What Are Commodities?
Commodities are raw materials that are often used to create other products such as energy, food, and goods. From the fuel in our cars and the food on our plates to the materials that make up our homes and technology, everywhere you look, commodities play a critical role in almost every aspect of our daily lives.
What Are Fungible Commodities?
Many commodities are tradable assets, similar to forex and equities. This is possible because commodities are fungible.
Fungible basically means the items are mutually interchangeable. A commodity of a particular type could be changed for another one of the same type without much differentiation. They are of equal value regardless of where they’re produced.
To help you understand this, let’s think about the alternative - something that is non-fungible. For example, if we look at different types of cola, we know there’s a different value depending on the brand and recipe. They differ in terms of taste and perceived value. The price of a litre of cola will differ, it isn’t fungible. You’d expect to pay more for Coca-Cola or Pepsi than a supermarket’s own brand version.
On the other hand, a commodity like corn (depending on the type) is seen as being the same value regardless of where it’s produced. As a result, commodities are easily tradable across borders, with a globally agreed-upon price for each type of commodity. This makes it easy for people to buy and sell commodities all around the world.
The most popular commodities for trading are:
- Oil which can be categorised by types like WTI or Brent
- Metals like gold, silver and copper.
- Agricultural products like soybean and corn, but these are usually less popular which could mean higher transaction costs.
How to Trade Commodities
Typically, commodities trade through futures contracts, this allows an individual or company to lock in a quantity of the commodity at a set price for delivery at a future date – a clever way to guard against price swings. But you can also trade commodities at the spot price which is the price you would pay if you wanted that commodity right now rather than in the future.
Although the market is made up of producers and buyers looking to sell and purchase these commodities, there are also many speculators who are just betting on price changes, traders like us. In fact, the majority of futures contracts, particularly in oil, never actually go to delivery.
Just like any other market, the price of a commodity primarily depends on the supply and demand for it. For example, if the global economy is performing well, then demand for things like oil should also increase and we should see the prices rise.
