Definition
A commodity is a raw material or primary product, such as crude oil, copper, wheat or gold, that is largely interchangeable with other units of the same grade. Buyers care mainly about grade, quantity, location and delivery date rather than the producer.
How it works
Commodities are usually grouped as energy, metals, agriculture and livestock. Prices are driven by physical supply and demand, weather, inventories, transport and storage costs, currencies and policy, so shocks can be sudden and regional.
Many financial participants gain exposure through futures, exchange-traded products or related company shares rather than by holding physical goods. These routes can behave differently from the spot market because of contract expiry, rolling, fees, and the fact that a miner's or producer's share price also reflects costs and management.
Formula / convention
Contract notional value = contract size × price per unit
Illustrative example
Illustrative: a fictional grade of copper trades at 9,000 US dollars per tonne, and one futures contract covers 25 tonnes. The contract's notional value is 25 × 9,000 = 225,000 US dollars. A 2% price move changes that value by 0.02 × 225,000 = 4,500 US dollars, so even a small percentage move can be large in cash terms.
What to watch for
Commodity prices can be volatile and are affected by events outside financial markets, such as weather, conflict and regulation. A product that tracks a commodity may not follow its spot price closely over time.