Commodities Explained: 3 Examples of Commodities

Commodities are goods or raw materials that can be bought, sold, or traded. When a particular commodity is interchangeable with another commodity of the same grade or quality, it is considered fungible. There are two general types of commodities: hard commodities (natural resources that must be extracted like crude oil and rubber) and soft commodities (agricultural products that can be grown and harvested like lean hogs, soybeans, and coffee).

Generally, commodities are the raw materials that go into finished products. As basic goods, commodities like oil, livestock, and metals are interchangeable with other goods in the same category. For example, a barrel of wheat that meets industry standards is going to be categorically the same as any other barrel of wheat that meets the same standard—no matter the producer. Two different bread companies may produce very different products, however, even if they purchased the wheat for their bread from the same producer.

Along with stocks and real estate, physical commodities are one of many asset classes of investment. Commodities are bought, sold, and traded in commodities markets regulated by legal entities called commodities exchanges. In the United States, the Commodity Futures Trading Commission (CFTC) oversees the commodity derivatives and futures markets.

Major commodities exchanges in the US include the New York Mercantile Exchange (NYMEX), the Chicago Mercantile Exchange (CME), and the Chicago Board of Trade (CBOT). These exchanges are part of the CME Group, which is the world's biggest financial derivatives exchange. Internationally, the London Metal Exchange and Tokyo Commodity Exchange are significant.

Individual investors may trade commodities to offset the volatility of the stock market, reduce risk, and add diversification to their portfolios. Commodities are bought and sold in a number of ways within financial markets, including via commodity futures contracts, options, exchange-traded funds (ETFs), and mutual funds. In derivatives markets, commodity prices are connected to the value of underlying assets.

To learn more about commodities, explore a few examples.

1. 1. Energy commodities: These hard commodities are resources like natural gas and heating oil. Oil prices change based on a number of factors, including the supply and demand of the raw natural resource crude oil, which is processed to become gasoline.
2. 2. Metal commodities: Other types of hard commodities include precious metals such as palladium, gold, and silver.
3. 3. Agricultural commodities: Agricultural commodities are grown and raised on farms and ranches across the globe. Some examples of these soft commodities include palm oil, cocoa, live cattle, and wheat.

All investments and investment strategies entail inherent risks and introduce the potential for financial loss or the depreciation of assets. The information presented in this article is for educational, informational, and referential purposes only. Consult a professional investment advisor before making any financial commitments.

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