The commodities market is a very lucrative market to trade in even though it’s also very risky.
What makes a Commodity?
The very first characteristic of a commodity is that it is fungible; meaning that one unit of one kind of commodity could be exchanged with another unit of that same commodity without any loss of value.
For instance, you should be able to exchange one barrel of oil with another barrel of oil without too much loss in value. If the product is not fungible, then it may not be a commodity.
It’s also very important that the product is tradable. There are commodities that are directly listed on the exchanges and therefore they become tradable. For instance, look at the Brent crude. It is listed on an exchange so it is highly tradable.
On the flipside, you can also check out the case of the plutonium commodity. This commodity is not listed on an exchange and that means it is not directly tradable.
Because commodities should be tradable, they also need to be deliverable. The products food grains and oil can be delivered to whoever buys them if the buyer wants them. Thus, they are considered to be commodities.
The biggest characteristic that makes a commodity a commodity is liquidity, which means that a huge number of people are buying in and out of the commodities at any given point in time. That means there is always an active market for these commodities and that the prices are always being quoted.
Liquidity tells you that anyone can buy any amount of these commodities at a very short notice, also ensuring the presence of an active secondary market.
Common Commodity Types
Energy is a very basic factor for the continuation and survival of human lifestyle. It can be in the form of fossil fuel, electricity, or renewable natural resources.
There are also different infrastructures that have been created for the delivery of energy over vast landscapes in a very short time.
Energy products like oil, natural gas, and electricity are just some of the most widely traded energy commodities during the past century.
The metals commodity includes silver and gold, which have been used as money for the past centuries. Nowadays they are being used for industrial and commercial purposes.
Most of the richest and highly successful commodity traders have made their fortunes by investing on metals such as steel and platinum.
The metals commodity has a very highly liquid market that is available globally and provides investors with tons of opportunities to trade.
Agricultural products are also highly traded commodities. Companies usually hedge their future exposure to agricultural products at the commodities markets.
On the other hand, agricultural produce is largely sold in the futures market. Agricultural products cannot be stored for a very, very long time, meaning they have limited shelf life and perishable.
But the commodities markets around the world are quite advanced that they are allowing traders to trade even agricultural products with minimal or zero hassle.