What are Commodities?

Commodities represent virtually every raw material, ranging from the precious metals of gold and silver to sugar and soybeans. The commodities market is a very volatile market due to the overwhelming number of fundamental and technical factors that play into it. Trading oil isn't as much trading oil as it is the fundamentals that are involved.  For example, a terrorist attack overseas, an OPEC oil cut, or a natural disaster can all play into the price of oil around the world. Commodities traders are some of the most resilient investors; it takes a lot of nerve to stay in the market when it makes it wild moves.

What Makes a Commodity?

Commodities are products that are standard in their application, purpose and quality. Each commodity market has quality criteria for the producers and traders. For example, orange juice trading on the commodities markets is a frozen concentrate, while aluminum comes in two different qualities based on purity and application. The commodities market is heavily regulated to maintain quality and assure that each bushel, barrel or ton of a commodity is exactly the same.

What are Commodities Exactly?

The commodities markets are where traders and producers of the world's natural resources come together to find a standard market value for each product. Commodities are highly speculative due to the nature of a supply and demand "economy" that is built on the ever changing market factors. The commodities market plays a very central role in finding the true value of virtually every product by creating an equilibrium of true demand plus speculative value. The run up in oil prices in 2008 was mostly due to speculation; however, if investors agree that oil is worth $140 per barrel, then this will be the market value all around the world. The commodities market knows no discrimination; buyers and sellers may or may not have practical purposes for the commodities being traded, but that does not impact price.

Commodities Markets Balance out Trade

Without the commodities markets, prices for natural resources would vary place to place all around the world. Likewise for determining price, the commodities markets balance out natural resources by economic feasibility. US consumers will be willing to pay more for oil than Saudi Arabia as the supply is different; if US consumers outbid England for Saudi oil, then that oil will be delivered to the buyer in the United States.

Why do people trade commodities?

Commodities offer the ultimate volatility in intraday trading. The wild movements often as great as 5-10% can be leveraged through brokerage accounts up to 40:1. This kind of obscene leverage is utilized by day traders who can multiply their gains and leverage up small amounts of money to buy a large volume of a certain commodity. Corporations that produce raw materials often trade on the commodities market as a way to balance out the amount of money they receive for their goods. Corporate traders have the responsibility to ensure that wild market movements up or down do not affect the profit margins of the company at hand.