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Commodities are goods that are traded in accordance to specific standards that have been established by the basis grade. Every commodity can be described as a unique node in the production of other goods and services owned by different enterprises.
Among all different kinds of basic goods, there will naturally be some ebb and flow in the exact quality of each individual commodity. Due to the the regulatory effect of the basis grade’s standards, there will usually be certain minimum level of quality that each commodity will adhere to in order to preserve the sanctity of exchange.
Production and purchasing
When a commodity is being exchanged, a certain contractual arrangement ensures that both the minimum and maximum quality of both goods are effectively counterbalanced. The avenue of buying and selling a commodity is a futures contract.
Those who personally produce a commodity may utilize the futures contract as an effective hedging method; in this scenario, the actual delivery of the good will usually occur at the moment of the contract expiry.
The hedging method can be an effective way for the seller of a commodity to potentially exercise a measure of stop loss to preserve their capital in the event that the price of their good lowers before the date of sale. By settling on a static price that the commodity will be sold for ahead of time, the commodity producer can assure that the fluctuation of the market doesn’t take an unexpected bite out of their profit in the worst case scenario.
Commodity forms and value determination
Some of the oldest commodity categories have included fossil fuel, precious minerals, livestock meat, and harvested grains. With the advent of the free market and speculative market runs, the range of the definition of of “commodity” has expanded considerably. In the current market, an intangible financial stock can be categorized as a commodity. A certain amount of bandwidth or cell phone minutes could also be considered a commodity as well.
In a sense, the concept of commodity quality regulation is to ensure that there isn’t too much of a divergence from the mean quality of any particular commodity that happens to be produced by a number of different manufacturers.
With goods such as standardized units of fossil fuel, there naturally wouldn’t be too much of stark difference between the quality of units produced by different manufacturers. In the case of more unique goods with room for production customization, there may naturally be a degree of variability in the quality of different units produced by different manufacturers; for example, certain trademarked electronic products.
Profiting from commodity price fluctuation
In contrast to the commodity producer who hedges in order to protect their profits against volatile market movements, the commodity speculator is one who active seeks out the best opportunity to profit from a sharp market movement that makes certain goods become more valuable at a future date. While the speculators do not actively participate in the production or delivery of the goods upon which they speculated, they can potentially use their speculative projections to take advantage of certain goods’ liquidity.
Conclusion
Commodities are products, raw materials, currencies, and all other traded goods that serve as either tangible or intangible indicators of value. The production, sale, purchase and speculation of these goods are what fuel the motion of the market.