what are commodities 
commodities are raw materials used to manufacture consumer products they are inputs in the production of other goods and services rather than finished goods sold to consumers in commerce commodities are basic resources that are interchangeable with other goods of the same type the quality of a given commodity may differ slightly but it is essentially uniform across producers when traded on an exchange commodities must also meet specified minimum standards also known as a basis grade investopedia joules garciaunderstanding commoditiescommodities are the raw inputs used in the production of goods they may also be basic staples such as certain agricultural products the important feature of a commodity is that there is very little differentiation in that good regardless of who produces it a barrel of oil is basically the same product regardless of the producer the same goes for a bushel of wheat or a ton of ore by contrast the quality and features of a given consumer product will often be quite different depending on the producer e g coke vs pepsi 1some traditional examples of commodities include grains gold beef oil and natural gas more recently the definition has expanded to include financial products such as foreign currencies and indexes commodities can be bought and sold on specialized exchanges as financial assets there are also well developed derivatives markets whereby you can buy contracts on such commodities e g oil forwards wheat or gold futures and natural gas options some experts believe that investors should hold at least some portion of a well diversified portfolio in commodities since they are not highly correlated with other financial assets and may serve as an inflation hedge 2you might consider allocating up to 10 of your portfolio to a mix of commodities ordinary investors can look to one of several commodities etfs or mutual funds to gain exposure buyers and producers of commoditiesthe sale and purchase of commodities are usually carried out through futures contracts on exchanges that standardize the quantity and minimum quality of the commodity being traded for example the chicago board of trade cbot stipulates that one wheat contract is for 5 000 bushels and states what grades of wheat can be used to satisfy the contract 3two types of traders trade commodity futures the first are buyers and producers of commodities that use commodity futures contracts for the hedging purposes for which they were originally intended these traders make or take delivery of the actual commodity when the futures contract expires for example the wheat farmer who plants a crop can hedge against the risk of losing money if the price of wheat falls before the crop is harvested the farmer can sell wheat futures contracts when the crop is planted and have a guaranteed predetermined price for the wheat when it is harvested commodities speculatorsthe second type of commodities trader is the speculator these are traders who trade in the commodities markets for the sole purpose of profiting from the volatile price movements these traders never intend to make or take delivery of the actual commodity when the futures contract expires many futures markets are very liquid and have a high degree of daily range and volatility making them very tempting markets for intraday traders many index futures are used by brokerages and portfolio managers to offset risk also since commodities do not typically trade in tandem with equity and bond markets some commodities can be used effectively to diversify an investment portfolio special considerationscommodity prices typically rise when inflation accelerates which is why investors often flock to them for their protection during times of increasing inflation particularly when it is unexpected so commodity demand increases because investors flock to them raising their prices the prices of goods and services then go up to match the increase this causes commodities to often serve as a hedge against a currency s decreased buying power when the inflation rate increases 45