We have all heard this term ‘commodities’ but what does it mean, and how do we trade them? Its not very difficult to explain what commodities are. In easy language commodities are the raw materials which people use to create the world around us in which we live. Understanding that concept we can then divide commodities into three main types, energy, metals, and agricultural products; the energy allows people to sustain themselves; the metals allow us to build tools and weapons; and of course the agricultural products are what we eat. These three items are the main components of today’s global economy.
Commodities must meet the following three criteria:
- Commodities must be tradable. In other words, there has to be a real investment vehicle established to allow it to be traded. This can mean either a futures contract assigned to it on a major exchange, or a company processes it, or there exists an ETF which keeps track of it.
- Commodities need to be deliverable. If you wanted to, you could take possession of it. Like a bushel of tomatoes or a barrel of oil.
- There is a busy market which keeps the commodities liquid. Many buyers and sellers allow investors to jump and out of the market in commodities with ease.