Next video:
Loading the player...

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 examples of commodities include iron ore, crude oil, salt, sugar, tea, coffee beans, copper, rice, wheat, silver, and platinum. 

Commodities are basic because they have simply been grown or extracted from their natural state and brought up to a minimum grade for sale in a marketplace - there is no extra value added to them by the producer. Although the quality may differ slightly between producers, commodities by definition are very similar no matter who produces them. All commodities of the same grade are priced equally, and are interchangeable.

The most widely traded commodities have well established markets. Investors buy and sell commodities through futures contracts on exchanges. The exchanges standardize the quantity and minimum quality of the commodity. For example, the Chicago Board of Trade stipulates that one wheat contract is comprised of 5,000 bushels. It also states what grades of wheat can be used to satisfy the contract. All wheat that meets that grade, no matter where it was grown, and despite slight variations in quality, will be sold for the same price.

 

Related Articles
  1. Investing

    Understanding the Commodity Market

    There are currently 50 physical and virtual commodity markets worldwide where almost 100 primary commodities trade through the exchange of ownership rights.
  2. Investing

    All About Liquid Commodities

    You might hear 'liquid commodities' and think of an auction, but they're actually a high-volume, fast paced financial product suitable for day traders.
  3. Investing

    Commodity Funds 101

    These funds make investing in gold, oil or grain an easier prospect.
  4. Investing

    3 Reasons to Invest in Discounted Commodities

    Though they're selling at depressed prices, there are several reasons that it could make sense to invest in commodities now.
  5. Investing

    Why Hedge Funds are Mass-Selling Agricultural Futures

    An oversupplied wheat market, speculation about Federal Reserve shifts to interest rates, and other factors have contributed to the large-scale shift.
  6. Investing

    Commodities Without Worries

    ETFs have made commodities investing easier, but look before leaping.
  7. Investing

    Commodities: The Portfolio Hedge

    These diverse asset classes can provide downside protection and upside potential. Find out how to use them.
  8. Investing

    Hedge Funds Pray for High Commodities Prices in 2017

    The commodities rally in 2016 was strong, giving hedge funders hope for 2017.
Hot Definitions
  1. Efficiency Ratio

    Ratios that are typically used to analyze how well a company uses its assets and liabilities internally. Efficiency Ratios ...
  2. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  3. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin account. In the context of the NYSE and FINRA, after an ...
  4. Salvage Value

    The estimated value that an asset will realize upon its sale at the end of its useful life. The value is used in accounting ...
  5. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  6. Promissory Note

    A financial instrument that contains a written promise by one party to pay another party a definite sum of money either on ...
Trading Center