Traditional commodities fit broadly into five categories: agriculture, livestock, energy, metals and natural gas. Commodities are basic goods that have been grown or harvested in their natural state. These commodities are then used as inputs in the production of other goods or services.
We use commodities almost without a second thought in our everyday life. Let’s look at a typical morning routine and how commodities are involved. At breakfast, we enjoy bacon and eggs from livestock. Gold or silver extracted from the earth are used in the jewellery we use. We use gasoline and diesel to power our vehicles and get us where we need to go.
Most commodity markets around the world trade in agricultural products and other raw materials (like wheat, barley, sugar, maize, cotton, cocoa, coffee, milk products, pork bellies, oil and metals). In finance, investors rarely buy or sell commodities outright. Instead, they buy a contract to either buy or sell the commodity at a future date and scheduled price. This is known as a futures contract.
Futures contracts are traded on an exchange. Commodities must meet specific minimum standards called basis grade. Commodity exchanges stipulate these standards, which change from year to year. These are necessary to maintain uniformity in the market.
What is a commodity?
But proceed with caution if you want to take part in commodity trading, as it is among the most complex forms of investing. While it can offer lucrative rewards, you will also need to take on high risks due to the wild fluctuations in prices.
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