What are Commodities?
A commodity is a natural resource that can be bought and sold such as agricultural, metals, and energy commodities.
Commodities are the basic ingredients or raw materials of the manufactured goods for both industrial and food products.
The goods production and consumption depend on factors such as climate, season, and resources – whether natural or man-made. Supply and demand are also affected by the complex interaction between volatile economic factors and various consumer habits. For this reason, the probabilities of commodity price volatility increase significantly.
Commodities are generally traded in very large quantities either in cash market or in futures exchange which is the most common case in the stock markets that unifies the quantity and the minimum limit of the traded commodities quality such as Chicago stock market where the Chicago board of commerce states that the wheat contract is 5000 (bushels) and mentions the wheat grades and varieties used to meet the contract.
There are two kinds of commodities merchants in futures contracts: the first is the buyers and producers who trade for hedging purposes. These futures, enable the farmer to hedge against the risk of losing money if the price of the wheat falls before the harvest and sell the crop and guarantees a predetermined price for wheat.
The second kind is the speculators who usually trade in commodity markets for the sole purpose of profiting from the volatile price movements, and in this case, traders do not intend to actually deliver goods at the end of the contract.
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