Commodities

A commodity is a basic physical good that can be produced, mined, or grown, and that is largely interchangeable with the same good produced by someone else. A barrel of crude oil, a bushel of wheat, an ounce of gold, or a pound of copper from one source is treated as equivalent to the same item from another source, which is what allows it to be bought and sold on standardized terms rather than negotiated item by item.

Commodities are usually grouped into categories: energy (oil, natural gas), metals (gold, silver, copper), agriculture (corn, wheat, soybeans), and livestock (cattle, hogs), among others. Traders rarely buy or sell the physical barrels or bushels directly. Instead, most trading happens through derivative contracts such as futures, which are agreements to buy or sell a set quantity of the commodity at a set price on a future date, or through funds and other instruments designed to track a commodity's price.

The nuance that trips up beginners is confusing the commodity itself with the contract used to trade it. The definition above, which describes a standardized future-delivery contract, is actually describing a futures contract, not the commodity. The commodity is the underlying good; the futures contract is one of several tools used to speculate on or hedge against that good's price. Someone trading "oil" on a chart is almost always trading a futures contract or an oil-tracking fund, not a tanker of crude.

Commodity prices are driven by supply and demand factors that are different from those affecting stocks, things like weather, harvests, geopolitical supply disruptions, storage capacity, and shipping. This gives commodities a distinct behavior pattern that traders watch separately from equity markets.