Reviewed by Aug 27, 2020| Updated on
What is Commodities?
Commodity refers to an object or item of an economic good or service. It is freely exchangeable in the market, usually known as the commodity market or spot market. An essential aspect of a commodity is that an item called as a commodity is common among its kind and cannot be differentiated. Examples of commodities include gold, iron, energy, livestock, meat, and various agricultural produce. It often involves items of raw materials or inputs used for manufacturing another article or product that is sold in the open market.
The term 'commodity' is derived from the french word 'commodité' that means 'amenity or convenience'. A commodity can either be classified as a hard commodity or a soft commodity. Hard commodities are mined. They include gold, silver, helium, and oil, whereas soft commodities are crops grown such as rice, corn, and wheat.
What are the advantages of Commodities?
- *Potential Returns: *Increasing demand for infrastructure projects and the growing industries will boost the prices of commodities. It will positively impact the stock prices of companies in the related industries.
- Potential hedge against inflation: Inflation implies higher prices for commodities. Options for potential hedging against the rise in commodity prices has most of the times protected commodity investors.
- *Diversification: *Commodities and commodity stocks usually provide returns that differ from other stocks and bonds during volatile markets. Hence, they can act as a good investment avenue. Investors having a portfolio of assets will manage such situations, but there is always no guarantee about the returns.
Who should consider it?
There are various sizes of commodity exchanges across the globe. Primarily, the commodities exchange lays a platform for buying and selling of commodities at fair prices. Here, the actual delivery of the commodities is involved. On the other hand, another group of people speculate the prices of the commodities and make gains or loss from such speculation. They may also track a specific commodity index by investing in future contracts or exchange-traded products (ETPs).
The former is for manufacturers or wholesalers who trade in a high volume of commodities and look out for pricing advantage. The latter is an investment choice made for only sophisticated investors since the stock is highly volatile and complex. Therefore, there will be a difference in return-on-investment between commodity stock and commodity.
Investors can think about diversifying their funds by allocating reasonable amounts in commodities and futures to get a maximum benefit over a long-term. With the mutual funds becoming a favoured investment option for investors, there are several mutual funds where fund houses invest in commodity-related businesses.
Commodities do not have geographical boundaries for their trading. Hence, the market for commodities can begin with a local town and can range beyond the national borders too. The theory of demand and supply drives the prices of commodities in a market.