What Are Commodities?
Commodities are raw materials or primary agricultural products that can be bought and sold, such as gold, oil, and coffee. The key characteristic of a commodity is that it is standardized and interchangeable with another commodity of the same type. For example, one barrel of Brent crude oil is the same as another, regardless of who produced it.
Major Categories of Commodities
- Energy: Includes crude oil, natural gas, and gasoline. These are fundamental to the global economy.
- Metals: Can be divided into precious metals (like gold and silver) and industrial metals (like copper and aluminum).
- Agriculture: Includes soft commodities like coffee, cocoa, and sugar, as well as grains like wheat and corn.
- Livestock: Includes cattle and hogs.
How to Invest in Commodities
Directly buying and storing commodities can be impractical for most investors. Instead, investors typically gain exposure to the commodities market through futures contracts, which are agreements to buy or sell a specific quantity of a commodity at a set price on a future date. Investors can also buy stocks of companies that produce commodities or invest in commodity-focused Exchange-Traded Funds (ETFs).
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