Commodity

A commodity is a basic good used in commerce that is interchangeable with other goods of the same type. Unlike branded products, commodities are standardized - a bushel of wheat from one farmer is essentially identical to a bushel from another. Major commodities include agricultural products (corn, wheat, soybeans), energy (oil, natural gas), and metals (gold, silver, copper). Commodity markets have existed for centuries, originally helping farmers and producers manage price risk. Today, commodities trade on specialized exchanges like the Chicago Mercantile Exchange (CME) and the New York Mercantile Exchange (NYMEX). Trading occurs through futures contracts, which are agreements to buy or sell a specific quantity at a future date. Commodity prices are driven by supply and demand dynamics. Weather affects agricultural production; geopolitical events impact oil prices; economic growth influences demand for industrial metals. Because commodity production often can't respond quickly to demand changes, prices can be highly volatile. Investors add commodities to portfolios for several reasons. Commodities often move differently than stocks and bonds, providing diversification benefits. They can serve as an inflation hedge since commodity prices tend to rise when general prices increase. Some investors also speculate on commodity price movements or invest thematically in trends like renewable energy or electric vehicles. There are several ways to invest in commodities. Futures contracts offer direct exposure but are complex and carry significant risks. Commodity ETFs provide easier access for most investors. Stocks of companies that produce commodities, like mining or oil companies, offer indirect exposure along with the business risks and rewards of those companies. Understanding commodities helps investors appreciate the broader economic forces that affect financial markets and the real economy that underlies all financial assets.