Commodities: What Are They & How Do They Work?

Commodities: What Are They & How Do They Work?
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Point Editorial

A commodity is a good that is interchangeable with other goods. It can either be bought, sold, or traded. The production of larger goods and services involves the use of such materials. 

Some examples are a barrel of oil, gold, grain, and beef. What a commodity entails has changed over the years. The definition now includes financial goods, such as different currencies. 

Read on for more information on the various types of commodities and how a commodity market works. 

What is a commodity? 

Commodities are goods that are exchanged on the market, just like stocks and bonds. Commodity utilization is a common practice in the production of other goods and services. 

Contracts – also known as futures – outline the general quality and quantity standards a commodity must meet before it is viable for trading. More specifically, these agreements outline the date when the goods must be bought or sold.

There are two types of commodity traders: producers or buyers, and speculators. The former refers to individuals who deliver the commodity or take possession of it before the contract deadline. The latter refers to those who trade commodities for profit. 

Commodities are volatile, as their value and accompanying prices constantly fluctuate. They also have a high degree of liquidity, meaning that they are converted to cash quickly. 

Therefore, that makes them easy to sell and tempting to buy. 

Types of commodities

A commodity is a resource used in the creation of other products. The three major types of commodities are as follows: 

Agriculture

These goods include animals raised for food like cattle and pigs; grains, such as wheat, soybeans, rice; and other crops incorporated into beverages like sugar, cocoa, and coffee. Cotton and lumber also fall into this category. 

Energy

Energy commodities refer to gasoline, natural gas, and crude oil. Economic trends that influence the buying and selling of these goods directly influence oil prices for the average consumer when filling the gas tank.

Metals

These goods must be extracted through mining and include copper, gold, and platinum.

How does the commodity market work?

A commodity market is an environment where you can buy, trade, and sell raw materials. 

There are two categories of commodity classifications: hard and soft. Hard commodities are natural resources that require mining, such as gold, silver, and oil. Soft commodities are agricultural products and livestock like corn, coffee beans, sugar, and beef. 

As the demand for goods and services increases, the price of goods will also rise, and commodities are no exception. Economic booms and busts, natural disasters, and investor interest are just a few factors that can determine demand. 

Investors gain access to available commodities by investing in companies that deal in these products. These types of assets increase the diversity of an investor's financial portfolio.

Commodity trading occurs in one of two arenas: spot markets and derivative markets. Spot markets – also called "cash markets" – deal with the physical goods themselves. Participants pay for and receive these goods immediately. On the other hand, a derivative market heavily deals in contracts, specifically futures.

Who regulates commodity markets? 

Commodity markets are centralized, meaning a single authority oversees them. This system promotes efficiency, ensures the standardization of trading practices, and prevents fraudulent practices like price manipulation and short selling.

The Commodity Futures Trading Commission regulates commodity exchanges in the United States.

6 examples of real-life commodity stock markets

ICE Futures U.S. and CME Group are two major U.S. commodity exchange platforms. These platforms coordinate the business of the New York Mercantile Exchange, the Commodity Exchange Inc., the Chicago Board of Trade, and the Chicago Mercantile Exchange Group. The mentioned arenas are four of the most prominent commodity trading platforms in the United States. 

The Chicago Board of Trade, established in 1848, is arguably one of the most influential markets today. The commodities traded by the Chicago Board of Trade are agricultural goods, precious metals, energy products, and even U.S. Treasury Bonds. Corn, silver, gold, soybeans, rice, and ethanol are just some of the resources bought and sold here. In 2007, the company merged with the Chicago Mercantile Exchange. Butter, cattle, pigs, and lumber are some of the primary goods traded there. 

The London Metal Exchange and Tokyo Commodity Exchange are two of the most renowned international commodity markets.

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Ultimately, a commodity is an asset in a tangible form, as compared with intangible assets like checking and savings accounts. Partaking in commodity exchanges is another way to acquire wealth. If you are interested in this, there are many tools to help you, alongside market investing. 

Enter Point Card

You work hard for your money, and Point works hard for you in return. Point is a means for those who want to use their own money while receiving exclusive benefits, including unlimited cash-back on all purchases and bonus cash-back on subscriptions, food delivery, rideshare services, and coffee shops. Plus, Point Card comes with car rental and phone insurance, not to mention travel perks and fraud protection with zero liability.

In short, Point is an excellent tool for navigating your financial journey intelligently, whether you're taking steps to join economic markets or are simply going shopping to treat yourself. 

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