Commodities

Here’s one of my favourites, commodities such as gold, crude oil, and food, have been traded on the markets for a lot longer than stocks and shares, and still form a large part of the global economy. They have a reputation for being a safer bet than equities, but is this reputation warranted? In this article, we take a brief look at the history of the commodities markets from ancient times up to the present day.

Commodities is a term that is used to describe raw, or primary products that are traded on the stock market in much the same way as stocks or shares. Examples of commodities include gold, crude oil, and food. In a wider sense, commodities is a term that can be used to describe a whole range of stock market products, such as services, debt, and investments, that do not fall into the categories of stocks or shares.

The commodities market as it stands today has its roots in the trading of agricultural products before the 20^th century. Back in ancient times, commodities such as sheep and goats were used as a form of currency for trading with in some agricultural civilisations. In order for products to be traded as commodities, there has to be a large degree of standardisation in the pricing and measurement.

Naturally, there has always been some ambiguity about the use of living things as commodities. In fact, the widely used term ‘fleeced’ (meaning conned or cheated) dates back to these early commodities markets, when traders purchased sheep only to discover upon their arrival that they had already been fleeced, which meant they were worth a lot less. This ambiguity placed a large emphasis on the reputation of commodities traders, as those who had a history of fleecing their customers would not be considered trustworthy enough to use animals as commodities by other traders.

As time went on and civilisations become more sophisticated, rare commodities such as gold, jewels, and spices were traded in much the same way. The modern commodities market is effectively a more sophisticated version of these early trades. The value of commodities on the stock exchange is very much decided by the laws of supply and demand. As technology has advanced, commodities such as gold and crude oil, both of which are finite resources, have become much more in demand.

In 2008, the rapid emergence of China and India as major industrial forces had driven up the prices of commodities across the board to an all-time high. However, later that year, the commodities bubble burst, leading to tumbling commodities prices across the board. Over time, commodities have been shown to have a similar profit potential to equities, with just as much risk. While they have a reputation as being a safer bet than equities, due to the fact that they cannot go out of business as such, this is a fallacy, as the price volatility of commodities can be even more extreme.

Commodities can be traded in a number of ways. The simplest, in which commodities are physically passed on to their new owner as soon as possible, is known as spot trading. On wholesale markets, this usually involves an inspection process, but on commodities markets, a set of agreed standards have to be applied to all the commodities so that they can be traded without inspection. A forward contract is one in which commodities are sold at an agreed price, known as the forward price, and then passed on at a later date. Futures contracts are a slightly more complicated form of forwards contracts for commodities that are traded on futures exchanges, and this is currently the most common type of commodities trade.