Do you ever think about what goes into that cup of coffee you reach for every morning? What about the gas that you use to fill up your tank every week? Most of us never realize it, but virtually all of the goods begin with commodities.

Commodities are an extremely important part of the financial market. That's because they are essential for producers and manufacturers. A commodity is essentially a basic product or raw material used to make all the goods and services that we need in our everyday lives.

There are a wide array of commodities, including oil, gas, coffee, soybeans, and rice. These commodities are traded on commodity exchanges around the world such as the Chicago Mercantile Exchange (CME), the London Metals Exchange, and the Intercontinental Exchange (ICE). Investing in commodities provides investors with a way to diversify their portfolios, especially during times of market volatility.

Want to learn more about this unique part of the market? Keep reading to find out more about the different types of commodities, their price structures, and who sets them on the market.

KEY TAKEAWAYS

Commodities come in many forms, including grains, energy products, and metals.
Prices change as economic events unfold and trigger waves of buying and selling.
Traders generally don't buy and sell physical commodities.
Commodities trade in the cash or spot market, and on organized exchanges as futures contracts.
Commodities futures trade on exchanges and are used for speculation and hedging.

// Types of Commodities

Since commodities are traded on exchanges, their prices aren't set by a single individual or entity. In fact, there are many economic factors and different catalysts that affect and move their prices each day.

Just like equity securities, commodity prices are primarily determined by the forces of supply and demand in the market. For example, if the supply of oil increases, the price of one barrel decreases. Conversely, if demand for oil increases (which often happens during the summer), the price rises. Gasoline and natural gas fall into the energy commodities category.

Weather plays an extremely significant role in price changes for crop-related or agricultural commodities, especially in the short term. If the weather affects supplies in a certain region, it has a direct impact on that commodity's price. Commodities that fit into this category include corn, soybeans, and wheat. Cotton, coffee, and rice are referred to as soft commodities.

Gold is one of the most actively traded commodities because it is used to produce jewelry and other goods. But is also considered to be a worthwhile, long-term investment. Silver and copper are other examples of commodities in the metals group.

Livestock is another group of commodities. This category includes live animals, such as hogs, and cattle.

// Stock CFD trading

With Investous you can trade Contracts for Difference (CFDs) that use commodities as an underlying asset, allowing you to go long or short a company’s shares without actually owning them. This enables you to speculate on the moving prices of shares, even if you don’t have access to an exchange like the New York Stock Exchange or London Stock Exchange. For instance, you’d buy contracts for IBM shares if you believe shares of the company will increase in price or sell them short if you think price will decrease. The beauty of trading CFDs is the ability to speculate on prices rises or falling while also being entitled to the dividends if the company announces payouts to shareholders. With a long list of major global company shares available, get in on the action today by joining Investous.