A commodity is a natural resource that can be processed and sold. Commodities that are tracked in the financial markets include agricultural goods, metals, energies and minerals, among others.
Commodities are the essential components of other manufactured goods – the building blocks for both industrial and domestic products and foodstuffs. They are shipped around the world to meet demand, because not all countries are capable of producing every commodity they need.
The production and consumption of commodities depends on factors such as climate, season and resources – both natural and man-made. Demand is also influenced by a complex interaction between economic factors and consumer habits.
Because of this, commodity prices have the potential to fluctuate greatly.
Commodities are generally traded in very large quantities, either on the cash market or, more frequently, on the futures exchange.
Commodity speculation
Major commodities tend to trade in very large quantities and it would be unrealistic for most traders to process them. Instead, and especially because of their volatile nature, commodities are often used for speculation on their prices.
They trade on the commodities market, which is made up of a number of international commodity exchanges. In the commodity market, as opposed to the stock market, everything expires – this is because the commodity will eventually need to be delivered to its final owner.
You can sell futures contracts just as easily as buy them, so you can profit no matter which direction the price is heading.
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