Commodities

Commodities are basic raw materials and agricultural products that are produced in bulk and are largely interchangeable, whoever produced them.

Hard and soft commodities

• Hard commodities

  Natural resources that are mined or extracted, such as metals and energy. Examples: gold, copper, crude oil and natural gas.

• Soft commodities

  Agricultural products that are grown or raised. Examples: wheat, coffee, cotton, sugar and cattle.

Why commodities are traded

• Producers and users manage risk: a farmer or a manufacturer may want to agree a price in advance so they can plan.
• Price discovery: trading on organised markets brings together many views of supply and demand.
• Diversification and investment interest: some investors look at commodities as a different kind of asset from shares or bonds.

Common ways people gain exposure

In general terms, there are several ways to gain exposure to a commodity. Each works differently and carries its own risks and costs.

• Physical ownership: owning the material itself, for example gold bars or coins. This involves storage and insurance.
• Futures contracts: agreements to exchange a commodity at a set price on a future date, traded on exchanges.
• Exchange-traded funds and similar products: funds that aim to follow a commodity or a basket of commodities.
• Shares in producers: owning part of companies that mine or grow commodities. Their value also depends on the company itself.

Next: Gold, a well-known hard commodity.

General education only. This site gives no prices, forecasts or advice.