Commodities

From Debt Free Dude
Jump to: navigation, search

A commodity is a good that is supplied without regard to qualitative differentiation. This simply means that the good, no matter where it is from or who is selling it, is relatively at the same quality level as the other goods of its type.

Most commodities are or have to do with natural resources. A few examples of commodities are wheat, crude oil, coffee beans and even rubber! These items are all produced in large quantities without any major discrepancies in quality when compared with products from another area or producer.

Because commodities are very cyclical in nature, many avoid investing in ventures that deal with commodities. However, if one is experienced enough to know what happens during these cycles and knows an irregularity when he or she sees one, it may not be as large of a risk as it appears.

As was mentioned, commodities are virtually alike in quality. However, to keep variation in quality at a minimum, there is a minimum standard of quality or a "basis grade" that is referred to before commodities are put onto the market.

Commodities are most often used in the production of goods or services. Crude oil, for example, is taken to refineries and made into usable fuel for vehicles of all kinds.

Commodities differ from other goods, again, in that they do not differ much at all in quality. For example, the wood that we use to build houses is not usually any better quality when it comes from a certain lumber company relative to another company in that same business. In the electronics business, however, there is a wide variety of qualitative differentiation that must be taken into consideration when purchasing an electronic product.

Speaking of technology, with recent technological advancements, cell phones and bandwidth have also become commodities. If a buyer goes out to purchase a cell phone, the basic services that phone offers will most likely be just as good as the next cell phone, for all practical purposes.