What is a Commodity?

The basic definition of a commodity is usually an agriculturally grown or naturally-occurring material that can be traded (bought and sold). Commodities of the same type and grade, do not differ much between producers, making them interchangeable and priced similarly, if not equally. There are some commodities that possess an intrinsic value due to their scarcity and difficulty in extracting or mining, this mainly includes metals like gold, silver and platinum.

4 Categories of Commodities:

  • Agricultural Commodities: includes raw goods like sugar, cocoa, coffee beans, etc.
  • Energy Commodities: includes petrol products like oil and gas.
  • Metal Commodities: includes precious metals like gold, silver and platinum, but also base metals like including copper.
  • Livestock Commodities: includes pork bellies, live cattle as well as meat commodities.

Other terms you might come across when trading in commodities are soft and hard commodities. Soft commodities are agricultural commodities or animals, while hard commodities are mainly those that have been mined like gold, oil etc.

There are many different factors that can affect the price of a commodity. Prices for certain commodities have been known to surge when a commodity is scarce or threatened. In general, the most influential across the commodities are when there are changes in the supply and demand of a specific commodity. This is not to say that there are not other factors that can influence the price, including: weather, war, and changes to the U.S. dollar.

Here’s an example:

The largest producer of corn in the world is the United States. Say that there was a sudden freeze across the United States, just before harvest time, which decimated all of the U.S. corn crops. Due to this, the global supply of corn would drop and the demand for corn would rise. Most likely, as a result, the price of corn would rise, or surge, as the supply dwindles and it becomes a ‘hot commodity’.

With Invest505, you can speculate on the prices of commodities with Contracts for Difference (CFDs), allowing traders to participate in the futures market with derivatives instead of the physical assets themselves.