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Commodities are the raw materials that keep the world running. From the food we eat to the fuel that powers our homes and cars, commodities are everywhere.
In this lesson, we’ll break down what commodities are, how they are categorized, and the different ways they are traded.
A commodity is a basic good that businesses use to produce other goods and services.
These are raw materials—things like oil, gold, wheat, and coffee, that are traded on global markets.
The key feature of a commodity is that it is interchangeable, meaning one unit of a commodity is essentially the same as another (e.g., one barrel of oil is the same as another barrel of oil, no matter where it comes from).
Example: Think about coffee beans. Whether they’re grown in Brazil or Ethiopia, they can be traded in bulk as long as they meet the same quality standards. This standardization makes commodities easy to trade.
Commodities are typically grouped into four main categories:
Agricultural Products: These include crops like wheat, coffee, soybeans, rice, and corn.
Metals (Mined & Manufactured): Includes gold, silver, copper, aluminum, and platinum.
Livestock: Includes cattle, hogs, and dairy products like milk.
Energy: Covers crude oil, gasoline, natural gas, and coal.
Commodities are also sometimes split into two categories: soft commodities and hard commodities.
Hard commodities: They include energy and manufactured products. They’re considered “hard” commodities because they’re mined or extracted from other natural resources.
Soft commodities: They include agricultural products and livestock. They’re called “soft” commodities because they’re usually farmed, not mined.
Just like stocks, commodities can be bought and sold online. When you trade commodities, you’re speculating on how their prices will change, whether they will rise or fall over time.
Direct Commodity Trading: This involves physically buying and selling the actual goods (like a farmer selling wheat to a food company).
Online Commodity Trading: Traders use financial contracts like futures or CFDs to speculate on price movements without actually owning the physical product.
For a commodity to be tradable, it must be standardized. That means it meets specific quality and quantity requirements so that traders know exactly what they are buying or selling.
Commodities are primarily traded in two main markets:
The spot market is where commodities are traded on the spot, meaning buyers and sellers exchange goods instantly for cash. This market is often used for urgent needs.
Example: A refinery buys crude oil directly from a producer to meet immediate production needs.
In the futures market, traders buy and sell contracts that lock in a price for a commodity to be delivered at a future date. This helps businesses and investors hedge against price changes.
Example: A farmer agrees to sell 1,000 bushels of wheat at $5.50 per bushel in three months. No matter what happens to the price in the future, the farmer is guaranteed that price.
Commodities can be traded on several platforms and markets around the world:
These are specialized markets where standardized contracts for commodities are bought and sold.
Some major exchanges include:
Chicago Mercantile Exchange (CME Group): One of the largest futures exchanges, trading energy, metals, and agricultural products.
New York Mercantile Exchange (NYMEX): Primarily focuses on energy and metal contracts like crude oil, natural gas, and gold.
Intercontinental Exchange (ICE): Trades in energy, agricultural products, and metals.
London Metal Exchange (LME): Specializes in industrial metals like copper and aluminum.
Some commodities are traded directly between buyers and sellers in OTC markets instead of exchanges. These contracts can be more customized but are less regulated.
Many brokers now allow traders to buy and sell commodities online using financial instruments like futures, options, and ETFs. This makes commodities trading more accessible to individuals.
For some commodities, like agricultural goods and metals, trading still happens in physical markets, where buyers and sellers negotiate directly.
This can include auction houses, trade fairs, and specialized trading hubs.
Commodities are raw materials used in industries, ranging from food and metals to energy products.
They are categorized into agriculture, metals, livestock, and energy, or as hard and soft commodities.
Commodities trading involves buying and selling these goods to profit from price changes.
They can be traded in spot markets (for immediate delivery) or futures markets (for contracts with set future prices).
Commodities are traded on global exchanges like CME, NYMEX, and LME, as well as in OTC and online trading platforms.
With the basics of commodities covered, the next lesson will introduce CFD trading, an approach that allows you to trade commodities without owning the underlying asset.
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