Commodities definition

A commodity is a basic physical asset that is typically used as raw material in the manufacturing process that can be traded in the financial markets. There is little difference between a commodity coming from one producer or another, and all commodities of the same type can be traded as the same asset on exchanges.

Commodities are generally split into two main types. These are hard commodities, which are materials that need to be mined or extracted from natural resources, and soft commodities, which are products that need to be grown, farmed, or raised.

Some commodity categories include:

Energy: These are resources that produce energy. They include crude oil, heating oil, natural gas, gasoline, and more. As a result of having a limited global supply, energy prices often rise with demand. Generally, energy commodities are considered volatile.

Metals: Metals include both industrial and precious metals. Industrial metals are those used in manufacturing processes and are usually used in large quantities, and they include tin, copper, aluminium, and more. Precious metals are normally used in the production of jewellery, and they include gold, silver, and platinum.

Agriculture: This category includes crops, with the most popular being soybean, wheat, sugar, coffee, and corn. The supply of these commodities tends to be affected by the climate, such as the occurrences of droughts, flooding, and other natural disasters, and diseases, which can have an impact on their trading price.

Livestock: This category includes animals and animal products, such as live cattle, pork, and milk. The supply of these commodities tends to be affected by the climate as well, or by manufacturer and producer availability, which can have an impact on their trading price.

Trading commodities is usually done through futures contracts on exchanges, or through forward contracts over-the-counter. Prices are agreed upon in advance, as well as the quantity and type of commodity.

In a physical commodities market, the actual physical goods will be exchanged. Most commodity traders, however, do not physically own the goods. Rather, they speculate on price changes in the market and aim to profit from price movements without taking delivery of the actual commodity.

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