What is a commodity and how do you trade them?

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

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