Tradable commodities are essential goods used in commerce, often interchangeable with other goods of the same type, and used to produce other goods.
Key Takeaways
- Tradable commodities are goods used in commerce and are interchangeable with other goods of the same type.
- The inputs in the creation of finished goods and services are tradable commodities.
- Tradable commodities are classified as energy, metals, livestock, and agriculture.
- Trading commodities is accomplished using futures contracts.
What Are Tradable Commodities?
Tradable commodities are usually categorized into four groups: energy, metals, livestock, and agriculture. Economists see little differentiation between a tradable commodity from one producer and the same commodity from another source.
The trading of commodities is usually executed through futures contracts on exchanges that standardize the quantity and minimum quality of the products traded. Regulatory bodies may allow for the trade of 5,000 bushels of wheat, but laws regulate how the bushels can be sold and delivered and the minimum quality standards required for the grain.
What Affects Commodity Prices?
The futures element of trading commodities can add risk to the transaction since factors that cannot be controlled, like the weather, may affect production. Economic and societal pressures also affect commodity pricing. Food and energy prices reached record highs during the COVID-19 pandemic and the rise of the war in Ukraine, both causing supply disruptions. Experts commonly recommend diversifying a portfolio of tradable commodities with other assets due to outside factors which affect pricing.
In 2023, oil, gas, gold, and silver topped the list of the most traded commodities.
Tradable vs. Non-tradable Commodities
Many products are not considered tradable commodities, either because of the nature of the product or the demand for the product within its home country. If tomatoes are in high demand in China, and domestic production cannot keep up with the demand, they are imported in high quantities. Because of this high rate of importation, economists cannot use futures trading and pricing techniques used with tradable commodities.
What Types of Commodities Are Traded?
Common tradable commodities include crude oil, wheat, soybeans, gold, silver, livestock, coffee, sugar, cotton, corn, frozen orange juice, and natural gas. Derivative products of some commodities are also traded, such as soybean oil and soybean meal.
How Do Investors Buy Commodities?
Investors can purchase the commodity outright or invest in the stocks of companies that deal in commodities, such as oil and gas companies, or buy the futures contracts of the commodities, though speculative and must be sold before delivery. One of the easiest ways to buy commodities is to invest in exchange-traded funds (ETFs) that follow commodity indexes.
What Is the Most Traded Commodity?
The most traded commodity is crude oil. Crude oil is used in many products, from petrochemicals to petroleum to lubricants to diesel.
The Bottom Line
Tradable commodities are used to produce other goods and are classified as energy, metals, livestock, and agriculture. Tradable commodities are traded via futures and a sector of financial markets. Futures help determine the price of these commodities and are used as hedging tools by producers and speculative investments by investors.
FAQs
Key Takeaways. Tradable commodities are goods used in commerce and are interchangeable with other goods of the same type. The inputs in the creation of finished goods and services are tradable commodities. Tradable commodities are classified as energy, metals, livestock, and agriculture.
What is a tradable commodity? ›
Definition English: Tradable commodities consist of basic goods used in commerce that are often interchangeable with other goods of the same type. These tradable commodities are usually evaluated by economists as inputs in the production of other goods or services.
What are commodities and how are they traded? ›
Commodities trading involves buying and selling raw materials such as metals, energy, and agricultural products. Prices are influenced by supply and demand, geopolitical events, and global economic factors. Investors can use futures contracts and options to speculate on price movements or hedge against market risks.
How do commodity traders work? ›
Key Takeaways. Commodity traders are individuals or businesses which buy and sell physical commodities such as metals or oil. Traders aim to profit from anticipated trends as well as arbitrage opportunities.
How does a commodities exchange work? ›
commodity exchange, organized market for the purchase and sale of enforceable contracts to deliver a commodity such as wheat, gold, or cotton or a financial instrument such as U.S. Treasury bills or Eurodollars at some future date.
What are the examples of tradable commodities? ›
Common tradable commodities include crude oil, wheat, soybeans, gold, silver, livestock, coffee, sugar, cotton, corn, frozen orange juice, and natural gas.
How are most commodities traded? ›
Commodities are bought and sold on exchanges, like stocks. Well-known exchanges include the Chicago Mercantile Exchange (CME), New York Mercantile Exchange (NYMEX) and London Metal Exchange (LME).
What are the three most traded commodities? ›
Three of the most commonly traded commodities include oil, gold, and base metals.
Is commodity trading good or bad? ›
Trading commodities is a lucrative investment option that can help you grow your wealth, but keep in mind that it comes with its set of rules and regulations. Commodity trading gives you the option to leverage your gains but it can also leverage losses if you are not careful enough.
Can you make money with commodities? ›
You can make a lot of money through futures contracts if you're right about the underlying commodity price, but you can lose a lot too. Be sure to understand the risks involved so you can avoid, or at least be aware of, the potential for a margin call and other events that can impact the success of your trade.
Traders make money by buying commodities (or commodity derivatives) for a certain price and then subsequently selling them for a higher price. The buyer of a futures contract makes money if the future market price of the commodity exceeds the market price of the commodity at the time of purchase.
How does grain trading work? ›
Selling the grain allows you to exit the cash market and take the cash price received. By itself, this would lock in both the futures price and basis. However, by purchasing a futures contract, you re-enter the futures market with the opportunity to sell the contract for a higher price at a later date.
What is the difference between a tradable and a non-tradable commodity? ›
Tradable goods and services can be sold and consumed outside of the region they are produced. In contrast, non-tradable goods and services can only be bought and consumed where they are produced. Cars and computer software are tradable. A meal at a restaurant is not.
What is the most tradable commodity in the world? ›
Oil is the most traded commodity in the world, with about 100 million barrels traded every day.
What are non-tradable commodities? ›
Typically, non-tradable goods include such items as electricity, water supply, all public services, hotel accommodation, real estate, construction, local transportation; goods with very high transportation costs such as gravel; and commodities produced to meet special customs or conditions of the country.
What are the three types of commodities? ›
There are three major types of commodities; agriculture, energy, and metals. These three are differentiated in the means of accessing them. The means of accessing them is based on whether they are hard or soft.
