Commodities is simply a label applied to items that are produced to satisfy human wants or needs. A commodity can be bought or sold through futures contracts on specific exchanges. An exchange will usually specify a minimum quality and quantity that can be bought.
People like to trade commodities as they use them in everyday life. The price direction of commodities can sometimes be easier to predict than shares in companies.
Companies will also trade in commodities. A typical example of this is an airline betting that crude oil prices will rise. By making money if crude oil rises, they can offset any loses the company would make by spending on petrol during flights. This is known as hedging, and means the airline company can apply a set cost to crude oil, when designing future business plans.
Top 10 traded commodities (in order of popularity) ;
Gold
Many people like the idea of buying gold as the price never seems to drop. Due to the collapse of several banks over the past decade, gold is now also seen as a safer investment. As you can see below, the price of gold has generally risen over the last 20 years.
Chart courtesy of goldprice.org.
The chart clearly shows that investing in gold over the last 20 years would have provided a better rate of interest than leaving money in a savings account.
Oil
Crude oil is one of the most talked about traded commodities as it has the widest impact on society. It affects many sectors such as the transport sector, the energy sector and of course the oil & gas sector! As a commodity, crude oil is normally purchased in batches of 1,000 barrels.
Crude oil can be invested in directly through commodities and also indirectly through oil ETF’s and stock in individual oil companies.
As you can see by the chart below, demand currently heavily outweighs supply of crude oil, meaning the price of oil has risen sharply over recent times.
