Go to any finance site and right next to your three major stock indexes, usually you will come across the going rate for natural materials across the world: gold, oil, silver, even lean hogs and live cattle. All of these materials are classified as commodities and I’m here to drop some knowledge on you about them.
What is a commodity?
That’s a great question. To put it simply – commodities are materials that naturally come out of the earth that can be bought and sold based on speculation. Everything from orange juice to wheat to platinum are considered commodities and can be moved around in a market setting.
The most commonly watched commodities are oil, coffee, natural gas, and gold, which are all traded for various reasons. Clearly, the commodity that gets the most attention is crude oil because it directly affects the vast majority of citizens. Do you drive a car? You’re affected by the crude oil prices because these determine how much you pay at the pump.
What drives commodity prices?
Commodity prices are determined based on speculation. If you have a hunch that there is going to be a shortage of sugar throughout the world as a result of some natural disaster that no one predicted, you would try to get your hands on as much sugar as possible because the price of sugar will sky rocket due to the shortage. However, if the natural disaster misses the sugar crops and the status quo isn’t impacted, you wouldn’t make as nice of a profit as you expected.
Needless to say, if you’re looking to make a quick buck, dabbling in the commodity trade might not be the best move for you because so much of it is up in the air – but hey, isn’t that how the stock market works anyway?
What are the risks of commodity trading?
Look at that transition right there. Aside from the fact that commodity prices are generally based on speculation, there are some significant risks when it comes to trading commodities. For instance, oil prices are pretty high and we all know that. However, you can’t just pick up and start trading oil to make some money. Most commodities are located in different continents that have strict regulations from the different governing bodies over the regions. So if Joe Schmo from Tallahassee, Florida intends on being the next ExxonMobile, he has another thing coming.
More commodities questions?
Take a look at this great site with the essentials of commodities trading. Just because it comes from Dummies.com doesn’t make you a dummy. Also, if you want to track commodity prices, head over to CNNMoney to keep track of the most popular commodities.