Written by: Marcus Thornfield, CFA
Senior Investment Strategist & Commodity Markets Educator with 15+ Years of Active Trading Experience
Introduction: You’re Not Alone in Finding Commodities Confusing
If you’ve ever wondered what people mean when they talk about “commodity prices” on the news, or why the price of oil seems to affect everything from your grocery bill to your retirement account—you’re asking exactly the right questions.
I remember my first day on a trading floor in 2008. I was surrounded by screens flashing “WTI Crude,” “Corn Futures,” and “Gold Spot Price,” and I felt completely overwhelmed. Fast forward 15 years, and I’ve helped thousands of beginners understand that commodities aren’t just for Wall Street traders—they’re the building blocks of our entire economy, and understanding them can genuinely improve your financial literacy and investment decisions.
Here’s what I promise you in this guide:
- A crystal-clear definition of what a commodity actually is (no jargon)
- The main types of commodities and real-world examples you recognize
- How commodities are traded and why they matter to your everyday life
- Honest answers about whether you should invest in them as a beginner
Let’s start from the absolute beginning.
Section 1: What Exactly is a Commodity? The Core Definition and Key Characteristics
The Simple Definition
A commodity is a basic good or raw material that can be bought, sold, or traded. What makes something a commodity is that it’s largely uniform and interchangeable no matter who produces it.
Think about it this way: A barrel of crude oil from Texas is essentially the same as a barrel from Saudi Arabia. A bushel of corn grown in Iowa is functionally identical to one grown in Brazil. You can’t say the same thing about, say, an iPhone versus a Samsung phone—those are branded products, not commodities.
The Four Key Characteristics That Define a Commodity
In my experience teaching beginners, understanding these four traits clears up most confusion:
- Fungibility (Interchangeability)
One unit of the commodity is essentially the same as another. A gold bar is a gold bar, regardless of where it was mined. - Standardization
Commodities are graded and measured by industry standards. For example, crude oil is classified by quality benchmarks (like WTI or Brent), and coffee beans are graded by size and defect count. - Physical or Extractable Nature
Commodities are tangible goods that come from the earth (mined or drilled) or are grown (agricultural products). - Market-Driven Pricing
Prices are determined by global supply and demand, not by individual sellers. That’s why you see commodity prices fluctuate constantly on financial news.
Why This Matters to You
Understanding what makes something a commodity helps you grasp why their prices are so volatile. Unlike a stock (which represents ownership in a company), a commodity’s value is purely tied to supply and demand fundamentals. A bad harvest in Brazil? Coffee prices spike globally. A new oil discovery in the Middle East? Crude prices may drop.
The U.S. Commodity Futures Trading Commission (CFTC) regulates commodity markets in the United States to ensure fair trading and protect market participants—which includes you, whether you’re a direct investor or simply a consumer affected by commodity prices.
Section 2: The Main Types of Commodities Explained (Hard vs. Soft)
Commodities are traditionally divided into two broad categories: hard commodities and soft commodities. Let me break down each type with examples you’ll immediately recognize.
Hard Commodities: Natural Resources That Are Mined or Extracted
These are commodities that come from the earth through mining or drilling. They’re called “hard” because they’re durable, non-perishable, and physically solid (or liquid in the case of oil).
Major Categories of Hard Commodities:
1. Energy Commodities
- Crude Oil (WTI, Brent)
- Natural Gas
- Gasoline
- Heating Oil
- Coal
Why they matter: Energy commodities power the global economy—literally. According to the U.S. Energy Information Administration (EIA), fluctuations in crude oil prices directly impact transportation costs, manufacturing, and consumer prices worldwide.
2. Metals
Precious Metals:
- Gold
- Silver
- Platinum
- Palladium
Industrial (Base) Metals:
- Copper
- Aluminum
- Nickel
- Zinc
- Lead
Why they matter: Precious metals are often viewed as “safe haven” assets during economic uncertainty. Industrial metals are essential for construction, electronics, and manufacturing. The London Metal Exchange (LME) is the world’s largest market for trading base metals.
Soft Commodities: Agricultural Products That Are Grown
“Soft” commodities are grown rather than mined. They’re typically perishable (or semi-perishable) and subject to weather, seasonal cycles, and agricultural conditions.
Major Categories of Soft Commodities:
1. Grains and Oilseeds
- Corn
- Wheat
- Soybeans
- Rice
- Oats
2. Livestock and Meat
- Live Cattle
- Feeder Cattle
- Lean Hogs
3. Soft Agricultural Products (Also Called “Softs”)
- Coffee
- Sugar
- Cocoa
- Cotton
- Orange Juice
Why they matter: These commodities directly affect your grocery bill and food prices. A drought in the U.S. Midwest can send corn and soybean prices soaring, which then increases the cost of animal feed, meat, and processed foods.
Quick Comparison Table: Hard vs. Soft Commodities
| Feature | Hard Commodities | Soft Commodities |
|---|---|---|
| Source | Mined or extracted | Grown (agricultural) |
| Durability | Non-perishable, durable | Often perishable or seasonal |
| Examples | Gold, crude oil, copper | Coffee, wheat, cotton |
| Price Drivers | Supply disruptions, geopolitical events, industrial demand | Weather, harvest cycles, crop disease |
Section 3: How Are Commodities Traded and Why Do They Matter to You?
How Commodity Trading Actually Works
When I started in the industry, the most common mistake I saw beginners make was thinking that commodity trading meant physically buying barrels of oil or tons of wheat and storing them in a warehouse. That’s not how it works for most participants.
Commodities are primarily traded through two main mechanisms:
1. Spot Markets (Physical Markets)
The spot market is where commodities are bought and sold for immediate delivery. This is the “real” physical market where producers, manufacturers, and consumers trade actual goods.
- Example: A coffee roaster buying coffee beans directly from a farm or importer for delivery within a few days.
2. Futures Markets (Derivative Markets)
This is where most commodity trading activity happens. A commodity futures contract is an agreement to buy or sell a specific amount of a commodity at a predetermined price on a future date.
Who uses futures markets?
- Producers (Hedgers): A corn farmer might sell corn futures to lock in a price before harvest, protecting against price drops.
- Commercial Buyers (Hedgers): An airline might buy crude oil futures to lock in fuel costs, protecting against price spikes.
- Speculators and Investors: Traders and investment funds who aim to profit from price movements without intending to take physical delivery.
Where are commodities traded?
The major global commodity exchanges include:
- CME Group (Chicago Mercantile Exchange) – The world’s largest derivatives marketplace, trading everything from crude oil to livestock to metals.
- Intercontinental Exchange (ICE) – A leading global exchange for energy and agricultural commodities, including Brent crude oil.
- London Metal Exchange (LME) – The world center for industrial metals trading.
These exchanges provide transparency, standardization, and regulatory oversight to ensure fair pricing and reduce counterparty risk.
Why Commodities Matter to You (Even If You Never Invest in Them)
Here’s what personally helped me understand the importance of commodities when I was starting out: Commodity prices are the invisible hand that touches almost every part of your daily life.
Real-World Impacts:
- Energy prices (oil, natural gas) directly affect your gas tank, heating bills, and airline ticket costs.
- Agricultural commodities (wheat, corn, soybeans) influence grocery prices, from bread to meat to cooking oil.
- Metals (copper, aluminum) affect the cost of electronics, cars, and home construction.
- Precious metals (gold, silver) often serve as an inflation hedge and safe-haven asset during economic uncertainty.
Economic Indicators:
Commodity prices are also key economic indicators. Rising oil prices might signal growing global demand (economic expansion) or supply disruptions (geopolitical risk). Falling agricultural prices could indicate oversupply or weak demand.
According to data from the World Bank Commodity Markets, commodity price shocks can have significant impacts on inflation, currency values, and economic growth—especially in emerging markets.
Can You Invest in Commodities as a Beginner?
Short answer: Yes, but you need to understand the risks first.
There are several ways individual investors can gain exposure to commodities:
- Commodity ETFs (Exchange-Traded Funds)
Funds that track commodity prices or commodity-related companies (e.g., SPDR Gold Shares, United States Oil Fund). - Commodity Mutual Funds
Actively managed funds that invest in commodity futures or commodity-producing companies. - Stocks of Commodity Producers
Buying shares in companies that mine gold, drill oil, or grow agricultural products (e.g., ExxonMobil, Barrick Gold, Archer Daniels Midland). - Commodity Futures and Options
Direct trading of futures contracts (requires significant knowledge and capital; not recommended for most beginners).
Important Risk Disclosure:
Commodity investments can be highly volatile and are subject to factors beyond traditional stock market risks—including weather, geopolitical events, and currency fluctuations. The U.S. Commodity Futures Trading Commission (CFTC) provides educational resources and investor warnings about the risks of commodity trading. The U.S. Securities and Exchange Commission (SEC) also offers guidance on commodity-related investment products.
My Advice for Beginners:
If you’re just starting out, I strongly recommend:
- Educate yourself first. Understand the specific commodity and market dynamics before investing.
- Start small. Use broad-based commodity ETFs for diversification rather than individual futures contracts.
- Think long-term. Commodities can be volatile in the short term but may offer diversification and inflation protection over longer periods.
- Consult a financial advisor. Especially if you’re unsure how commodities fit into your overall investment strategy.
Conclusion: You Now Understand the Fundamentals of Commodities
Congratulations—you’ve just taken a significant step in your financial education.
You now understand:
✅ What a commodity is: A basic, interchangeable raw material or good.
✅ The two main types: Hard commodities (mined/extracted) and soft commodities (agricultural/grown).
✅ How they’re traded: Through spot markets (physical delivery) and futures markets (contracts for future delivery).
✅ Why they matter: They affect prices you pay every day and serve as important economic indicators.
✅ Whether you can invest: Yes, but with education, caution, and an understanding of the risks.
In my 15+ years in the commodity markets, I’ve seen how understanding these fundamentals empowers people to make smarter decisions—not just as investors, but as informed consumers and economically literate citizens.
Your Next Step:
If you’re curious about investing in commodities, start by exploring educational resources from reputable sources like the CFTC, CME Group’s education center, and financial news outlets like Bloomberg or Reuters.
Remember: The best investment you can make is in your own knowledge.
FAQ: Common Questions About Commodities (Answered Simply)
1. What’s the difference between a commodity and a stock?
Great question—this confuses a lot of beginners.
- A stock represents ownership in a company. When you buy Apple stock, you own a tiny piece of Apple Inc. and benefit (or suffer) based on the company’s performance, management decisions, and profitability.
- A commodity is a physical good or raw material. When you invest in gold (the commodity), you’re betting on the price of gold itself, not on any particular company. Commodity prices are driven purely by global supply and demand.
Key difference: Stocks can pay dividends and grow based on a company’s success. Commodities don’t pay dividends or grow; their value fluctuates based solely on market supply and demand.
However, you can buy stocks of commodity-producing companies (like a gold mining company), which combines elements of both.
2. Is investing in commodities risky for a beginner?
Yes, commodities can be risky—especially if you jump in without understanding the market.
Here’s why:
- High volatility: Commodity prices can swing wildly due to weather, geopolitical events, currency changes, and supply disruptions.
- No cash flow: Unlike stocks or bonds, commodities don’t generate income (dividends or interest). You profit only if prices rise.
- Complexity: Futures contracts, leverage, and expiration dates add layers of complexity unsuitable for most beginners.
- Storage and transportation costs: Physical commodities involve additional costs not present in stocks or bonds.
The CFTC advises investors to thoroughly understand commodity markets and the specific instruments before trading.
My recommendation for beginners:
- Start with commodity ETFs rather than direct futures trading.
- Treat commodities as a small part of a diversified portfolio (not your entire investment).
- Focus on learning before committing significant capital.
3. Can an average person invest in commodities?
Absolutely, yes—but you don’t need to become a futures trader to do it.
In the past, commodity investing was mostly limited to institutional traders and wealthy individuals. Today, technology and financial innovation have opened access to everyday investors.
Practical ways an average person can invest in commodities:
- Commodity ETFs and ETNs (Exchange-Traded Notes)
These trade like stocks on regular exchanges. Examples include:- SPDR Gold Shares (GLD) – tracks gold prices
- United States Oil Fund (USO) – tracks crude oil
- Invesco DB Agriculture Fund (DBA) – tracks agricultural commodities
- Commodity Mutual Funds
Professionally managed funds that invest in commodity futures or commodity-related companies. - Stocks of Commodity Producers
Buy shares in companies that mine, drill, or grow commodities (e.g., Newmont for gold, Chevron for oil, Archer Daniels Midland for agriculture). - Brokerage Accounts with Commodity Access
Many online brokers now offer access to commodity futures and options (though I strongly recommend education first).
Important note: You do not need to physically buy and store barrels of oil or bushels of wheat. Modern investment products give you price exposure without the logistical headaches.
Bottom Line: Commodity investing is accessible to average investors, but it requires education, risk awareness, and a thoughtful approach. Start small, diversify, and never invest money you can’t afford to lose.
Final Thought from the Author:
Commodities have fascinated me for over 15 years because they’re where the real economy meets financial markets. They’re the coffee in your cup, the gas in your car, the metal in your smartphone. Understanding them makes you a smarter investor and a more informed citizen.
If this guide helped you, share it with someone else who’s curious about the markets. And remember—every expert was once a beginner who refused to give up learning.
Stay curious. Stay informed. Invest wisely.
— Marcus Thornfield, CFA
Disclaimer: This article is for educational purposes only and does not constitute financial advice. Commodity investing involves significant risk, including the potential loss of principal. Always consult with a qualified financial advisor before making investment decisions. For regulatory information and investor protection resources, visit the U.S. Commodity Futures Trading Commission (CFTC) and the U.S. Securities and Exchange Commission (SEC).