What are Commodities or a ‘Commodity’
A commodity is a physical base “good/goods” used in commerce that is tradable with other commodities of the same type or currency (buying gold for cash etc.)
Commodities that you can trade are most often used as inputs in the production of other goods or services this is why we refer to them as Base goods. The quality of a given commodity may differ slightly, but it is essentially uniform across producers. When they are traded on an exchange, commodities must also meet specified minimum standards, also known as a basis grade of which makes the commodity tradable on global markets.
Key features of commodities:
- Tradability, the commodity has to be tradable, meaning there needs to be a viable investment vehicle to help you trade it. For example, a commodity is included if it has a futures contract assigned to it on one of the major exchanges, or if a company processes it, or if there’s an ETF that tracks it. As an example, Uranium, which is an important energy commodity, isn’t tracked by a futures contract, but there are many companies specialize in mining and processing it. By investing in these listed companies you would get exposure to the rise or fall in the physical price of this commodity.
Deliverability, all the commodities have to be physically deliverable. Crude oil is included because it can be delivered in barrels, and wheat is included because it can be delivered by the bushel so there is a physical recognised quantity of the commodity being traded for a price.
Liquidity, every commodity in this learning center has an active market with buyers and sellers constantly transacting with each other. Liquidity is critical because it gives you the option of getting in and out of an investment without having to face the difficulty of trying to find a buyer or seller for your securities.