A commodity is a basic raw material that comes out of the ground or off the land: metals, energy, and crops. What sets it apart from a company share is fungibility — one standard unit is interchangeable with any other of the same grade. A bushel of a given wheat class is a bushel; it has no brand, no management team, and no earnings.
The main groups
Commodities split into a few familiar buckets:
- Energy — crude oil, natural gas, gasoline. The biggest and most economically important group.
- Metals — split into precious (gold, silver, platinum) and industrial (copper, aluminium, nickel).
- Agriculture — grains (wheat, corn, soybeans), softs (coffee, sugar, cotton), and livestock.
A useful shorthand: hard commodities are mined or extracted (metals, energy); soft commodities are grown (crops, livestock).
Why they behave differently
A stock is a claim on a business that can grow, innovate, and compound. A commodity is just stuff — it doesn’t earn anything or pay you to hold it. Its price is set almost entirely by supply and demand for the physical material right now.
That gives commodities three distinctive traits:
- No income. Unlike a dividend stock or a coupon bond, raw materials produce no cash flow. Gold sitting in a vault is the same gram a year later. Your return comes only from price changes.
- Storage costs money. Someone has to tank the oil and silo the grain. That cost shapes prices over time.
- They march to their own drummer. Crop prices answer to weather; oil answers to wars and OPEC. That low correlation with stocks is exactly why some investors hold them.
Spot vs futures
Most people never touch the physical material. Commodities trade mainly through futures — standardised contracts to buy or sell a set quantity at a set date. The spot price is for delivery now; a futures price is for delivery later. Futures let producers and users lock in prices, and let investors get exposure without renting a warehouse. (More on the mechanics in the later lessons.)
The takeaway
Commodities are raw materials — energy, metals, crops — that trade on supply and demand, produce no income, and cost something to store. That makes them a fundamentally different animal from stocks and bonds, which is the whole reason they earn a place in some portfolios.
This is education, not financial advice.