What is a Commodity?
Commodity is a general term for plenty of products used by the consumer. By Definition, a commodity is a physical substance, like grains or metals which is interchangeable with another product of the same type and which is bought and sold by investors through sales and purchases. The price of the commodity is set according to the demand and supply of that commodity.
This sale and purchase of commodity is carried out through future contracts which are of a uniform or standard quality.
Types of commodities
There are two types of commodities - soft commodities and hard commodities.
Hard commodities are those that have a longer shelf life. Products like oil, iron ore, silver, gold and similar products are listed as hard commodities which do not spoil with time.
Soft commodities are products that have a shorter or restricted shelf life. Commodities like agricultural products, rice, wheat, and the types are all perishable and need to be consumed within a specified time or they can spoil.
The commodities have to be alike and exchangeable even if they belong to different parts of the world. Gold should be similar and of the same purity in two places for it to be exchanged, likewise food products also need to belong to the same class in order to be exchanged. Electronic products do not fall under the commodity category as there are plenty of manufacturers each providing with a different kind of technology, hence these cannot be traded as commodities.
Trade of commodities
These commodities are traded from corner to corner in markets that are located in different corners of the world through commodity exchanges. These market exchanges comprises of speculators and hedgers who trade these commodities.
Who is a Hedger?
A hedger is the actual manufacturer of commodities who wants to sell their commodities at a good price so that they are protected against a drastic change in the economy incase it falls due to endless fluctuations in the market.
Who is a Speculator?
A speculator is a trader who wants to do business so that he can make a large profit by speculating the commodity. Any awareness of any mishaps that can happen in the near future can profit a speculator big time as he would then make use of his business mind so that he can speculate the price according to his business sense. Traders are quite good at what they do and deal with commodity exchange in two ways: by spot trading where the price of the deal is decided on the spot and delivery of commodities follows a later date, or by Future’s contract, which is a popular way of trade where the price of the commodity is decided immediately and can benefit both the buyer and the seller. The whole concept of exchange of commodities is based on the demand and supply of that particular commodity.