Commodities: What are commodities?

The term ‘commodities’ refers to any item produced to meet needs or wants; in economics, these include all types of goods and services, although more specifically, it only refers to a class of goods that satisfy a common or even an essential demand. Commodities are often provided with very little to no difference in terms of quality, which means markets usually treat all types as equal without considering the producer. These commodities are fixed, generic, and generally unprocessed objects or substances that can be bought or sold, or traded in bulk in the financial market. These include food, grains, metals, and minerals. Food commodities are innumerable; these include livestock, oil, cotton, sugar, coffee, cocoa, and so on.

Commodities are often sold and purchased with little regard to whoever manufactured or produced it, mainly because the products themselves differ only very slightly but are generally uniform across all producers. Their prices are then affected by supply and demand; if a commodity is plentiful, its price will go down, but if a commodity is scarce due to the season or some production issues, its price will go up.

In finance, however, commodities refer to monetary products that can be bought, sold, or exchanged, such as currency, stocks, and bond indexes. These commodities are interchangeable, as long as they are of the same type. Investors can trade in financial commodities by buying and selling them on the futures exchanges. When trading, they have to enter into futures contracts.

A futures contract carries with it both the right and the obligation to buy or sell something at a given price within a specified period or by a specified date. This means that once you enter into such a contract, you have to make the trade sooner or late before the given date. A futures contract is a legally binding agreement or financial instrument. These are standardized according to the quantity, quality, and the delivery time and location of each type of commodity. This is, however, different from an option, which, as the term implies, carries with it the right but not the obligation to trade in the said commodity.

Financial commodities are some of the most commonly traded commodities today. They are listed on the CBOT or the S&P 500 indexes.

Anyone trading in the commodities should have in-depth knowledge of the commodity he or she is trading in, and should be prepared to deal with the rising and falling of the value of the said commodity.



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