What is a commodity?
Commodities are primary products, that can be grouped under standard headings, such as minerals, agricultural produce or oil, and then traded. The key to such trading is that the commodities under each heading are interchangeable, that’s why attempts to set up a gemstone commodity market have failed, as each one is different. Commodities are usually destined to be used in the production of finished goods.
Where have you heard about commodities?
Because commodities are at the start of so many manufacturing processes, a rise in the price of one can quickly impact everything else along the supply chain. Commodities are highly sensitive to weather crises and world events too. So you might hear in the news that the price of potatoes or coffee is going up because of a bad crop or flooding, or that a rise in oil caused by a political development is leading to higher petrol prices.
What you need to know about commodities...
The world of commodities is wide and varied. Most people have heard of gold, Brent crude oil and copper, but beyond them are commodities such as wheat, sugar, natural gas, aluminium, lead, tin, nickel, zinc, iron-ore and coal. They’re usually traded at high volumes electronically, but are not considered a good place to start for beginner investors as prices are highly volatile.
A less risky way of investing in this area is to invest in companies which work in the production of commodities, such as a silver mining company. As well as being bought and sold on the cash market, commodities can also be traded on futures exchanges in the form of futures contracts