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In today’s markets, many investors trade in bonds and stocks. Other investors, however, trade in commodities. Just exactly what are commodities? A simple explanation defines commodities as goods that are traded on an exchange. These goods include such things as gold, oil and coffee. The prices commanded by these goods fluctuate depending on that items supply and demand level. The trading of commodities also plays a role in transfer the items from the producers of the goods to the companies that require them for production purposes.
Commodities are considered to be anything of value. On the other hand, there are some commodities that maintain a consistent price throughout different markets. These general are in high enough demand that they become liquid in their value and can be sold on an exchange. The most commonly traded commodities that are usually traded are staples that are used on a global basis.
Very similar to stocks, commodities trading is usually done through paper contracts. A share of stock means that a person has partial ownership of a business or company, while a commodities contract, also known as a futures contract, gives the investor the right to own a commodity at a date in the future. When that particular date is reached, the contract will stop being sold on the exchange.
The value of futures rises and falls based on supply and demand. If an investor thinks a certain commodity will be in short supply, then the price of the contract will go up. The reverse also holds true. If investors think the commodity won’t be in short supply, the price will go down.
