Commodity
A commodity refers to a physical product which is used interchangeably with other products of the same type.
What are commodities?
. Some traditional examples of commodities include grains, wheat, oil and gas. In other words, vital resources which are used in manufacturing processes to produce other goods and services such as metals, agricultural products and energy.
Their value is generally uniform despite being manufactured by different producers. This is because they are subject to universal quality standards. When traded in the stock exchange, by law, commodities must meet minimum standard requirements and are bought and sold at uniform price points. So rather than searching for the price of a company on the stock market, instead you can just Google search the price for coffee or soy beans.
KEY TAKEAWAYS
- A commodity is a physical and raw product which are used interchangeably with other products within production processes
- Some traditional examples of commodities include grains, wheat, oil and gas
- Commodity prices are generally uniform and therefore don't tend to fluctuate in value
- You can invest in them through Exchange Traded Funds (ETFs) or by investing in a company which is orientated around a particular commodity
How to invest in commodities
There are a number of ways to invest in commodities. You can do this by purchasing Exchange Traded Funds (ETFs) which track a particular commodity index. This means you will invest in a broad range of commodity-related businesses and provide a good way of diversifying your assets.
Another way is by directly purchasing stocks of a business orientated around a particular commodity. An example of this would be investing in a company like BP or Shell which are two of the world’s major oil and gas players. Commodities are renowned for being volatile, so being fully aware of the risks you’re taking before making an investment is key.
You can also invest in commodities through a futures contract. That is a standardized contract whereby the buyer agrees to purchase some underlying commodity (or the seller to sell it) at a predetermined future price and date.
What determines the price of a commodity?
Prices of commodities are determined by a number of push pull factors listed below:
How to invest in commodities
There are a number of ways to invest in commodities. You can do this by purchasing Exchange Traded Funds (ETFs) which track a particular commodity index. This means you will invest in a broad range of commodity-related businesses and provide a good way of diversifying your assets.
Another way is by directly purchasing stocks of a business orientated around a particular commodity. An example of this would be investing in a company like BP or Shell which are two of the world’s major oil and gas players. Commodities are renowned for being volatile, so being fully aware of the risks you’re taking before making an investment is key.
You can also invest in commodities through a futures contract. That is a standardized contract whereby the buyer agrees to purchase some underlying commodity (or the seller to sell it) at a predetermined future price and date.
What determines the price of a commodity?
Prices of commodities are determined by a number of push pull factors listed below:
Examples of commodities
- Gold
- Coffee
- Aluminum
- Oil
- Cotton
- Sugar
- Coffee
- Palladium
- Copper
- Timber
In addition to supply chain commodities, foreign currencies and indexes are examples of financial commodities. Technological advances have also led to new types of commodities being exchanged in the marketplace. For example, cell phone minutes and bandwidth.