Commodity

A commodity is a basic good used in commerce that is interchangeable with other goods of the same type.

Conventionally, commodities are used to produce other goods or services. Investors can trade with commodities directly via cash settlements or use derivative instruments, such as futures and options contracts. 

The most popular commodities are various types of raw materials or goods, such as:

• Metals
• Grain
• Oil
• Beef
• Natural gas

Buyers and producers of commodities

There are two types of parties that engage in commodity trades – buyers and producers of commodities, as well as regular investors. Buyers and producers of raw materials conventionally engage in commodities trades via futures contracts on dedicated marketplaces, such as the Chicago Board of Trade (CBOT). They use futures contracts to hedge against possible future price fluctuations and lock in their earnings. 

Trading commodities 

Commodities are also frequently traded by investors who are not interested in obtaining the underlying assets. Due to the fact that commodities do not typically trade in tandem with equity and bond markets, investors use commodities to diversify their portfolios or benefit from price fluctuations. Moreover, commodities are employed to protect investors from inflation, as the value of real assets tends to rise.

A clear example is the real estate market – in order to protect their savings from being eaten away by inflation, investors often purchase real estate so as to anchor their savings to real assets.