What are Commodities?

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People often talk about "futures", "commodities", and "commodity futures" in a sloppy fashion, but in almost all cases they are referring to the same thing - futures contracts.  However, in this third lesson I'd like to define exactly what a commodity is and in the next lesson we will talk about what futures contracts are.  

A commodity is something that is deemed to be necessary and useful in the commercial affairs of a society.  Some examples of specific commodities will make this definition clear: crude oil, wheat, corn, soybeans, sugar, coffee, livestock, etc.  These are real and tangible things upon which our society attaches value and deems necessary to maintain its standard of living.  

Recently, however, there have been numerous additions to commodity classes.  Now, in addition to tangible and raw goods, assets such as currencies, interest rates, indexes, and single stocks are also considered commodities. 

This may seem strange at first, but if you consider how our society has become very technologically and financially oriented it is easy to see how these financial assets play a very important role in the daily life of our society and can be considered commodities.

Of course, there are plenty of other commodities - such as water, but these are in such plentiful supply that there is no need to trade them in the futures markets.  Commodities that are traded in the futures markets are very sensitive to supply and demand, and therefore suffer from extreme price fluctuations.

 

Don't get confused about the terms "commodities" and "futures".  Try to remember that when someone speaks of "commodities" or "futures" they are nearly always referring to the trading of futures contracts on an exchange, which is the topic of the next lesson.