What is a commodity and how do you trade them?

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Considering commodity trading? But what is a commodity and how do you trade them? We take a look.

What is a commodity?

In general use, the term ‘commodity’ means anything that has value as part of an exchange. According to the Cambridge Dictionary: a commodity is a “substance or product that can be traded, bought or sold”. As an economic term, ‘commodity’ typically refers to “raw or partly refined materials”, such as “crude oil, cotton, rubber, grains, metals and other minerals”, according to Britannica.com. Commodities, according to the Reserve Bank of Australia, cover products in the broad areas of energy, metals, agricultural goods and livestock. Examples of commodities include cocoa beans, coffee, corn, milk, oats, rice, soybeans, wheat, natural gas, crude oil, copper, and silver.

What is commodity trading?

Commodity trading is the act of buying and selling raw materials or primary products in a market. Trading in commodities is typically conducted in two forms:

Actuals: commodities are exchanged for money and the produce is received in a timely fashion. This practice is in decline, according to Britannica.com.
Futures: Futures are contracts to buy or sell a particular asset (or its equivalent value in cash) on a specified date in the future. This type of trade is the most common nowadays, according to Britannica.com, and the “purpose of trading in futures is either to insure against the risk of price changes (hedging) or to make a profit by speculating on the price trend”.

How do you trade commodities?

Commodities can be traded via commodity exchanges, which are centralised markets where commodity contracts are bought and sold. For example, grain and energy futures can be traded on the Australian Securities Exchange (ASX). Commodities can also be part of Exchange Traded Funds (ETFs), where investors buy shares in a special type of fund that bundles together different classes of products, such as bonds, stocks and commodities, and trades them.

→ Learn more: Are we entering the next commodities supercycle?

→ Which Exchange Traded Funds have the highest returns?

→ Exchange Traded Funds (ETFs): the ultimate guide

Compare Online Share Trading Accounts

Main image source: Nokwan007/Shutterstock.com

This article was reviewed by our Sub Editor Jacqueline Belesky before it was published as part of our fact-checking process.

Amanda Horswill

Former Deputy Editor, Canstar

A journalist for more than two decades, Amanda Horswill has reported on a galaxy of subjects, including property, lifestyle, hyper-local news, data journalism, the Arts and careers.

She’s served as the Editor of Brisbane News, Deputy Features Editor for The Sunday Mail, Deputy Editor – Digital at Quest Community News, and a host of other senior positions at News Corp, prior to joining Canstar.

Amanda is fascinated with the ever-changing world of finance. A passionate believer in the motto “knowledge is power”, she strives to translate the news into practical information that will help readers make informed decisions about their future. While at Canstar, her work was regularly referenced by publishers such as the Sydney Morning Herald , The Age, The New Daily and Yahoo Finance.

Amanda holds a Bachelor of Arts (Journalism, Media Studies and Production, and Public Relations) and a Graduate Certificate in Editing and Publishing, from the University of Southern Queensland.