Commodities Traders
November 1st, 2009
What is a commodity trading?
For people outside of the Wall Street marketplace, understanding the world of stocks, bonds, P E Ratios and some other jargon that is used every day in the business section of the newspaper can be challenging. One of the terms that a lot of people use without really understanding the term is commodity. Many people know that commodities are traded like stocks and that they can be worth a lot of money, but if you asked them what exactly a commodity is, they wouldn’t be able to answer.
So, what exactly is a commodity?
Commodities have usually a few qualities they usually have. They are manufactured by more than one company and the quality of the commodity is the same from a company to a company. You won’t see the difference between different companies’ product.
It might sound confusing, but it’s really quite simple. For example, oil, electricity and lumber are considered commodities, but clothes aren’t. Because people can tell the difference between company A’s clothes and company B’s clothes, clothes aren’t commodities. But a barrel of one company is the same as a barrel of oil from another company. In economics this is called product differentiation.To summarize: if two products are different they aren’t commodities.
Historically, commodities are priced based on their “marginal cost,” which means the cost it takes to take the oil from the ground, barrel it and ship it. In today’s market, however, most commodities are priced higher based on things like one companies ability to do the job either faster or slower.
Some other products that can be called commodities are wheat, orange juice and pork bellies (the belly-part of a pig that bacon is made from). Some new commodities are internet bandwidth and some computer chips.
In the famous movie from the early 1980’s called Trading Places, a group of men tried to make money on the commodities market. You can see in the movie how quickly large amounts of money can be made and lost on the commodities market.
This is just an introduction to the commodities. If you would like to trade commodities you must learn much more about the subject.
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