What are commodities?

Physical substances such as metals, food and grains that can be interchanged with some other product of the same type, and which the investors buy or sell, mainly through future contracts are commodities. Commodities are the products which are of uniform quality and can be traded across various markets. They are bifurcated into two types i.e. soft commodities and hard commodities. Soft commodities include agricultural products such as rice, wheat, soybean etc whereas hard commodities include gold, silver, crude oil and iron ore etc.

Commodities are interchangeable and should be of similar quantity. For example, the gold should have the same purity in trading. The commodities can be traded across the markets through commodity exchanges. People in speculation buy and sell commodities. To avoid the price risk in future, the investors trade in future contracts. Futures Contracts’ where the price of the commodity is decided immediately, but the delivery is made after a certain period of time. Almost all the commodity traders trade on the margin which results in substantial risk to the invested principal. The commodities market is based on the simple principle of supply and demand and since there is a lot of demand, hence we see that the trading in commodities is very high.