How to Invest in Lithium (& Why You Should)

November 1, 2022, 8:00 AM

How to Invest in Lithium

Lithium, the lightest metal on the periodic table of elements, has emerged as a metal of choice for many 21st century electronics and electrical devices. In particular, it is the basis of the lithium-ion battery, as well as consumer products such as computers and smartphones. While any investment in future-oriented technology is a gamble, since someone could invent a better battery tomorrow, for the time being it looks like demand for lithium will remain high. Here’s how to invest in this market.

Consider working with a financial advisor as you consider investing in commodities.

Stocks and Stock Funds

Two of the most common ways to invest in lithium are with stocks, also known as equities, and a type of security that is known, collectively, as derivatives. Perhaps the easiest way is through the stock market. You cannot invest in lithium directly this way, since commodities don’t have publicly traded shares. However, you can invest in companies that use or supply this product. This is an excellent way to invest in demand for lithium, while also smoothing out some of the volatility that comes from directly investing in a commodity.

Investing in companies that make lithium-ion batteries like Panasonic, Livent and Samsung allows you access to this market, while at the same time allowing you to invest in the companies themselves. That means that if someone does invent a better way of storing power, you are less exposed than you would be by investing in lithium more directly.

There are two main products in this space: consumer products like laptops and phones and electric vehicles (EV). Investors looking for the EV market should focus on companies like LG, Panasonic and CATL – although investors should note that CATL is a Chinese company, which means it comes with some fairly significant political and accounting concerns. Companies like Tesla, Rivian, General Motors, Lucid Group and Ford are all leading the way in this market. Investing in any or all of them offers exposure to lithium.

Some lithium producers are publicly traded, like Albermarle Corp., which directly sells lithium to the companies that use it, so the more lithium costs the better it does.

Exchange-traded and mutual funds are another option for getting exposure to lithium equities. For example, there is Lithium ETF by Global X, which invests directly in lithium as commodity. It builds its portfolio out of assets linked to lithium, such as producers and heavy users of the product. The goal is to create a fund that mimics the success of the lithium market overall.

Futures and Options

How to Invest in Lithium

Finally, you can invest in lithium directly through the commodities market with futures and options. With these derivatives, as this type of security is known, you can literally buy and sell access to lithium as a material. However, it is important to note that the commodities market is extremely volatile and extremely risky. This is not a good market for inexperienced investors and you should only participate if you fully understand the costs and risks.

A futures contract is a contract to buy or sell some commodity at a later date. The contract essentially says, “On X day, I will buy/sell this product for this amount of money.” Your profits are based on the difference between your contract and the asset’s price at the contract’s expiration date.

There are two types of futures contracts. In a standard futures contract, you actually buy the product in question. If you enter a contract to buy lithium, and do not sell it to someone else, on the contract’s expiration date someone will literally show up with a truck full of lithium.  This is generally relied upon by producers and businesses who want to set their prices in advance. You can also buy a cash settlement futures contract, in which both parties agree not to exchange physical assets but rather to simply exchange the value of the contract in cash.

Like a futures contract, in an options contract you trade the value of an asset. So the value of your contract is based on the difference between the contract price and the asset’s value on the expiration date.

However, unlike a futures contract, a standard options contract operates on a cash settlement. You also have the option to not to execute this contract if you choose. With futures, on the contract’s expiration date you must follow through on the deal even if it is a money-losing position. With an options contract, at the expiration date you can decide not to follow through on the deal if it is unprofitable.

To even this system out, when you buy an options contract you pay an up-front price known as a “premium” to the person selling it.

The Bottom Line

How to Invest in Lithium

There are several ways to invest in lithium as a commodity if you are interested in it. You can pursue the stocks of companies that produce this material, or those that use it in vehicles, batteries and related applications. You can also invest in groups of lithium stocks by buying a stake in funds, like ETFs. Alternatively, you can participate directly in lithium with options and futures.

Tips on Investing

  • Investing in commodities, however you set it up, can be an interesting way to diversify your portfolio. But is it right for you? Working with a financial advisor can give you clarity into that and many related questions. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

  • Determine how your money will grow over time with this free investment calculator from SmartAsset.

Photo credit: ©iStock.com/Olemedia, ©iStock.com/jasonbennee, ©iStock.com/Blue Planet Studio

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