Commodities

Financial Dictionary -> Investing -> Commodities

There are certain broad definitions of the term commodity, for example some people may consider a commodity as something you need in order to survive like water, but in business commodities have a very specific meaning.

A commodity is any product, item or resource that is in constant global demand, but doesn't have quality characteristics or added value that can alter its perceived worth. For example salt is salt; it has never been changed and nobody wants it to be changed. We don't have chocolate flavored salt or salt that gives us extra vitamins. The world over, salt is simply salt and is sold that way. This is a commodity. On the other hand desktop computers come in all different shapes and sizes, with all different functions, each with their own value based on its quality. The faster its processor the more it can be sold for. This is not a commodity.

So in the salt example, the price of salt is universal and fluctuates on a daily basis due to the amount of salt available and its global demand. If salt suddenly became scarce, its price would go up because the demand is still there.

One of the most sought after commodities on the earth, that has sparked war, political problems and is making some corporations very rich is oil. We've all seen price fluctuations at the gas pumps.

Other common commodities are iron ore, coal, ethanol, sugar, coffee beans, soybeans, aluminum, rice, wheat and everybody's gold, silver and diamonds.

Despite this 'salt is salt' theory, this of course doesn't stop companies adding their own brand and marketing behind the commodity to help them sell it to their target audience. We all like to think our coffee comes from the utopian region of mount wonderful and is ground by the most skilled coffee kings of the east, but it is probably just the same as Carol's crumby coffee from the corner store. Branding is a totally different subject.