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Commodities

commodities: what are they?

The term Commodity refers to raw materials, that particular category of goods that are traded in the market without qualitative differences. More specifically, these are so-called fungible goods, which are therefore substitutable in the satisfaction of the need to which they are related, regardless of who produces them.

History and characteristics

The term Commodity which came into use in the English language in the 15th century derives from the French commodité, used to indicate an advantage or convenience.

Due to their fungible characteristics, Commodities are easily traded in the market and can be used as underlyings for various financial instruments.

Indeed, there are Commodity bonds, which are bonds whose principal repayment value and interest is indexed to the price of a certain commodity. Commodity futures, are future contracts in which one is obligated to exchange a predetermined quantity of a commodity on a predetermined date and at a predetermined price set on the date of trading.

What are the main Commodities?

Commodities understood as an asset class represent a very heterogeneous group of commodities, with different uses, different specificities and qualities, different storage capacity and different renewability intensity. They can be classified into two macro-categories: Soft Commodity, Hard Commodity.

Commodities derived from the agricultural and livestock sector belong to the Soft category, which can be divided into:

Commodities in the energy, precious metals and industrial sectors belong to the Hard category. They can then be divided into:

How the market works

Traditional commodities, from agricultural products to metals, are traded on stock exchanges and accessed directly by investors. On nontraditional commodities, such as renewable energy and coal, on the other hand, one can invest by buying or selling securities of the companies that manage them.

How to invest in commodities

First of all, you can invest by buying the commodity at the market price (“spot” investment). In addition, a traditional form of investing in commodities are commodity futures, which are derivative contracts through which parties agree to exchange by a certain deadline a quantity of a commodity at a defined price.

You can also invest in this sector through Exchange Traded Funds (ETFs) or Exchange Traded Commodities (ETCs). The former are investment funds listed on the stock exchange and traded like stocks. The latter are financial instruments issued against investment in commodities or commodity derivative contracts.

Where commodities are traded

Then there are several exchanges around the world where commodities are traded, from the European Intercontinental Exchange (ICE)-where commodities such as cotton, coffee, and electricity are traded-to the New York Mercantile Exchange (NYMEX)-where naphtha, natural gas, gasoline, gold, and silver are traded instead.