Commodity

A commodity refers to a raw or unrefined material that can be traded and is utilized to create other products that are ultimately consumed. These materials serve as inputs in the manufacturing of goods or services.

Commodities possess monetary value and are regarded as tangible assets. Examples of commodities include those harvested from the earth's surface and those extracted from deep underground.

Common categories of commodities include:

• Energy: crude oil, gasoline, heating oil, natural gas
• Metals: gold, silver, copper, platinum, palladium
• Softs: cocoa, coffee, cotton, orange juice, sugar
• Grains and Oilseeds: corn, soybeans, soybean meal, soybean oil, wheat
• Livestock / Meats: feeder cattle, live cattle, lean hogs
• Other: lumber, dairy products

Currently, crude oil is the most actively traded commodity worldwide. Commodities are exchanged on various markets, with the three primary global commodities markets being:

• CME Group (resulting from the merger of the Chicago Mercantile Exchange and the Chicago Board of Trade)
• Intercontinental Exchange
• London Metal Exchange

For trading purposes, a specific commodity is generally interchangeable with others of the same type and quality. For instance, one barrel of oil is considered equivalent to any other barrel. This interchangeability is referred to as fungibility. Commodities are categorized into two types:

• Hard commodities: These are metals or energy resources that are mined or extracted from natural sources.
• Soft commodities: These are agricultural products that are farmed or grown and are often seasonal and susceptible to spoilage.

The act of buying and selling commodities for profit is known as commodities trading, which is divided into two main types:

• The spot market: This market is for commodities that are delivered immediately.
• The futures market: This market is for commodities that will be delivered at a later date.

Most traders in commodities are speculators who do not intend to take physical delivery of the commodities they trade, leading to most futures contracts being closed before their delivery date. Futures contracts are traded on futures exchanges, with most commodities linked to a specific local exchange.

There are two main categories of participants in the commodity markets:

• Hedgers (or "commercials"): These are businesses involved in the production, shipping, processing, or handling of commodities, such as oil and gas producers, miners, grain millers, farmers, and meatpackers.
• Speculators: This group includes banks, hedge funds, and individual traders who speculate on the price movements of commodities to make a profit.

For individual traders, there are several ways to enter the commodities markets without directly engaging in agriculture or livestock raising:

• Futures contracts: These are agreements to buy or sell a specific quantity of a commodity at a predetermined price in the future. Buyers can profit if the price rises, while sellers can benefit if the price falls (known as going short). In retail futures markets, actual delivery of commodities is rarely executed; contracts are typically closed before expiration.
• Options on futures: These contracts provide the holder the right, but not the obligation, to buy or sell a specific futures contract at a designated price before a specified expiration date.
• Exchange-traded funds (ETFs): ETFs are tradable securities that function like common stocks and can be bought or sold on an exchange. Many ETFs are linked to individual commodities, a collection of commodities, or a commodity index.
• Traditional stocks: Numerous publicly traded companies have direct or indirect exposure to commodities and commodity markets, such as miners, oilseed processors, and oil and gas exploration firms.

In addition to spot trading, there are also forward contracts that allow for the purchase and sale of products at a fixed price for future delivery. Options provide the choice to buy or sell at a later date without the obligation, while futures require delivery or payment for the commodity.

Options and futures can be viewed as speculative bets on future commodity prices, and they can also serve as hedging tools for actual trades. For example, an airline might purchase a forward contract or choose an option or future to secure the future price of fuel.

These commodity derivatives also present opportunities for speculation, allowing traders to buy or sell based on anticipated price changes. Utilizing options or futures for hedging can enhance safety in trading.

Private investors can gain exposure to the commodities markets by investing in funds that focus on commodities. A growing trend in commodity investment is through stock market-listed exchange-traded funds (ETFs), which can be bought and sold like shares. The management fees for ETFs are generally lower than those of other investment funds, and the process of buying or selling shares in ETFs is much more straightforward and quicker.