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Main Dictionary C

Commodity

A commodity is a tangible product or resource of value that might be interchanged with products or resources of the same type as a part of commercial activity. Commodities are represented by different groups of goods such as metals (gold, silver, copper, etc.), agricultural resources used in production of food and clothes, energy, financial products and technological achievements.

Commodities’ value almost always lies in their use in production of other goods and a constant demand for them in the market, so they are traded every day, and their prices are extremely significant for trading and economy in general. As commodities are traded on an everyday basis, their prices constantly change and affect the situation in the market.

An important feature of a commodity is that its quality doesn’t differ much from producer to producer, so basically one type of commodity is always the same or very similar resource or good. There are specific standards for each type in the market which must be met for a commodity to be traded. So, the basic quality and minimum amount of a commodity are usually specified by these standards.

Trading commodities

Commodities are traded on commodity stock markets of different types. As a commodity is usually sold and purchased in huge amounts, requiring difficult transportation and delivery, it’s not always traded directly on spot markets where buyers come to actually purchase and take the commodity. Popular options for trading commodities are futures markets and forwards markets, where future contracts are traded among buyers and sellers. These contracts are in fact arrangements to buy a specific amount of a commodity for a specific price at a specific time, and the delivery is organized only after the contract expires, and contracts are frequently rolled over or closed, so the delivery doesn’t actually happen.

As there are two main types of markets for trading commodities, there are two main types of commodity buyers accordingly. 

In general, buyers might be divided into two large groups:

  • Actual buyers who are interested in commodities as means of production for their businesses. When buying futures, these buyers do it for hedging and minimizing risks for their businesses. After the contracts expire, these type of buyers actually use the commodities in question.
  • Speculators who are interested in gaining profit by playing with highly volatile prices of commodities. These type of buyers never really consider delivery or the use of commodities in production, as their only goal is the further selling of commodities when the prices go up. As commodity markets are liquid, and the price movements there are very noticeable and regular, these markets are extremely attractive for those traders and investors, though it might be risky sometimes.

Risks of investing in commodities

As it has been stated above, commodities and their prices have a real impact on the economy because of being used in production of different products, including essential goods. Commodity prices are closely linked with the inflation level, raising with the growth of inflation. That feature of commodity stocks lead to the investments in commodities as a way to avoid negative effects of inflation. But at the same time, there are noticeable risks in such investments.

Commodity prices are determined, as usual, by supply and demand, which in their turn are often affected by different factors leading to rapid price changes. Another important factor is that commodities are usually traded in futures markets, which have their own peculiarities and are traditionally considered more complex than regular stock markets. These two factors combined create noticeable risks that must be considered before investing in these type of assets.

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