When you are trading in financial markets, there are certain terms you need to know in order to be successful. One of these is ‘commodity.’ So this week, the Academy of Financial Trading turns its attention to commodities; what are they, why do you need to know about them?
Every business, sector, industry etc. comes with its own terminology; its own words that hold meaning specifically in that area. A basic step to learning about financial trading is to learn to speak their language, so that you can understand that they are saying and how you can turn it to your advantage.
You will hear the word ‘commodity’ bandied around by traders, industry experts and financial news columnists as though it’s part of everyday speech, so if you are ever going to get to grips with the finer points of financial trading, this is a good place to start.
A commodity is a marketable item that is produced to satisfy wants and needs. Essentially this means that they are physical goods that meet a demand; this is why they hold value.
You get many different classes of commodity but the one you’re most likely to encounter is a goods commodity. These are the physical goods that hold value through their use in the real world. Goods commodities can range from oil to tea to wheat to sugar; it’s a very varied category.
Typically they are bought and sold on commodity exchanges – so this is where you will most likely encounter the term – on a three month contract basis. The values these commodities fetch have a very significant effect on real world prices. For example, the value of wheat affects the price of a loaf of bread or packet of pasta in your local supermarket.