Commodity

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A commodity is anything for which there is demand, but which is supplied without qualitative differentiation across a given market.

Characteristic of commodities is that their prices are determined as a function of their market as a whole. Well-established physical commodities have actively traded spot and derivative markets. Generally, these are basic resources and agricultural products such as iron ore, crude oil, coal, ethanol, sugar, soybeans, aluminium, rice, wheat, gold and silver.

Commoditization occurs as a goods or services market loses differentiation across its supply base, often by the diffusion of the intellectual capital necessary to acquire or produce it efficiently. As such, goods that formerly carried premium margins for market participants have become commodities, such as generic pharmaceuticals and silicon chips. Linguistically, the word commodity came into use in English in the 15th century, derived from the French word "commodité", similar in meaning to "convenience" in terms of quality of services. The Latin root meaning is commoditas, referring variously to the appropriate measure of something; a fitting state, time or condition; a good quality; efficaciousness or propriety; and advantage, or benefit. The German equivalent is die Ware, i.e. wares or goods offered for sale. The French equivalent is "produit de base" like energy, goods, or industrial raw materials.

Commodity trade

In the original and simplified sense, commodities were things of value, of uniform quality, that were produced in large quantities by many different producers; the items from each different producer are considered equivalent. It is the contract and this underlying standard that define the commodity, not any quality inherent in the product.

Commodities exchanges include:

• Chicago Board of Trade
• Euronext.liffe
• London Metal Exchange
• New York Mercantile Exchange
• Multi Commodity Exchange
• Dalian Commodity Exchange

Markets for trading commodities can be very efficient, particularly if the division into pools matches demand segments. These markets will quickly respond to changes in supply and demand to find an equilibrium price and quantity. In addition, investors can gain passive exposure to the commodity markets through a commodity price index.

See also

• List of traded commodities
• Commodity fetishism
• Commodity markets
• Commodity money
• Commodity price index
• Trade
• Jim Rogers (commodities expert)
• Trading Places - comedic film about playing the commodity markets

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Last updated on Wednesday March 12, 2008 at 09:03:00 PDT (GMT -0700)
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