Commodities

Stock trading dictionary: meaning, example and how traders use it.

Last updated: October 17, 2026

Definition: Commodities are basic raw materials and agricultural products, such as crude oil, natural gas, gold, copper, wheat and coffee, that are standardized enough to be traded interchangeably on exchanges, mostly through futures contracts.

Types of commodities

  • Energy: crude oil, natural gas, gasoline, heating oil.
  • Metals: precious metals like gold and silver, and industrial metals like copper and aluminum.
  • Agriculture: grains such as corn, wheat and soybeans, and softs such as coffee, sugar and cotton.
  • Livestock: live cattle and lean hogs.

Because one barrel of a given oil grade or one bushel of a given wheat grade is interchangeable with another, these goods can be traded without inspecting each unit.

How commodity prices are set

Most price discovery happens in the futures contract markets, where buyers and sellers agree today on a price for delivery later. Prices respond to supply and demand: weather, harvests, mining output, geopolitics, inventories and economic growth. Because most commodities are priced in US dollars, a stronger dollar can weigh on prices. Commodities are also watched as an inflation signal because they feed into the cost of many goods.

Commodity investing example

Suppose a commodity fund holds crude oil futures when the near-month contract trades at $70 and the next month trades at $72. To keep its exposure, the fund must sell the expiring contract and buy the more expensive one, a process called rolling. If the spot price ends the year unchanged, the fund can still lose money because it repeatedly paid up to roll. This effect, called contango, explains why commodity fund returns can differ from the spot price.

The opposite condition, backwardation, occurs when later contracts trade below the near month, often when current supply is tight. In that case rolling can add to returns. Investors comparing commodity products should read how each fund gains its exposure, which contracts it holds, how often it rolls and what fees it charges, because these details can matter as much as the direction of the commodity price itself. Physically backed metal funds avoid roll effects but carry storage and custody costs instead.

Ways to invest in commodities

  • Futures directly, which involve leverage and margin.
  • Commodity ETFs and exchange-traded products, some holding futures and some holding physical metal.
  • Physical holdings, such as gold bullion or silver coins.
  • Producer stocks in the energy and materials sectors, which add company-specific risk.

Risks of commodities

Commodity prices can be highly volatile, swinging sharply on weather or political events. Commodities produce no earnings or dividend, so returns depend entirely on price changes and roll effects. Some investors still use a small allocation for portfolio diversification, since commodities do not always move in step with stocks and bonds.

Frequently asked questions

Are commodities a good hedge against inflation?

Commodities have sometimes risen during inflationary periods because they are inputs to consumer prices, but the relationship is inconsistent and returns can be volatile.

How can a regular investor buy commodities?

Common routes include commodity ETFs, mutual funds, stocks of producers, physical precious metals, or futures through a broker approved for futures trading.

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For information only, not investment advice. See the disclaimer.