What are Commodities

Trading commodities dates back to ancient times; the rise of many empires can be directly linked to their ability to create complex bartering systems and facilitate the exchange of commodities.

Unlike stocks and bonds, commodities are an important aspect of daily life. A commodity is a basic good used in commerce that is interchangeable with other goods of the same type, and these are often used as inputs in the production of other goods and services. Traditional examples of commodities include grains, gold, beef, oil, and natural gas. Commodities affect the prices of your food, gasoline, plane tickets, jewelry, and the clothes you wear. In fact, the price of your breakfast is highly dependent on some of the most actively traded commodities out there – cereal (corn), toast (wheat), latte (coffee), sausages (pork), and donuts (sugar)!

Commodities that are traded are typically sorted into three broad categories: Metals (Industrial & Precious), Energy (Fossil Fuels, Renewables, & Power), and Agricultural (Softs & Livestock).

In the most basic sense, commodities are known to be risky investment propositions because their market (supply and demand) is significantly impacted by uncertainties that are difficult or impossible to predict, such as unusual weather patterns, epidemics, and disasters both natural and man-made.

For investors, commodities can be an important way to diversify portfolios beyond traditional securities. There are a number of ways to invest in commodities, such as futures contracts, options, and exchange-traded funds (ETFs), which offers investors ways to select what kind of risks they want to take on as well as how they do it.