A commodity is a fungible basic good that is interchangeable with other goods of the same nature. While the quality of a commodity may differ slightly, they are expected to be similar enough that they are transposable. They can be bought and sold directly within the stock market or as a derivative, including futures and options.
How Do Commodities Work?
The market for commodities is similar to other markets, in that commodities are bought, sold, and traded either in person or virtually. These deals can be based on the current price of the commodity or on the future expected price. Supply and demand can affect the prices of commodities.
What Are Some Examples of Commodities?
Common examples of a commodity include oil, natural gas, grains, precious metals, and beef. With technological advances in today’s society, certain financial instruments, bandwidth, and cell phone minutes are also considered commodities.
What Are Commodity Stocks?
One way to invest in commodities is to purchase stock in the company that owns the commodity. There is less risk involved with investing in commodities in this way. It is dependent upon the price; therefore if the price of the commodity increases, the company should profit and the price of their shares should increase, as well.
What Are Commodity ETFs?
An exchange-traded fund (ETF) is a fund that is invested in the physical commodity. Some examples of commodity ETFs are natural gas, precious metals, and oil. Commodity ETFs can include investments in futures contracts or on actually acquiring and storing the physical commodity.
Types of Commodities
There are several main categories of commodities. These categories include energy commodities, metal commodities, and agricultural commodities. Specific examples are detailed below, although there are many commodities that exist.
Energy commodities encompass many energy sources. These commodities can include coal, oil, gasoline, and natural gas. Also they include renewable energy sources, such as solar energy or wind power.
Metal commodities can be broken down into two main categories: base metals and precious metals. Base metals are easier to obtain since they include copper, lead, nickel, and zinc. On the contrary, precious metals include gold, silver, platinum, and palladium.
Agricultural commodities can include any crop that is planted and produced annually in addition to any animal that is raised on farmland. There are many agricultural commodities. The most common ones include livestock, dairy products, wheat, cotton and corn.
What Are Commodity Markets?
Commodity markets simply put are markets that exist for the buying, selling, and trading of hard or soft commodities. Let’s review commodity markets and trading and then we’ll discuss the major examples of commodity markets.
What Is Commodity Market Trading?
Commodity markets involve trading on either spot markets or derivative markets. Spot markets are where commodities are traded with the expectation of immediate delivery. This can include trading in exchanges or over-the-counter (OTC).
Derivative markets include trading with futures contracts, forwards, or options. Essentially, these include trading commodities and giving ownership in the future based on a current agreed upon price at the time of the transaction.
How Are Commodity Prices Determined?
Commodity prices are basically determined by supply and demand. They can also be determined by economic growth, mother nature, and even international politics. If there is an increase in demand for specific commodities, you will typically see an increase in prices.
Another example of how prices are determined is mother nature. This can affect prices because it can lead to major changes within the agricultural commodity market. If there is a major storm that leads to the destruction of harvests, this can cause a decrease in supply and drive up the cost of commodities.
Examples of Commodity Markets
There are different types of commodity markets all over the world. Some of the major markets in the United States include the Chicago Board of Trade (CBOT), the Chicago Mercantile Exchange (CME), the New York Board of Trade (NYBOT), and the New York Mercantile Exchange (NYMEX).
What Is the Chicago Board of Trade (CBOT)?
The Chicago Board of Trade was initially established in 1848. The CBOT has established itself as one of the main places for futures trading, both in the United States and worldwide. It is one of the oldest and largest futures exchanges in the world.
Originally, it was established to trade agricultural commodities, such as wheat and corn. However, now it not only trades agricultural commodities, but includes metal and energy commodities as well.
What Is the Chicago Mercantile Exchange (CME)?
Originally established in 1898, it was known as the Chicago Butter and Egg Board, before changing its name in 1919. The CME is the second-largest futures and options exchange in the world and the largest within the United States. In 2000, the CME became the first exchange to go public. Eventually, it merged with the Chicago Board of Trade (CBOT), which took place in 2007.
What Is the New York Mercantile Exchange (NYMEX)?
The New York Mercantile Exchange (NYMEX) was initially established in 1872, known then as the Butter and Cheese Exchange of New York. Located in New York City, specifically in Manhattan, it is one of the largest commodity futures exchanges in the world. In 2006, it was purchased by the CME Group, which also owns the CBOT, CME, and The Commodity Exchange (COMEX).
What Is the New York Board of Trade (NYBOT)?
The New York Board of Trade (NYBOT) was initially founded in 1870. It was established as a physical commodity futures exchange. Also located in New York City, it trades futures and options on numerous commodities, including currencies, coffee, cotton, cocoa, and sugar. In 2006 it became a part of the Intercontinental Exchange (ICE).
Why Are Commodities Important?
Commodities are important because they directly impact the overall economy. Investors are able to buy, sell, or trade commodities all over the world. They can directly impact market movements and can even act similar to trade tariffs, depending on if the price of the commodity is increasing.
Getting Help Understanding Commodities
As we now know, commodities are fungible goods that are bought and sold across numerous exchanges throughout the world. They can directly impact the economy and can even be a direct indicator of inflation, depending on their prices and if they are increasing or responding well to economic changes.
Consulting with a financial advisor can help you to better understand the different types of commodities and how you can invest in them. With all of the different commodity options and markets out there, a financial advisor can help simplify things and guide you in the right direction for what is best for your investments.