Commodities are marketable goods or materials that satisfy people’s wants or needs and are interchangeable with other commodities of the same type. Oil, coffee, sugar, and gold are all examples of different commodities.
Though the quality of a traded commodity may vary slightly depending on its producer, the commodity will be essentially the same. This is because they must meet required, predetermined standards, which are known as a basis grade. This means that all oil, regardless of where or by whom it was produced, will be similar. This is as opposed to electronics, such as TV’s or MP3 players, which will differ depending on the brand.
One characteristic of a commodity is that its price is determined as a function of the market as a whole. You have multiple types of commodities such as soft commodities, which are grown (e.g. soybeans and tea), while hard commodities are extracted through mining, such as coal. Energy commodities are energy-providing goods, like electricity or gas. These commodities must be consumed immediately as the storage of such goods is impractical.
When currencies and stock prices fall, you will notice that often the price of commodities subsequently rises. Commodity trading does not often experience volatility because it involves the trade of materials and goods that we all need. For this reason it is always a good idea to diversify your assets when trading commodities and thus maximize your trading profitability.