Commodities may seem like a somewhat exotic investment vehicle and while they are typically employed by more sophisticated investors, they can play an important role in helping to diversify your portfolio and hedge against rising retail prices and inflation.
Commodities are physical goods such as gold, corn, coffee etc. Commodities are traded via futures contracts that designate: the type of commodity, amount, grade and delivery location. These contracts are traded on commodity exchanges, one of the most well known is the Chicago Board of Trade (CBOT).
Commodities are traded for different reasons. For example, many companies utilize commodities to help hedge future prices. Airline companies often hedge against increases in jet fuel costs by purchasing futures contracts that allow them to lock in prices rather than having to accept market prices.
The other major category of commodity investor is that of speculators. Speculators are not hedging prices but are participating in the market to purely for profit.
Commodities contracts are highly leveraged which is one reason they are so popular. Additionally, it is important to note that you don’t have to actually take delivery on the specific commodity contract you purchase. Unless of course you wish to actually take delivery of a thousand barrels of pork-bellies.