Understanding commodities: what they are, what they are for and why you should care

Different types of assets are usually traded in financial markets, such as stocks, bonds and currencies. The term ‘commodity’ also resonates in this list, a concept that appears frequently in world news and that plays an important role within the economic dynamics.

(Read more: What is deflation and why is it important to combat it in time?)

And although it is common to hear this name, sIts operation is not taken into account.

Commodities are basic products that are traded in international markets and are most frequently used as inputs in the production of other goods or services. Regardless of who produces them, their value lies in compliance with certain standards.

This type of merchandise is divided into two categories: hard and soft. Hard commodities include natural resources that must be extracted, such as gold, rubber, silver, and oil; while the soft ones correspond to agricultural and livestock products, such as corn, wheat, coffee, sugar, soybeans and meat.

In that order of ideas, the main groups of ‘commodities’ include those items derived from the agricultural sector; unprocessed energy resources that are of vital importance for power generation, transportation and industry, and unrefined metals that are useful for various industrial applications.

(Read more: What can the Colombian economy expect from the trade relationship with China and Japan?)

(See: What you should know about DXY, the index that measures the value of the dollar)

The purchase and sale of these raw materials is usually carried out through futures contracts in bags that standardize the minimum quantity and quality of the products that are sold. As the name implies, in this type of contract the parties agree to buy and sell a particular asset of a specific amount, at a predetermined price and on a set date.

Many futures markets have a high degree of daily range and volatility, making them attractive to day traders as well as stockbrokers and investment managers.

However, The value of commodities can vary depending on factors such as supply and demand., political instability and climate changes. Inflation, currency behavior, inventory, among others, are also added here.

Regarding the actors participating in this market, the list includes producers, consumers, traders and investors. In this sense, producers seek to sell their products to obtain profits, while merchants acquire them to produce goods or satisfy demand.

(See: From boom to bust: what happens when an economic bubble bursts)

BRIEFCASE