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Financial Advisors Gaithersburg MD: What is a Commodity?

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What is a Commodity?

Our financial advisors can help you determine whether or not commodities are appropriate for your portfolio.  First, what is a commodity? Commodities are generic goods or raw materials that are interchangeable with other commodities of the same type. They are usually fixed physical goods or agricultural products. Commodities usually include bulk goods such as grains, oil, metals, livestock, coffee, beef, and natural gas. To be considered a commodity, a product tends to have little differentiation no matter who is producing it. They are basic goods that are simply harvested or extracted from their natural state. Newer examples of commodities can include foreign currency, cell phone minutes, or bandwidth.

Supply and Demand

Commodity prices are determined by supply and demand. The production of certain commodities might differ depending on the season, or the demand might differ depending on the timing. A bad crop might make a commodity rarer and thus the price will tend to be higher. Commodity brokers often recommend futures contracts to carry out the sale and purchase of commodities. Futures contracts, also known as just “futures”, are agreements to buy or sell a specific commodity at a pre-arranged price in the future. The contract requires a standardized minimum quality and quantity of the commodity being traded.

One might think that commodities are not a worthwhile investment because commodity prices rise and fall. However, during inflationary periods, commodities can to protection for your portfolio, as the demand and price rises for the different basic goods. As things cost more, you can sell your investment in a commodity for an increased price. Our financial advisors do not offer commodities directly, but investors can get exposure indirectly through mutual funds. A financial advisor can help you determine if these are appropriate for your personal situation.

If you need more information about commodities, contact CIC Wealth today; our commodity financial advisors are here to help.

Investments in commodities may have greater volatility than investments in traditional securities, particularly if the instruments involve leverage. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs, and international economic, political, and regulatory developments. Use of leveraged commodity-linked derivatives creates an opportunity for increased return but, at the same time, creates the possibility for greater loss.