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Home ยป definition of commodities

What Are Commodities

So what are commodities and what is the best way to trade them? In general terms, commodites are physical goods that are usually used as raw materials in the production of other goods or services. Not only so, but in their own class, though they come from different producers, these raw materials are all the same. Oil is oil; corn is corn; silver is silver, pork bellies are pork bellies – pretty much all the same wherever you get them from. It is this “sameness” that allows them to be classified and traded in open exchange markets.

What Are Commodities Categories?

In order to form a tradable market, commodities have been classified and subclassified into various classes. The primary classes are:

  • Energy
  • Metals
  • Agriculture
  • Livestock

Each of the above classes contain a number of sub-categories:

Energy

Energy comes in various forms and is used worldwide to provide electricty in homes and streets, power our vehicles and factories and give us the comfort of heating and cooling. So in the energy sector we have oil, which is further refined into gasoline and heating oil. Then we have coal and natural gas, as well as green energy and nuclear products.

Metals

Precious metals and industrial metals (also known as base metals) form the two subclasses of metals. Gold, silver and platinum are considered precious metals. Major industrial metals include copper, aluminum, zinc, nickel, lead, tin and palladium.

Agriculture (sometimes called “Softs”)

Agricultural produce were the first commodities to be traded and today, they remain the most important as their main product is food – a basic human need. Commodities produced from agriculture is wide ranging and includes a wide range of products like cotton, sugar, orange juice, cocoa, coffee, milk, butter and lumber.

Livestock

The major livestock commodities traded today are related to hogs and cattles. They are lean hogs, pork bellies, live cattles and feeder cattles. The demand for livestock commodities tends to rise along with economic prosperity since meat products are generally more expensive.

What Are Commodities Options?

Since all the above are traded in dynamic market conditions, their prices will rise and fall according to the laws of supply and demand. This being the case, manufacturers who use these raw materials in production seek to control their risk in terms of costs. This gave birth to the commodities futures markets, where companies could secure the future price of a given commodity, or hedge against price changes in their raw material inputs.

Once the comodity futures market became well established as a standalone regulated market, there sprang another financial derivative – options on futures. Since options have limited risk (unlike futures) and a different pricing structure, they present opportunities for savvy traders.

Filed Under: COMMODITY OPTIONS TRADING Tagged With: commodities meaning, definition of commodities

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DISCLAIMER: All stock options trading and technical analysis information on this website is for educational purposes only. While it is believed to be accurate, it should not be considered solely reliable for use in making actual investment decisions. This is neither a solicitation nor an offer to Buy/Sell futures or options. Futures and options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed in this video or on this website. Please read "Characteristics and Risks of Standardized Options" before investing in options. CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVERCOMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.