The term 'Commodities' is included in the Economics edition of the Financial Dictionary. Get your copy on Amazon in Kindle, Paperback or Audio edition. Choose your edition here...
Commodities turn out to be items that are taken from the earth, such as orange juice, cattle, wheat, oil, and gold. Companies buy commodities to turn them into usable products like bread, gasoline, and jewelry to sell to other businesses and consumers. Individual investors purchase and sell them for the purposes of speculation, in an attempt to make a profit.
Commodities are traded through commodities brokers on one of several different commodities exchanges, such as COMEX, or the Commodities Mercantile Exchange, NYMEX, or the New York Mercantile Exchange, and NYBOT, or the New York Board of Trade, among others.
Commodities are traded with contracts using a great amount of leverage. This means that with a small amount of money, a great quantity of the commodity in question can be controlled and traded. For example, with only a few thousand dollars, you as an investor are able to control a contract of one thousand barrels of heating oil or one hundred ounces of gold.
As a result of this high leverage that you obtain, the amounts of money made or lost can be significant with only relatively small moves in the price of the underlying commodity. This leverage results from the fact that commodities are nearly always traded using margin accounts that lead to significant risks for the capital invested. For example, with gold contracts, each ten cent minimum price move represents a $10 per contract gain or loss.
Commodity trading strategies center around speculation on factors that will affect the production of a commodity. These could be related to weather, natural disasters, strikes, or other events. If you believed that severe hurricanes would damage a great portion of the Latin American coffee crop, then you would call your commodity broker and instruct them to buy as many coffee contracts as they had money in the account to cover.
If the hurricanes took place and coffee did see significant damage in the region, then the prices of coffee would rise dramatically as a result of the negative weather, causing the coffee harvest to be more valuable. Your coffee contracts would similarly rise in value, probably significantly.
A variety of commodities can be traded on the commodities exchanges. These include grains, metals, energy, livestock, and softs. Grains consistently prove to be among the most popular of commodities available to trade. Grain commodities are usually most active in the spring and summer. Grains include soybeans, corn, oats, wheat, and rough rice.
Metals commodities offer you the opportunity to take positions on precious metals such as gold and silver. Changes in the underlying prices of base metals may also be traded in this category. Metals include copper, silver, and gold.
Energy commodities that you can trade are those used for heating homes and fueling vehicles for the nation. With the energy complex you can trade on supply disruptions around the world or higher gas prices that you anticipate. Energy commodities available to you are crude oil, unleaded gas, heating oil, and natural gas.
Livestock includes animals that provide pork and beef. Because these are staple foods in most American diets, they provide among the more reliable pattern trends for trading. Pork bellies, lean hogs, and live cattle are all examples of tradable livestock commodities.
Softs are comprised of both food and fiber types of commodities. Many of these are deemed to be exotic since they are grown in other countries and parts of the earth. Among the soft markets that you can trade are sugar, coffee, cocoa, cotton, orange juice, and lumber.