DEFINITION OF 'COMMODITY'
A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often used as inputs in the production of other goods or services. The quality of a given commodity may differ slightly, but it is essentially uniform across producers. When they are traded on an exchange, commodities must also meet specified minimum standards, also known as a basis grade.
Any good exchanged during commerce, which includes goods traded on a commodity exchange.
dhanvarsha EXPLAINS 'COMMODITY'
The basic idea is that there is little differentiation between a commodity coming from one producer and the same commodity from another producer - a barrel of oil is basically the same product, regardless of the producer. Compare this to, say, electronics, where the quality and features of a given product will be completely different depending on the producer. Some traditional examples of commodities include grains, gold, beef, oil and natural gas. More recently, the definition has expanded to include financial products such as foreign currencies and indexes. Technological advances have also led to new types of commodities being exchanged in the marketplace: for example, cell phone minutes and bandwidth.
- Precious Metals: Gold, Silver, Platinum etc
- Other Metals: Nickel, Aluminum, Copper etc
- Agro-Based Commodities: Wheat, Corn, Cotton, Oils, Oilseeds, etc.
- Soft Commodities: Coffee, Cocoa, Sugar etc
- Live-Stock: Live Cattle, Pork Bellies etc
- Energy: Crude Oil, Natural Gas, Gasoline etc
It facilitates speculation by providing opportunity to people, although not involved with the commodity, to trade on the views in the movement of commodity prices. The speculative position is taken with a small margin amount that is paid to the exchange, and the contract can be squared-off anytime during the trading hours.
For the people associated with the commodities the futures market can provide an effective hedging mechanism against price movements.
For example an oil-seed farmer may go short in oil-seed futures, thus ‘locking’ his sale price and in the process hedging against any adverse price movements. On the other hand a processor of oil seeds may buy oil-seed futures and thus assure him a supply of oil-seeds at a pre-determined price. Similarly the oil-seed processor may go short in oil futures, which may be bought by a wholesaler of oil. Also, there is a saying that ‘Gold shines when everything fails’. Thus, gold can be used as a hedging tool against other investments.
Traders may exploit arbitrage opportunities that arise on account of different prices between the two exchanges or between different maturities in the same underlying.