Commodity

Understanding the Term "Commodity"

When we talk about trading, the term commodity often comes up. But what exactly is a commodity? In the most basic terms, a commodity is a basic good used in commerce that is interchangeable with other goods of the same type. These goods are often used as inputs in the production of other goods or services. Let's dive a bit further into the term and discover the world of commodity trading.

The Basics of Commodities

Commodities are usually split into two main types: hard and soft. Hard commodities are those that are mined or extracted, like gold, oil, and natural gas. Soft commodities, on the other hand, are typically agricultural products or livestock, such as corn, wheat, or pork.

The universal nature of these goods means that their prices are dictated by global supply and demand. When the demand for a commodity rises, the price also increases, and when the supply of a commodity increases, the price falls.

Commodity Trading

Commodity trading takes place in commodity markets. Initially, commodities were traded directly in a physical marketplace, by the exchange of the commodity for money. But modern commodity markets use futures contracts to trade. It means traders invest in futures agreements for delivery of commodities at a later date.

The Importance of Commodity Trading

Commodities form an essential part of our daily lives. Items like coffee we drink, the oil used in cars, or the gold in jewelry are all commodities. Trading commodities is a way of diversifying an investment portfolio beyond traditional securities like shares and bonds. Additionally, commodities trading can provide a hedge against inflation, as commodity prices often rise when the overall cost of living increases.