Tradable commodities are essential goods used in commerce, often interchangeable with other goods of the same type, and used to produce other goods.
Key Takeaways
- Tradable commodities are goods used in commerce and are interchangeable with other goods of the same type.
- The inputs in the creation of finished goods and services are tradable commodities.
- Tradable commodities are classified as energy, metals, livestock, and agriculture.
- Trading commodities is accomplished using futures contracts.
What Are Tradable Commodities?
Tradable commodities are usually categorized into four groups: energy, metals, livestock, and agriculture. Economists see little differentiation between a tradable commodity from one producer and the same commodity from another source.
The trading of commodities is usually executed through futures contracts on exchanges that standardize the quantity and minimum quality of the products traded. Regulatory bodies may allow for the trade of 5,000 bushels of wheat, but laws regulate how the bushels can be sold and delivered and the minimum quality standards required for the grain.
What Affects Commodity Prices?
The futures element of trading commodities can add risk to the transaction since factors that cannot be controlled, like the weather, may affect production. Economic and societal pressures also affect commodity pricing. Food and energy prices reached record highs during the COVID-19 pandemic and the rise of the war in Ukraine, both causing supply disruptions. Experts commonly recommend diversifying a portfolio of tradable commodities with other assets due to outside factors which affect pricing.
In 2023, oil, gas, gold, and silver topped the list of the most traded commodities.
Tradable vs. Non-tradable Commodities
Many products are not considered tradable commodities, either because of the nature of the product or the demand for the product within its home country. If tomatoes are in high demand in China, and domestic production cannot keep up with the demand, they are imported in high quantities. Because of this high rate of importation, economists cannot use futures trading and pricing techniques used with tradable commodities.
What Types of Commodities Are Traded?
Common tradable commodities include crude oil, wheat, soybeans, gold, silver, livestock, coffee, sugar, cotton, corn, frozen orange juice, and natural gas. Derivative products of some commodities are also traded, such as soybean oil and soybean meal.
How Do Investors Buy Commodities?
Investors can purchase the commodity outright or invest in the stocks of companies that deal in commodities, such as oil and gas companies, or buy the futures contracts of the commodities, though speculative and must be sold before delivery. One of the easiest ways to buy commodities is to invest in exchange-traded funds (ETFs) that follow commodity indexes.
What Is the Most Traded Commodity?
The most traded commodity is crude oil. Crude oil is used in many products, from petrochemicals to petroleum to lubricants to diesel.
The Bottom Line
Tradable commodities are used to produce other goods and are classified as energy, metals, livestock, and agriculture. Tradable commodities are traded via futures and a sector of financial markets. Futures help determine the price of these commodities and are used as hedging tools by producers and speculative investments by investors.
FAQs
Tradable commodities are goods used in commerce and are interchangeable with other goods of the same type. The inputs in the creation of finished goods and services are tradable commodities. Tradable commodities are classified as energy, metals, livestock, and agriculture.
What are commodities and how are they traded? ›
A commodity is a basic good traded in large volumes and interchangeable with other goods of the same type. Commodities are either for immediate delivery in spot trading or for conveyance later when traded as futures. Commodity markets deal in metals (aluminum, copper, gold, lead, nickel, silver, zinc, etc.)
How do you trade commodities successfully? ›
Trade commodities at a set price on a set date in the future. Speculate on commodity futures prices with spread bets and CFDs – you'll get the pricing and expiry dates of the underlying futures without needing to take delivery of any assets.
How does investing in commodities work? ›
Investing in commodities
One is to purchase varying amounts of physical raw commodities, such as precious metal bullion. Investors can also invest through the use of futures contracts or exchange-traded products (ETPs) that directly track a specific commodity index.
What is the method of trading on commodities? ›
Commodity trading involves buying and selling goods such as metals, energy, and agricultural products. It can be done through futures contracts on exchanges, allowing traders to speculate on price movements or hedge against them.
How to trade in commodities for beginners? ›
How do I start trading commodities? First, choose from 35 commodity markets, or commodity-linked stocks and ETFs. Next, decide whether to speculate on market prices by going long or short. And finally, you'd need to open a live account with a provider who offers commodity trading.
How hard is commodity trading? ›
Trading commodities is complex because factors like weather events and political strife that are often difficult to predict can have an outsize impact on prices. Keep reading to learn the basics of how commodities trading works and some alternative ways to invest in commodities.
Can you trade commodities directly? ›
CFDs are offered on many trading platforms and allow investors to directly trade oil, gas and coffee — among other commodities — without actually owning the underlying instrument.
Why is it risky to invest a commodity? ›
Uncontrollable factors such as inflation, weather, political unrest, foreign events, new technologies and even rumors can have devastating consequences to the price of a commodity. Investors investing in commodities must be able to bear a total loss of their investment.
Do people make money in commodity trading? ›
Investors also say that since many commodities are cyclical in nature, meaning the prices increase during the same period every year, it makes it relatively easy to make money. However, as with any investment, proper knowledge is vital to make decent profits, and commodity trading is no exception.
Many commodity traders earn a bachelor's degree in business, finance or a related field. Some high-level traders may earn a Master's in Business Administration to further advance their knowledge of the market. Earning an advanced degree may lead to additional pay, a promotion or more responsibility in the workplace.
How does commodity trading work? ›
Commodity trading involves buying and selling various raw materials and their derivative products. These commodities cover a broad spectrum, ranging from agricultural goods to natural resources. If you're considering entering the field of commodity trading, the initial steps are essential.
What is a tradable commodity? ›
Tradable commodities are goods used in commerce and are interchangeable with other goods of the same type. The inputs in the creation of finished goods and services are tradable commodities. Tradable commodities are classified as energy, metals, livestock, and agriculture.
What commodity is traded most? ›
Brent Crude oil is the most traded global commodity. Brent Crude is extracted from the North Sea and accounts for two-thirds of global oil pricing. Like the other crude oil benchmark WTI, Brent Crude is mainly refined into diesel fuel and gasoline. Brent Crude is generally slightly more expensive than WTI crude oil.
How do commodities traders make money? ›
Commodity traders often act as speculators and attempt to make profits on small movements in commodity prices, gaining exposure through futures contracts. These traders go long if they believe prices are moving higher and short the commodity when they expect prices to fall.
What are examples of commodities? ›
Commodities are raw materials used to create the products consumers buy, from food to furniture, to gasoline or petrol. Commodities include agricultural products such as wheat and cattle, energy products such as oil and natural gas, and metals such as gold, silver, and aluminum.
What is the difference between a commodity and a stock? ›
Investors looking for aggressive returns habitually turn to one of the two asset types – stocks or commodities. Stocks denote company ownership, while commodities represent goods that include agricultural products, metals, oil, etc. Both these asset classes reserve sizeable profit-making potential.
