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What Are Commodities?
What are commodities? This word is used all the time in financial sections, but many people do not understand exactly what it entails. A commodity is a good that is normally sold and/or produced by a number of different companies and has the same quality regardless of which company sells it. There are ninety six different commodities that are traded on commodity exchanges throughout the world. What makes a commodity different from a product is that there is no product differentiation. Things like precious metals, agricultural products, and other raw materials are considered commodities.
A commodity can be any tangible good, but commodities that are traded in commodity markets are usually bulk goods and food products, including natural gas, gold, silver, oil, wheat, corn, oats, grains like barley and rice, coffee, pork bellies, beef, and others. The meaning of the term commodity has changed through the years, because the word traditionally meant a good that was subject to barter or sale, but the modern definition can include investment vehicles, like commodity futures. Commodities are only traded on commodity exchanges, just like stocks are only traded on stock markets, and these exchanges do much more than just facilitate the trade in commodities, they also enforce any regulations and rules in place to govern the trading process involving commodities.
There are two main commodity types, cash commodities and spot commodities. A spot commodity is a commodity that is traded right then on a spot market and is pending delivery, while a cash commodity is actually a commodity that is used in a futures contract. Before trading any commodities, a new trader on this market should know and understand the ups, downs, and volatility of that commodity. Grains are on of the oldest commodities traded, and they have been around for decades on the markets. Summer is the most volatile time for these commodities, and they include corn, wheat, and soybeans. Energy commodities are another group, and they include heating oil, crude oil, gasoline, natural gas. These commodities are very popular futures trades.
Metals are commodities that are traded every day. Precious metals are used to help hedge inflation, and they can also be used for the purposes of industry, construction, photography, and many other things. Metal commodities include copper, gold, and silver. Soft commodities are another group, and these consist of a number of food products and many industrial materials. These include cotton, sugar, cocoa, tea, and coffee. Livestock commodities are agricultural products that consist of meat only, such as cattle and hogs. These commodities usually have reliable trending patterns, because the production numbers can be estimated well in advance due to the herd statistics and breeding patterns.
Trading commodities can be just as risky as trading stocks or other securities. Volatility is one indicator of the risk each commodity poses, and the futures margin of the commodity will help determine the volatility of the commodity. The futures margin refers to the amount that the futures exchange will need as a good faith deposit or down payment for every futures contract that is opened. Some commodities are extremely active, while others may barely move over long periods of time, and these can include orange juice, rice, pork bellies, lumber, feeder cattle, and oats, so many traders stay away from these commodities even though they have a very low volatility and low risk, because they do not offer a chance to make much profit. Experienced commodity traders know the level of risk that they are willing to take, and they stick at or below this risk level to minimize any financial losses.
The information supplied in this article is not to be considered as medical advice and is for educational purposes only.