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What are commodities?

Commodities are products that are found or man made natural products. Think grain, sugar, oil but also meat, energy and metals. The four main categories of commodities are:

  • Energy
  • Metal
  • Livestock and meat
  • Agricultural

These categories can be split in:

  • Hard commodities, which are mined and extracted, like gas, oil and metals.
  • Soft commodities, which are grown and harvested, like grain, coffee, lumber and cattle.

Because commodities are most of the time mass produced in the same quality and quantity, they are priced the same no matter who produced them.

Commodity prices fluctuate all the time based on how the world responds to its many events. Because commodities are very different from stocks and bonds (these are only financial contracts), investors can use commodities to diversify their portfolio. Commodities are very commonly traded as a derivative in the form of futures. As mentioned before, many companies rely on certain ingredients. So a fixed future price might be very beneficial for various reasons.

The most famous commodity of them all is gold. Gold has been a relative safe investment. It's a store of value.

Penke

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