DEFINITION of commodity
A commodity is a basic physical asset, often is using as a raw material in the production of goods or services.
WHAT IT IS IN ESSENCE
To take place in the markets, a commodity must be commutable with another commodity of the same type and grade.
What does it mean?
That means that to a trader, gold is gold: no matter where it was mined, or which company mined it.
In economics, a commodity is an economic good or service that has full or substantial fungibility. That is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them.
Most commodities are raw materials, basic resources, agricultural. Or mining products, such as iron ore, sugar, or grains like rice and wheat. Commodities can also be mass-produced unspecialized products such as chemicals and computer memory.
The price of a commodity good typically depends on the function of its market as a whole. Well-established physical commodities have actively traded spot and derivative markets.
The wide availability of commodities typically leads to smaller profit margins. And diminishes the importance of factors (such as brand name) other than price.
There are
Soft commodities – goods like seedlings, such as wheat, or rice.
Hard commodities – which someone is mining, such as gold, helium, and oil.
Energy commodities – include electricity, gas, coal, and oil. Electricity has a particular characteristic that it is usually uneconomical to store. And must, therefore, be consumed as soon as it is processed.
HOW TO USE
All commodities require time to produce and process before delivering from producers to buyers. This gives rise to two main forms of payment that producers and buyers can settle on.
Commodity trading in the financial markets works in a similar manner to the two ways mentioned above. Traders can trade commodities based on the current spot price and make or lose money. It depends on whether the price moves for or against their position.