Commodities are the basic building blocks of the global economy: natural resources or agricultural products that are traded on dedicated exchanges throughout the world.
Commodities come in two main types:
- Soft commodities, which are typically agricultural products or livestock (like rice or sugar)
- Hard commodities, which are typically natural resources that are mined or extracted (like silver or gas)
A constantly changing market
The supply and demand levels of a particular commodity are dependent on a wide variety of different factors, like economic and political events, or the weather. They are also hugely influenced by the price of the dollar, because almost all commodity trading is priced in US currency. And all of this means that commodity prices can fluctuate significantly.
How do you trade commodities?
Like shares, commodities are bought and sold on exchanges, which tend to specialise in a particular markets. Some major examples include:
- The New York Mercantile Exchange (NYMEX) and Shanghai Metal Exchange (SHME), where energy and metals are traded
- The LIFFE, in London, where agricultural products are traded
Most commodity trades take the form of futures contracts. Futures contracts are agreements to exchange a set amount of a commodity for an agreed price on an agreed date in the future. The price of a futures contract will move as the price of a commodity moves, meaning that you can trade the contracts themselves instead of having to handle large amounts of resources.
