What Is A Commodity?

Ask The Legal & Financial Advisors Owings Mills MD  Trust!

It’s common for anyone seeking some of the best legal and financial advisors Owings Mills MD can provide to ask this question. It’s important for people to know the basics of commodities so that financial advisers can work with them to determine if commodities are are appropriate for their portfolio.

What is a commodity?

As top legal and financial advisors Owings Mills MD has to offer might explain, commodities are generic goods or raw materials that are interchangeable with other commodities of the same type. Traditionally, commodities were considered physical goods or agricultural products such as grains, oil, metals, livestock, coffee, beef, and natural gas. However, the expanding tech industry has created a new market of electronic and digital commodities that are not quite so tangible; these can include materials such as foreign currency, cell phone minutes, or bandwidth.

To be considered a commodity, a product generally has little differentiation regardless of who is producing it. As experienced legal and financial advisors Owings Mills MD can provide might know, commodities are basic goods that are simply harvested or extracted from their natural state.

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.

As a seasoned team of legal and financial advisors in Owings Mills MD might know, commodity brokers might recommend certain contracts to carry out the sale and purchase of commodities. These contracts are called “futures contracts,” or just “futures” for short. Futures contracts are agreements to buy or sell a specific commodity at a prearranged price in the future. The contract requires a standardized minimum quality and quantity for the commodity that is traded.

Investing in Commodities

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

A commodity’s pricing may also be affected by additional factors that are connected to a particular industry. For example:

  • Drought
  • Flooding
  • Inclement weather
  • Livestock disease
  • Trade embargoes
  • Tariffs
  • 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.

Commodities: Are they good investments?

It’s common for clients to ask legal and financial advisors Owings Mills MD trusts whether or not commodities are a worthwhile investment, especially because the prices of commodities rarely stay constant.

During inflationary periods for certain commodities, the increased demand for an item might cause the price to go up. When an item costs more, an investor might be able to sell that commodity for a price that is higher than what he or she paid to purchase it. This could potentially benefit a client’s portfolio.

An Owings Mills MD legal and financial adviser may not offer commodities directly, but investors might get exposure indirectly through mutual funds. Working with a financial advisers may help you determine if an investment in commodities would be appropriate for your personal situation.

If you would like more information about commodities, schedule a consultation with a top legal and financial advisors Owings Mills MD can offer.