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Monday, July 23, 2012

What are commodities

In my post I have often mentioned the word ‘commodities’, but did not fully explain what it means. Let me do it today. A commodity is a raw material or object that is either extracted from below the surface of the earth, such as: gold, silver, oil or simply comes out of the earth: grains, coffee, soybeans. We could also treat various kinds of meat as commodities as well as products that are produced from raw material. These can be: sugar, apple juice and etc. They can be bought in the Futures market where the goods are traded in contracts or some of them, such as sugar and the above mentioned apple juice as well as cocoa (and a few more) can be bought in your local store. 

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Anybody can trade commodities

Nowadays, any trader can trade these securities via some internet broker with the help of trading platform in the same way that stocks, currencies or bonds are traded. On the one hand, in this way you do not really buy physical materials (you do not get physical delivery of commodities). On the other hand, it is much better and more secure to trade these than stocks, currencies or bonds. Why? Because, unlike the other above mentioned securities these will never go bankrupt. 

Why commodities are better than other securities?

Stocks of any company lose all value, because a company can go bankrupt. Currencies are very volatile and you have to be a pro to trade them. And bonds of a country can also lose value if a company goes bankrupt (which is very real at the moment (take Greece or Spain for example). This will never happen to commodities as they cannot go bankrupt. We will always need gold, sugar, rice and meat. So, if you want more security in your trade commodities is the place to go to. 

However, you should remember that as any other financial instrument for investment commodities have become an object of speculation. They are trade on margin with high leverage in the futures market and if you are not careful you can lose a lot of money doing the same thing that experienced speculators and investors do. 

Ok, I hope you understand the basic concept of a commodity. In my future posts I intend to go over each commodity (or maybe the most popular ones) and look at the specifics of it. In the meantime you can read more on the topic in Wikipedia.

Here is the article:

Read also my previous post:

Trading financial markets carries a high level of risk, and may not be suitable for all investors. All information on the blog is of educational nature and cannot be considered as advice, recommendation or signals to trade in any financial markets.