What Is A Commodity?

A new investor may ask, "What is a commodity?" and get slightly differing answers. A commodity is a product that is in demand and can be produced, made or mined by just about anyone. Commodities generally refer to more raw materials, ranging from rubies to corn to aluminum, that have a somewhat universal price.

History Of Commodities
The first commodities on the financial markets came about when farmers had to sell their crops to buyers in the city. Farmers wanted a fair price locked in and buyers wanted to work out a good bargain before prices could rise or fall. The buyer and seller agreed to a purchase price at a certain day in the future. The idea of a futures market became the standard of trading in Chicago-the hub between the East and West. Grain and beef became the commodities market standard. The commodities markets grew to include foreign currency, petroleum and industrial metals, along with much more. Today, commodities brokers negotiate contracts to buy and sell all kinds of goods, from cocoa to beef.

Trading Commodities
When a commodity is given a certain value across all markets and exhibits little difference in quality, it can be included as a certain type of investment vehicle. Because the combination of the world's supply and the world's demand set the price for the commodity, investors can buy and sell commodities through futures contracts in an attempt to earn a profit. The central commodities markets are in Chicago and New York, and commodities broker houses are generally headquartered there.

Facts On Commodities Investing

• Commodities investing is considered low-risk because of the futures contracts established.
• Products must be considered "standard" to be traded.
• Commodities can provide a hedge against stock market losses because their prices don't always follow the ups and downs of the stock market.
• Commodities can be purchased as part of a mutual fund that places investor money in stocks of commodity-related companies.