Commodities are another class of assets just like stocks. Most commodities are products that come from the earth that possess uniform quality are produced in large quantities and by many different producers.
Commodities include oil, gas, and gold, silver. Basically they are raw materials needed by large manufacturing companies in running their business.
Types of Commodities
- Metal- include gold, used in making jewelry; copper, the most widely used dorm of electrical wiring; silver, also used for jewelry and many other uses as well .
- Energy- it include crude oil used in transportation activities and production of plastics, natural gas used for electricity generation, and gasoline which powers light duty cars.
- Agricultural- commodities such as corn, coffee an important source of food for livestock and human sugar soybeans; whose oil is used for making breads cakes cookies one of the most important food crops in the world.
Commodities are basic goods and materials that are widely used and are not meaningfully differentiated from one another. Examples of commodities include barrels of oils, bushels of wheat, or megawatt-hours of electricity. Commodities have long been an important part of commerce, but in recent decades the trading of commodities has become increasingly standardized.
Types of commodity buyers
- Buyers and producers
They use commodity futures contracts for the hedging purposes for which they were originally intended. These traders make or take delivery of the actual commodity when the futures contract expires.
For example, the wheat farmer that plants a crop can hedge against the risk of losing money if the price of wheat falls before the crop is harvested. The farmer can sell wheat futures contracts when the crop is planted and guarantee a predetermined price for the wheat at the time it is harvested.
- Commodities Speculators
These are traders who trade in the commodities markets for the sole purpose of profiting from the volatile price movements. These traders never intend to make or take delivery of the actual commodity when the futures contract expires.
Relationship between commodities and derivatives
The modern commodities market relies heavily on derivative securities, such as futures contracts and forward contracts. Buyers and sellers can transact with one another easily and in large volumes without needing to exchange the physical commodities themselves. Many buyers and sellers of commodity derivatives do so to speculate on the price movements of the underlying commodities for purposes such as risk hedging and inflation protection.