What Are Commodities?

 

A commodity is a basic good, such as a raw material or primary agricultural product that can be bought and sold (such as copper or coffee) and is used in commerce, interchangeable with other commodities of the same type.

Commodities are most often used as inputs in the production of other goods or services, and although their quality may differ slightly, it is essentially uniform across producers i.e. a barrel of oil is basically the same product, regardless of the producer, compared to, say, electronics, where the quality and features of a given product will be completely different depending on the producer. Some traditional examples of commodities include grains, gold, beef, oil and natural gas. More recently, the definition has expanded to include financial products such as foreign currencies and indexes. Technological advances have also led to new types of commodities being exchanged in the marketplace: for example, cell phone minutes and bandwidth.

Whether they are related to food, energy or metals, commodities are an important part of everyday life. Similarly, they can be an important way for investors to diversify beyond traditional stocks and bonds, or to profit from a conviction about price movements.

In the past, a lot of people did not invest in commodities because doing so required significant amounts of time, money and expertise. Today, with the advent of 24 hour global news, buying and selling commodities has become the most accessible and straightforward route for new traders to make money on the markets. Geopolitical events can have a direct, and often immediate, impact on commodity prices. Just keep a close eye on trusted news sources, analyse key global events, and deduce probable outcomes, so you can execute timely and profitable trades.

There are different types of commodity investments for novice and experienced traders to consider. The sale and purchase of commodities is usually carried out through futures contracts on exchanges that standardise the quantity and minimum quality of the commodity being traded. Although commodity futures contracts provide the most direct way to participate in price movements, other types of investments with varying risk and investment profiles also provide exposure to the commodities markets.

The world’s top commodity is crude oil, the world’s “black gold”. What makes this commodity such a big player in the world’s economy lies in the relationship between oil and currency, which results from the fact that oil is the major resource needed for global economic growth. In periods of cheap or stable oil prices, economic growth is spurred and overall inflation expectations are reduced. In contrast, when oil prices become increasingly volatile, this has an adverse impact on growth expectations.