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May 27, 2021

Beginner Trading: What Are Commodities?

Commodities are among the most important asset classes. Along with currencies, equities and bonds, trading commodities is a popular choice for traders.

But what are commodities?

As an asset class, commodities is quite a broad category that can include many things. In basic terms, a commodity is a raw material, which means it is a primary good that can usually be used to create other goods.

One of the characteristics of a commodity is that it is fungible, which means commodities of the same type are interchangeable. This allows the market to set a standard price for a particular commodity, since any unit of that commodity will be valued in the same way.

In the financial markets, the most common commodities you’ll see being traded will fall into the energy or precious metals categories. Energy commodities include things like oil (WTI and Brent Crude) and natural gas, while precious metals would include gold and silver.

However, agricultural commodities are also traded in the financial markets. This includes products such as coffee, orange juice and even, surprisingly, electricity!

The most common, and most liquid commodities you're likely to find on most brokers would include oil, more specifically WTI and Brent, along with metals such as gold and silver, and even agricultural products like soybean and corn.

However, commodities can range from things like electricity and orange juice, and yes you can trade electricity!  

Although the market is made up of commodity producers and manufacturers of products looking to purchase commodities, it will also feature speculators who are just buying and selling the assets to profit from price movements. Therefore, as traders we can use things such as derivatives to trade the price movements without having to take physical delivery of any commodities. Having said that, there are worse things in the world than having to take delivery of a year’s supply of coffee beans!

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