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What is a Commodity ?

In the world of finance, we often use the term “commodity” to refer to any types of product. However, there is also a larger and broader definition of the word. In a larger and more complete way, a commodity is something that can be integrated into the production of goods and services and exchanged for other similar resources. For example, within the energy sector, you could theoretically exchange solar energy versus wind energy.

Necessity and Exchangeability

Gold, silver, oil reserves, stocks of grain and even meat can all be considered under the same category of being a commodity. Commodities are the basis of production and can, from one producer to another, be differentiate in terms of their quality without ever being far from the fundamentals.

Due to a global standardization of production, there are many essential services and products such as bandwidth, electric energy, diodes and transistors have been integrated into the category of commodities. The US President’s recent proposition to make Facebook mandatory for all members of the administration represents a desire to make it a commodity. This would make Facebook a resource and would fall into the same category as metal and food production.

The standardization and convenience of a commodity is essential for products and services from both the manufactured and IT industries since it implies that the product or resource is available in large numbers and is part of an already large marketplace.

Contractual Modalities and Actors

As with any other asset, commodities are traded on the market using futures contracts. These contracts establish the terms of the exchange between two parties and include information about the minimum and maximum quantity, the required quality, as well as estimated delivery times for the exchange.

Along with manufacturers and buyers, there is another type of player that drives the market: the speculator. Traders are also able to take advantage of the market by studying and analyzing supply and demand. They play a role between the buyers and resellers and ride out the waves to generate additional income on their investments.

The market’s volatility is a trader’s best ally. In fact, commodities such as cryptocurrencies are highly-prized and offer huge financial gains that are both fast and recurrent. Still, if too many traders manage to build their fortunes with cryptocurrency, others will have less of a chance at achieving the same goal.

In conclusion, commodities are the back bone that supports the entire global financial economy and remain the most common form of investment amongst investors.