Commodity
Table of Contents
Commodity
The French word “commodité,” which means “amenity or convenience,” is where the word “commodity” originates. Geographic limits do not restrict the trading of commodities. Therefore, the market for commodities might start in a small town and extend outside national boundaries. Supply and demand govern how much items cost on the market. As a result, commodities play a crucial role in trading.
What is a commodity?
An object or component of an economic good or service is referred to as a commodity. It can be freely exchanged on the market, referred to as the spot market or the commodities market.
A key characteristic of a commodity is that the thing we refer to as a commodity is typical of its kind and cannot be distinguished. Gold, iron, energy, animals, meat, and agricultural products are examples of commodities. It frequently involves components used as raw materials or inputs to produce another item or product marketed to consumers.
Understanding commodities
The primary materials used to create items are known as commodities. They could also be everyday necessities like certain agricultural goods. A commodity’s crucial characteristic is very little, if any. Regardless of the producer, an oil barrel is essentially the same product. A bushel of wheat or a tonne of ore works the same way.
As financial assets, commodities can be purchased and traded on specialised exchanges. So, you can purchase contracts on such commodities on well-developed derivatives marketplaces. Due to its low correlation to other financial assets and potential role as an inflation hedge, several experts advise investors to hold at least a small amount of their money in commodities.
A commodity code, a 10-digit number that aids in identifying import and export restrictions outside the EU, is attached to every product. This covers all possible duty and VAT assessments, and any import permits you would need to disclose when presenting a good to customs.
Types of commodities
Over 100 commodities are traded on about 50 major global commodity markets. There are four main categories of commodities that traders can deal in:
- Metal
Along with precious metals like gold, silver, and platinum, a wide range of metals used in manufacturing and construction, such as iron, copper, aluminium, and nickel, are accessible for trading in the market.
- Energy products
Energy products used in homes and businesses are exchanged in large quantities. These are oils and natural gas. Uranium, ethanol, coal, and electricity are additional energy commodities that are traded.
- Agricultural products
A wide range of agricultural and livestock products are traded on the commodities market. Take, for instance, sugar, cocoa, cotton, spices, cereals, oilseeds, pulses, eggs, feeder cattle, and various other products.
- Environmental goods
This category contains white certifications, carbon emissions, and renewable energy.
Characteristics of commodities
The various characteristics of trading in commodities are:
- Trading in commodities offers security from inflation and unexpected price increases.
- Commodity trading can assist one in protecting prices from a black swan event that could result in a price increase or significant discount.
- High leverage is like a two-edged sword; untrained traders risk significant losses.
- Because commodities are so volatile, one bad trade could cause you to lose all of your money.
- Commodity funds don’t offer enough diversification because they are concentrated in just one or two industries. The share price of a commodity ETF can be significantly impacted by a change in a commodity’s price.
- Commodity futures can offer tremendous leverage, which means that even a minor price change can result in significant profits.
- Diversification and avoiding over-concentration due to prolonged exposure to shares can be achieved using commodities.
Examples of commodities
Commodities are goods or services purchased and sold only based on price in commerce. The traded commodities are among them. They may also consist of goods that lack distinctive branding, advantages, or other characteristics that set them apart from competing goods.
One branded product that enjoys loyalty and a premium price is Coca-Cola, which is considered different from other cola drinks. As a cheap store brand isn’t all that distinctive from other store brands, it is more of a commodity. It is primarily purchased due to its inexpensive cost rather than its taste.
Frequently Asked Questions
Commoditisation is turning goods or services into uniform, commoditized items. The distinctive or distinguishing characteristics of the commodity are sometimes removed through this process in favour of interchangeable, identical, cheaper alternatives.
All commodity trading companies are altering commodities in logistics, storage, and shape (processing). Their primary duty is to carry out physical “arbitrages” that increase value through these changes.
The largest commodity trading firms in the world as of 2022 were
- Vitol
- Glencore
- Cargill
- Koch Enterprises
- Midland Archer Daniels
- Gunvor Worldwide
Commodity trading refers to a market where different commodities and their derivative products are bought and sold. These products are largely divided into four categories: agriculture, livestock and meat, metal, and energy.
The selling and purchasing of raw materials, including energy, spices, natural gas, energy products, and precious metals, occurs in commodity markets. The first method of trading commodities is through futures contracts.
Both the futures market and the spot market are available for trading commodities. The buyer instantly pays the item’s current spot price on the spot market. In futures markets, people buy contracts that guarantee items at a specified price shortly. On futures markets, you may trade processed goods as well.
A prolonged boom and bust in the commodity markets, with prices dropping noticeably above or below their long-term trends, is referred to as a commodity supercycle. These oscillations frequently linger for over a decade and may even outlive the business cycle.
Many analysts believe that a new supercycle may begin as countries recover from the epidemic and demand for green energy infrastructure increases.
Supercycles often last for 15-20 years; therefore, it might initially be challenging to distinguish between the beginning of a new supercycle and more frequent short-term price swings.
Related Terms
- Trailing Stops
- Exchange Control
- Relevant Cost
- Dow Theory
- Hyperdeflation
- Hope Credit
- Futures contracts
- Human capital
- Subrogation
- Qualifying Annuity
- Strategic Alliance
- Probate Court
- Procurement
- Holding company
- Harmonic mean
- Trailing Stops
- Exchange Control
- Relevant Cost
- Dow Theory
- Hyperdeflation
- Hope Credit
- Futures contracts
- Human capital
- Subrogation
- Qualifying Annuity
- Strategic Alliance
- Probate Court
- Procurement
- Holding company
- Harmonic mean
- Income protection insurance
- Recession
- Savings Ratios
- Pump and dump
- Total Debt Servicing Ratio
- Debt to Asset Ratio
- Liquid Assets to Net Worth Ratio
- Liquidity Ratio
- Personal financial ratios
- T-bills
- Payroll deduction plan
- Operating expenses
- Demand elasticity
- Deferred compensation
- Conflict theory
- Acid-test ratio
- Withholding Tax
- Benchmark index
- Double Taxation Relief
- Debtor Risk
- Securitization
- Yield on Distribution
- Currency Swap
- Overcollateralization
- Efficient Frontier
- Listing Rules
- Green Shoe Options
- Accrued Interest
- Market Order
- Accrued Expenses
- Target Leverage Ratio
- Acceptance Credit
- Balloon Interest
- Abridged Prospectus
- Data Tagging
- Perpetuity
- Optimal portfolio
- Hybrid annuity
- Investor fallout
- Intermediated market
- Information-less trades
- Back Months
- Adjusted Futures Price
- Expected maturity date
- Excess spread
- Quantitative tightening
- Accreted Value
- Equity Clawback
- Soft Dollar Broker
- Stagnation
- Replenishment
- Decoupling
- Holding period
- Regression analysis
- Wealth manager
- Financial plan
- Adequacy of coverage
- Actual market
- Credit risk
- Insurance
- Financial independence
- Annual report
- Financial management
- Ageing schedule
- Global indices
- Folio number
- Accrual basis
- Liquidity risk
- Quick Ratio
- Unearned Income
- Sustainability
- Value at Risk
- Vertical Financial Analysis
- Residual maturity
- Operating Margin
- Trust deed
- Leverage
- Profit and Loss Statement
- Junior Market
- Affinity fraud
- Base currency
- Working capital
- Individual Savings Account
- Redemption yield
- Net profit margin
- Fringe benefits
- Fiscal policy
- Escrow
- Externality
- Multi-level marketing
- Joint tenancy
- Liquidity coverage ratio
- Hurdle rate
- Kiddie tax
- Giffen Goods
- Keynesian economics
- EBITA
- Risk Tolerance
- Disbursement
- Bayes’ Theorem
- Amalgamation
- Adverse selection
- Contribution Margin
- Accounting Equation
- Value chain
- Gross Income
- Net present value
- Liability
- Leverage ratio
- Inventory turnover
- Gross margin
- Collateral
- Being Bearish
- Being Bullish
- Exchange rate
- Basis point
- Inception date
- Riskometer
- Trigger Option
- Zeta model
- Racketeering
- Market Indexes
- Short Selling
- Quartile rank
- Defeasance
- Cut-off-time
- Business-to-Consumer
- Bankruptcy
- Acquisition
- Turnover Ratio
- Indexation
- Fiduciary responsibility
- Benchmark
- Pegging
- Illiquidity
- Backwardation
- Backup Withholding
- Buyout
- Beneficial owner
- Contingent deferred sales charge
- Exchange privilege
- Asset allocation
- Maturity distribution
- Letter of Intent
- Emerging Markets
- Consensus Estimate
- Cash Settlement
- Cash Flow
- Capital Lease Obligations
- Book-to-Bill-Ratio
- Capital Gains or Losses
- Balance Sheet
- Capital Lease
Most Popular Terms
Other Terms
- Jumbo pools
- Inverse floater
- Forward Swap
- Underwriting risk
- Reinvestment risk
- Final Maturity Date
- Payment Date
- Secondary Market
- Margin Requirement
- Mark-to-market
- Pledged Asset
- Yield Pickup
- Subordinated Debt
- Treasury Stock Method
- Stochastic Oscillator
- Bullet Bonds
- Basket Trade
- Contrarian Strategy
- Notional Value
- Speculation
- Stub
- Trading Volume
- Going Long
- Pink sheet stocks
- Rand cost averaging
- Sustainable investment
- Stop-limit sell order
- Economic Bubble
- Ask Price
- Constant prepayment rate
- Covenants
- Stock symbol
- Companion tranche
- Synthetic replication
- Bourse
- Beneficiary
- Witching Hour
- Widow and Orphan stock
- Public Float
- Closing Price
- Reverse stock splits
- Quiet period
- Prepayment risk
- Interpolation
- Homemade leverage
- Prime bank investments
- Purchasing power
- ESG
- Capitulation
- Intrapreneur
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