A commodity is an economic good or service that has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them. Most commodities are raw materials, basic resources, agricultural, or mining products, such as iron ore, sugar, or grains like rice and wheat. Commodities can also be mass-produced unspecialized products such as chemicals and computer memory.
The price of a commodity good is typically determined as a function of its market as a whole: well-established physical commodities have actively traded spot and derivative markets. The wide availability of commodities typically leads to smaller profit margins and diminishes the importance of factors (such as brand name) other than price.
Commodity investing is investing in raw materials that are either consumed directly, such as food, or used as building blocks to create other products. These materials include energy sources like oil and gas, natural resources like timber and agricultural products, or precious metals like gold and platinum.
There are several ways to consider investing in commodities. One is to purchase varying amounts of physical raw commodities, such as precious metal bullion. Investors can also invest through the use of futures contracts or exchange-traded products (ETPs) that directly track a specific commodity index. These are highly volatile and complex investments that are generally recommended for sophisticated investors only.
Another way to gain exposure to commodities is through mutual funds that invest in commodity-related businesses. For instance, an oil and gas fund would own stocks issued by companies involved in energy exploration, refining, storage, and distribution.