Commodities are basic goods used in commerce that are interchangeable with other commodities of the same type. For example, an ounce of gold, a barrel of oil, a bushel of wheat. In each case, they are products that are pretty much the same no matter who produces it. However, because of slight differences and shipping costs, some types of oil may sell for more than others. Commodities are most often used as inputs in the production of other goods or services. They are traded on either spot markets, in the form of forwards or futures, or in the form of derivatives.
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Today's commodity market has its roots in the trading of agricultural products. Since ancient times people have assigned economic values to items such as sheep, goats, and wheat. The modern commodity market is much more standardized with specific delivery dates, commodity sizes, and precise commodity descriptions. A lot of the time commodity trading is mentioned synonymously with futures trading, however there are slight differences. Commodities refer to the underlying goods such as gold, crude oil, wheat, etc..., and can be traded between two parties. Futures, however, are standardized contracts among buyers and sellers of commodities that specify the amount of a commodity, grade / quality and delivery location. Commodity futures trade on an exchange such as the Chicago Mercantile Exchange (CME) or Chicago Board of Trade (CBOT). |
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