What are commodities?

Commodities are basic physical goods or raw materials used throughout the global economy.

Examples include:

Metals

• Gold

• Silver

• Copper

• Platinum

Energy

• Crude oil

• Natural gas

Agriculture

• Wheat

• Corn

• Coffee

• Sugar

• Soybeans

Unlike company shares, commodities represent physical resources.

What makes a commodity tradable?

Exchange-traded commodities generally need to meet defined standards relating to characteristics such as quality, quantity or grade.

This allows market participants to trade standardised contracts without needing to inspect every individual unit of the underlying commodity.

A key concept is fungibility.

A fungible asset is interchangeable with another unit of the same specified type and quality.

For example, gold meeting the same recognised specification can generally be treated as equivalent regardless of who owns it.

What are hard and soft commodities?

Commodities are often divided into two broad groups.

Hard commodities

Hard commodities are generally extracted or mined.

Examples include:

• Gold

• Silver

• Copper

• Crude oil

• Natural gas

Soft commodities

Soft commodities are generally agricultural products.

Examples include:

• Coffee

• Sugar

• Wheat

• Cocoa

• Cotton

Different commodities respond to different market forces.

Weather can be extremely important for agricultural markets, while oil prices may be more sensitive to global production and geopolitical developments.

Why do people trade commodities?

Commodity markets attract many different participants.

Some businesses need commodities for manufacturing or production.

Others produce commodities and want to manage the risk of future price changes.

Financial traders may participate because they expect prices to rise or fall.

Investors may also use certain commodities as part of a diversified portfolio.

Lesson summary

• Commodities are physical raw materials and resources.

• Examples include gold, oil, natural gas, wheat and coffee.

• Commodities can be classified as hard or soft.

• Standardisation makes exchange-based commodity trading possible.

• Producers, businesses, investors and traders all participate in commodity markets.