Introduction to Commodity Investment

Since the beginning of history, humans have used commodities. This has created a need for commodity trading. However, as financial markets progressed, commodity trading became a business in itself.

The modern world provides many options when it comes to commodity investment. Commercial users of the product can use these financial markets to hedge their exposure to the commodity. However, at the same time traders and speculators can also make a lot of money if they are able to accurately predict the movements of these commodities.

In this article, we'll start with the basics. We will first understand what the commodity market is, how one should approach it.

What are Commodities?

The most basic definition of commodities is that commodities are natural resources that are used as raw materials to create a better world.

Commodity Characteristics

• Fungible: The main characteristic of commodities is the fact that they are interchangeable. This means that one unit of any commodity can be replaced by another unit of the same commodity without losing its value. For example 1 kg of wheat can be exchanged for 1 kg of wheat again without losing too much value. If a unit is not commensurate, it cannot be called a commodity.
• Tradable: It is also important that the commodity must be tradable. Some commodities are directly listed on exchanges and are therefore tradable. Consider the case of Brent or Nymex crude. It can be bought and sold on exchanges and is therefore highly tradable. On the other hand, consider a commodity like plutonium. It is not directly listed on an exchange and therefore cannot be traded directly. Therefore, even though they are technically a commodity, we will not include them in our discussion.
• Deliverables: Since commodities are being traded, they must also be deliverables. Commodities such as oil and food grains can be shipped to buyers. Hence, they are considered as a commodity.
• Liquidity: The most important feature that makes any commodity tradable is liquidity. Liquidity means that several people are buying in and out of this commodity at any given point in time. Therefore, there is always an active market for these commodities and prices are being quoted. Virtually anyone can buy or sell an unlimited number of these commodities in a very short period of time. Liquidity ensures the presence of an active secondary market which is a prerequisite for any type of financial trading to occur.