Commodity

AAA

DEFINITION of 'Commodity'

1. A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often used as inputs in the production of other goods or services. The quality of a given commodity may differ slightly, but it is essentially uniform across producers. When they are traded on an exchange, commodities must also meet specified minimum standards, also known as a basis grade.

2. Any good exchanged during commerce, which includes goods traded on a commodity exchange.

VIDEO

Loading the player...

BREAKING DOWN 'Commodity'

1. The basic idea is that there is little differentiation between a commodity coming from one producer and the same commodity from another producer - a barrel of oil is basically the same product, regardless of the producer. Compare this to, say, electronics, where the quality and features of a given product will be completely different depending on the producer. Some traditional examples of commodities include grains, gold, beef, oil and natural gas. More recently, the definition has expanded to include financial products such as foreign currencies and indexes. Technological advances have also led to new types of commodities being exchanged in the marketplace: for example, cell phone minutes and bandwidth.

2. The sale and purchase of commodities is usually carried out through futures contracts on exchanges that standardize the quantity and minimum quality of the commodity being traded. For example, the Chicago Board of Trade stipulates that one wheat contract is for 5,000 bushels and also states what grades of wheat (e.g. No. 2 Northern Spring) can be used to satisfy the contract.

RELATED TERMS
  1. S&P/TSX Composite Index

    The Canadian equivalent to the S&P 500 market index in the ...
  2. Basis Grade

    The minimum accepted standard that a deliverable commodity must ...
  3. Chicago Board Of Trade - CBOT

    A commodity exchange established in 1848 that today trades in ...
  4. Commodity Swap

    A swap in which exchanged cash flows are dependent on the price ...
  5. New York Board Of Trade - NYBOT

    A commodities exchange in New York that trades futures and options ...
  6. Long-Term Equity Anticipation Securities ...

    Publicly traded options contracts with expiration dates that ...
Related Articles
  1. Stock Analysis

    The Best Stocks to Buy for Less than $10 before Year End

    Learn about the best stocks to buy under $10. These stocks are speculative but have considerable upside given their valuation and market conditions.
  2. Stock Analysis

    Best Stocks to Buy for Less Than $5

    Learn more about interesting small-cap stocks, selling for less than $5 per share, that investors may wish to consider adding to their portfolio.
  3. Active Trading Fundamentals

    Oil Exploration Companies Pose High Risk for Investors

    Learn why oil exploration companies pose high risks for investors. Oil exploration stocks are highly leveraged to the price of crude oil.
  4. Markets

    What are Commodities?

    A commodity is a basic good used in commerce that is interchangeable with other commodities of the same type. Commonly traded commodities include gold, beef, oil, lumber and natural gas. Additional ...
  5. Trading Systems & Software

    Four-Week Rule Boosts Winning Trades

    Acquaint yourself with an indicator that played a role in the early development of technical analysis.
  6. Investing Basics

    The Copper King: An Empire Built On Manipulation

    Find out how Yasuo Hamanaka's actions in the copper market forever changed the rules for commodity traders.
  7. Economics

    What Is Wrong With Gold?

    Despite its historic and symbolic appeal, this metal is simply a commodity. Here we explore its meaning as an investment.
  8. Forex Education

    The Forex Three-Session System

    Market hours for Tokyo, London and New York determine volatility peaks. Find out why.
  9. Investing Basics

    How To Invest In Commodities

    Find out which futures, options or funds will be your perfect commodity portfolio fit.
  10. Sectors

    Sugar: A Sweet Deal For Investors

    From sugar beet to sugar cane, this sector is growing despite a lot of sour challenges.
RELATED FAQS
  1. Can mutual funds invest in commodities?

    Mutual funds can invest in commodities. In fact, mutual funds may provide a better way for investors to gain exposure to ... Read Full Answer >>
  2. How can electricity be traded as a commodity by an individual investor?

    Electricity can be traded in the financial marketplace like any other commodity. Electricity futures trading offers an alternative ... Read Full Answer >>
  3. What is the relationship between implied volatility and the volatility skew?

    The volatility skew refers to the shape of implied volatilities for options graphed across the range of strike prices for ... Read Full Answer >>
  4. How are commodity spot prices different than futures prices?

    Commodity spot prices and futures prices are different quotes for different types of contracts. The spot price is the current ... Read Full Answer >>
  5. How do commodity spot prices indicate future price movements?

    Commodity spot prices indicate future price movements because commodity futures prices are calculated using spot prices. ... Read Full Answer >>
  6. What are some examples of positive correlation in technical stock market analysis?

    Some examples of positive correlation in technical stock market analysis are the relationship between commodity-producing ... Read Full Answer >>
  7. What expiry months are typically available for derivatives?

    The expiry months typically available for derivatives vary according to the specific financial market the derivative is traded ... Read Full Answer >>
  8. How did the financial crisis affect the oil and gas sector?

    The financial crisis had a negative impact on the oil and gas sector as it led to a steep decline in oil and gas prices and ... Read Full Answer >>
  9. Why can real estate be a good addition to a traditional stock and bond portfolio?

    Real estate can be a good addition to a traditional stock and bond portfolio because it offers diversification. Real estate ... Read Full Answer >>
  10. What are the major types of insurance policies that insurance companies will offer?

    The principal commodities used in producing chemicals are oil, natural gas, coal and a wide variety of metals and minerals. ... Read Full Answer >>
  11. How are industrial goods different from consumer goods?

    Industrial goods are made up of machinery, manufacturing plants and materials, and any other good or component used by other ... Read Full Answer >>
  12. What parameters are required for a market to exhibit perfect competition?

    A perfectly competitive market requires homogeneous goods, perfect knowledge, no barriers to entry or exit, and each firm ... Read Full Answer >>
  13. What commodities are the main inputs for the electronics sector?

    A variety of metals, plastics, raw materials and chemicals are used by the electronics industry. Some of the more common ... Read Full Answer >>
  14. Is fiat money more prone to inflation than commodity money?

    The value of fiat money is based largely on public faith in the issuer. Commodity money's value is based on the material ... Read Full Answer >>
  15. What is the aerospace sector?

    The aerospace sector, one of the largest and most powerful industries in the United States, supplies five markets: military ... Read Full Answer >>
  16. What commodities are not tradable?

    As of February 2015, commodities that are not tradable include diamonds, tomatoes, carbon dioxide, lemons, eggs, potatoes, ... Read Full Answer >>
  17. Are commodities the same as consumables?

    Some commodities are consumables, but not all consumables are commodities. Commodities encompass the raw materials used to ... Read Full Answer >>
  18. What developed countries have the greatest exposure to metals and mining?

    The developed countries with the most exposure to the metals and mining sector are Canada, Australia and the United States. ... Read Full Answer >>
  19. What are tradable commodities?

    Tradable commodities consist of basic goods used in commerce that are often interchangeable with other goods of the same ... Read Full Answer >>
  20. What's the difference between a commodity and a product?

    A commodity is a basic good used in commerce as an input in the production of services or goods. Little, if any, differentiation ... Read Full Answer >>
  21. Does Warren Buffett invest in gold? Why or why not?

    Warren Buffett does not invest in gold. He has invested almost $1 billion in silver, so the reason for his aversion to investing ... Read Full Answer >>
  22. What types of items can you buy futures for?

    When buying a future for an item, you enter into a futures contract. This financial contract obligates a buyer to secure ... Read Full Answer >>
  23. What causes oil prices to fluctuate?

    Oil is a commodity, and as such, it tends to see larger fluctuations in price than more stable investments such as stocks ... Read Full Answer >>
  24. How can I invest in gold?

    Investing directly in commodities, such as gold or oil, tends to be more difficult for investors than investing in stocks ... Read Full Answer >>
  25. Are eurodollars related to the currency called the euro?

    Eurodollars have little to do with the official currency of the European Union, the euro (EUR). In 1999, the euro was implemented ... Read Full Answer >>
  26. Who sets the price of commodities?

    Commodities are extremely important as they are essential factors in the production of other goods. A wide of array of commodities ... Read Full Answer >>
  27. How are foreign exchange rates affected by commodity price fluctuations?

    In the foreign exchange (forex) market, currency valuations move up and down as a result of many factors, including interest ... Read Full Answer >>
  28. How can I buy oil as an investment?

    Investors have many options for getting involved with oil. These methods come with varying degrees of risk and range from ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Depreciation

    1. A method of allocating the cost of a tangible asset over its useful life. Businesses depreciate long-term assets for both ...
  2. Recession

    A significant decline in activity across the economy, lasting longer than a few months. It is visible in industrial production, ...
  3. Bubble Theory

    A school of thought that believes that the prices of assets can temporarily rise far above their true values and that these ...
  4. Stock Market Crash

    A rapid and often unanticipated drop in stock prices. A stock market crash can be the result of major catastrophic events, ...
  5. Financial Crisis

    A situation in which the value of financial institutions or assets drops rapidly. A financial crisis is often associated ...
  6. Election Period

    The period of time during which an investor who owns an extendable or retractable bond must indicate to the issuer whether ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!