Search
Close this search box.

Table of Contents

Commodity



Definition

A commodity is a basic good used in commerce that is interchangeable with other goods of the same type. These are often used as inputs in the production of other goods or services. Examples of commodities include metals, energy, agriculture products, and even foreign currencies.

Phonetic

The phonetic transcription of the word “Commodity” is /kəˈmɒd.ɪ.ti/.

Key Takeaways

Three Main Takeaways about Commodity

  1. Flexible Nature : A commodity is a basic good or raw material in commerce that individuals or institutions buy and sell. Commodities are interchangeable with other goods of the same type, which allows for flexible trade and market fluidity.
  2. Price Determination : The price of a commodity is determined by the market, it is subject to changes in supply and demand. If the supply of a commodity is greater than the demand, the price will drop, and if the demand is greater than the supply, the price will increase.
  3. Investment Potential : Commodities provide a potential hedge against inflation. When prices rise, often the value of commodities goes up. For this reason, many investors include commodities in their overall investment strategy.

Importance

A commodity is an important term in business/finance because it refers to basic goods and raw materials that are either consumed directly, such as food, or used in production processes of other goods, like oil, steel, or gold. These are usually interchangeable with other goods of the same type and they play a critical role in understanding economic conditions globally. Commodities form the base for futures contracts in the exchange markets, offering opportunities for risk management and speculative gains for investors. The prices of commodities often reflect geopolitical, environmental, and economic forces, making them significant indicators of inflation trends, currency movements, and the health of an economy.

Explanation

The purpose of a commodity in the world of finance and business revolves around its role as a basic good used in commerce that is interchangeable with goods of the same type. Commodities are most often used as inputs in the production of other goods or services. The quality of a given commodity may slightly vary, but it is essentially uniform across producers. When they are traded in the financial markets, commodities must also meet specified minimum standards, also known as a basis grade.Commodities play a crucial role in determining the prices of goods, as they are a primary factor in the supply chain. The global economy’s stability can often be gauged by the prices of common commodities like oil, gold, natural gases, grains, among others; they tend to react to global events and changes in economic health. Additionally, commodities are used by traders and investors for speculation, and to hedge against various risks. In essence, commodities serve as a crucial economic mechanism for markets, industrial sectors, and investors.

Examples

1. Oil: This is perhaps the most often-traded commodity across the globe. Oil includes crude oil, gasoline, heating oil, and diesel. Prices are often driven by geopolitical developments, natural disasters, and changes in the economic climate.2. Gold: Another widely traded commodity, Gold is often used as a safe-haven investment during times of economic uncertainty. It is also used extensively in the manufacturing of jewelry and electronics. 3. Wheat: As one of the most significant agricultural commodities, wheat is traded across exchanges and its price can affect food prices globally. The price of wheat can be influenced by weather conditions, soil quality, and international politics. These are just a few examples and there are many more commodities like silver, natural gas, coffee, corn, and livestock.

Frequently Asked Questions(FAQ)

What is a commodity in finance and business?

A commodity is a basic good or raw material in commerce that is interchangeable with other goods or raw materials of the same type. Commodities are often used as inputs in the production of other goods or services.

Can you give examples of commodities?

Examples of commodities include gold, silver, crude oil, natural gas, wheat, corn, coffee, and livestock.

How are commodity prices determined?

Commodity prices are determined by supply and demand factors in the global market. These factors include weather patterns, geopolitical tensions, economic indicators and more.

How can I invest in commodities?

You can invest in commodities through futures contracts, exchange-traded funds (ETFs), commodity mutual funds, and buying the physical goods.

What is a commodity market?

A commodity market is a physical or virtual marketplace for buying, selling, and trading raw or primary products.

What is commodity trading?

Commodity trading involves investing in physical substances like gold and oil. Traders in commodities can profit from price variations.

Are commodities risky to invest in?

Like all investments, commodities can be risky. Prices can fluctuate due to various factors including economic and political news, supply and demand, and currency movements. It’s important to carefully research before investing.

What is commodity futures contract?

A commodity futures contract is a legal agreement to buy or sell a particular commodity at a predetermined price at a specified time in the future.

What are hard and soft commodities?

Hard commodities are natural resources that are mined or extracted, such as gold and oil. Soft commodities are agricultural products or livestock, such as corn, wheat, coffee, and pigs.

Related Finance Terms

Sources for More Information


About Our Editorial Process

At Due, we are dedicated to providing simple money and retirement advice that can make a big impact in your life. Our team closely follows market shifts and deeply understands how to build REAL wealth. All of our articles undergo thorough editing and review by financial experts, ensuring you get reliable and credible money advice.

We partner with leading publications, such as Nasdaq, The Globe and Mail, Entrepreneur, and more, to provide insights on retirement, current markets, and more.

We also host a financial glossary of over 7000 money/investing terms to help you learn more about how to take control of your finances.

View our editorial process

About Our Journalists

Our journalists are not just trusted, certified financial advisers. They are experienced and leading influencers in the financial realm, trusted by millions to provide advice about money. We handpick the best of the best, so you get advice from real experts. Our goal is to educate and inform, NOT to be a ‘stock-picker’ or ‘market-caller.’ 

Why listen to what we have to say?

While Due does not know how to predict the market in the short-term, our team of experts DOES know how you can make smart financial decisions to plan for retirement in the long-term.

View our expert review board

About Due

Due makes it easier to retire on your terms. We give you a realistic view on exactly where you’re at financially so when you retire you know how much money you’ll get each month. Get started today.

Due Fact-Checking Standards and Processes

To ensure we’re putting out the highest content standards, we sought out the help of certified financial experts and accredited individuals to verify our advice. We also rely on them for the most up to date information and data to make sure our in-depth research has the facts right, for today… Not yesterday. Our financial expert review board allows our readers to not only trust the information they are reading but to act on it as well. Most of our authors are CFP (Certified Financial Planners) or CRPC (Chartered Retirement Planning Counselor) certified and all have college degrees. Learn more about annuities, retirement advice and take the correct steps towards financial freedom and knowing exactly where you stand today. Learn everything about our top-notch financial expert reviews below… Learn More