering that such an investment project will involve not only benefits, but also threats. Below we will discuss the advantages and disadvantages of this type of investment.

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Investment in raw materials – advantages

Diversification of the investment portfolio

One of the main reasons to consider this type of investment is to diversify your investment portfolio. If most of your portfolio is invested in stocks or bonds, investing in commodities can help you reduce your risk.

What does it mean? The point is that commodities tend to trend differently compared to stocks and bonds. This means that adding them to your investment portfolio can help reduce risk. At the same time, such a diversity of assets increases the chances of profit.

Profits during inflation

The second reason to invest in commodities is that commodities can provide a guarantee of profits during inflation. When the prices of consumer goods increase, the prices of raw materials usually increase along with them, including: gold or silver. For this reason, commodities are considered a good hedge against inflation. Such an investment can therefore help to protect your investment portfolio against the value of low inflation.

Ease of investing

The third reason is relatively easy investing. This feature results from the fact that there are currently many ways to make such an investment. Today, there is no longer a need to invest in physical goods. We have various financial instruments at our disposal, e.g. investment funds, futures contracts and options. This is an obvious convenience for investors, giving them greater flexibility and choice.

Potentially high profits

Another reason to consider this type of investment is the potentially high rate of return. If you understand what is happening on the commodity market and can predict price trends, you can make really big profits. This will largely depend on how accurate your investment decisions are.

However, you must bear in mind that there is always a risk of loss, as we mentioned earlier. Raw materials as a form of investment may be a good option for investors who are ready to take such a risk.

minus as disadvantages

Investment in raw materials – disadvantages

High investment risk

Investments in raw materials are usually very risky because raw material prices can change drastically in a short period of time. This can lead to huge losses. Therefore, investors should carefully study the market and regularly analyze commodity prices to avoid unexpected losses.

The need for knowledge

Basically, the point is that if you want to be successful in such investments, you need to have certain knowledge. You probably guessed that it’s all about knowledge about the raw materials market. In addition, the ability to analyze price trends is important.

Dependence on external factors

The prices of raw materials depend on many external factors, which concern both changes in national and international politics, as well as war or natural disasters. Besides, they also depend on the demand and supply in the global market. Therefore, the risk is related to various types of external factors that no investor can influence.

Limited liquidity

Investments in raw materials are often less liquid than investments in stocks or bonds. Investment liquidity is the ability of an investor to easily sell his investment assets (e.g. shares, bonds or raw materials). Of course, we are talking about selling for cash, which has no noticeable impact on their market value. It is worth bearing in mind that selling raw materials in emergency situations may be difficult, which means there is a risk of losing the investment.

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Possible options, i.e. how to invest in raw materials?

Investing in raw materials aims to earn money by speculating on changes in raw material prices that occur on the market. Investors can invest in commodities in various ways:

  • by purchasing physical raw materials,
  • by purchasing futures contracts or options,
  • through investment funds,
  • through ETFs.

It is worth paying attention to investment costs and how to diversify your portfolio to avoid too much risk. Remember to carefully analyze the price charts of the raw materials you are interested in before making your first transaction. It would also be good to examine their foundations.

Due to the fact that the raw material market is very volatile, unfortunately their prices often fluctuate. This, in turn, can result in both high profits and huge losses. Therefore, investors should have a high risk tolerance threshold.

There is another important principle of investing that raw materials should only constitute part of the investment portfolio. Under no circumstances should you focus only on one type of investment.

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Investing in raw materials – how to start?

You probably already guessed that there is no one way to start such investments. Of course, there are several of them, we will discuss one of them, probably the most universal. We will also add that our method is based on several steps. So let’s get down to specifics.

  1. Get to know the raw materials market – before you start investing, it would be worth knowing at least basic information about this market. What we mean here is, for example, what raw materials are available, what factors influence their prices, how raw material trading works, etc. Find out as much as you can, it will certainly influence your future decisions and actions.
  2. Choose the raw materials that interest you – these will also be the ones in which you want to invest. You can choose raw materials that you are somewhat familiar with or those that are currently popular on the market.
  3. Define your investment goals – think about what you want to achieve by investing in raw materials. Are you looking for short-term profits or are you thinking about long-term investing? What level of risk are you willing to accept?
  4. Choose an investment platform – a platform that offers commodity trading. Remember that you have different options to choose from: an online platform, a broker or a bank.
  5. Open an investment account – this applies to an investment account on the platform of your choice. Then supply them with the funds you have decided to allocate for this purpose.
  6. Start investing – after depositing funds in your account, you can start investing in selected raw materials. We wrote earlier about the fact that you have various options for purchasing raw materials, you can return to that fragment.
  7. Monitor your investments – thanks to this you will be up to date with the prices of raw materials. This will allow you to make investment decisions based on current information, not historical information.

We would like to remind you that investing in raw materials always involves risk. Therefore, before investing, it is recommended to obtain professional advice, e.g. from a financial advisor. It is also very important that you thoroughly analyze the market and review your investment goals.

Are you a beginner investor? Would you like to know what to focus on during your first investments? Check out our investing tips for beginners.

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Investing in raw materials can be beneficial for investors because it will allow them to increase their investment portfolio. By adding commodities to your portfolio, you can diversify your investments, hedge against inflation and achieve high returns.

Of course, there is also risk here, as with any other investment. However, thorough analysis and understanding of the commodity market can help you achieve success. It will be a good idea to develop an action strategy.

Main image source: Image by pch.vector on Freepik

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