Commodities are items that occur naturally in several broad categories: metals (aluminum, gold, silver), energy (oil, natural gas, heating oil) agriculture (cotton, corn, wheat, soybeans, oranges, sugar and lumber), and livestock and meats (cattle, hogs, pork bellies). They’re an asset class available to investors, just like traditional stocks, bonds and cash.
Commodities are traded on exchanges via futures contracts, allowing those who use these and other commodities in the course of their normal business activities lock in prices at which they can buy or sell the commodity at some point in the future. They can also be a way for producers to hedge prices. For example, a farmer might buy or sell futures contracts to hedge their corn crop or the value of their live hogs in an effort to lock in a profit.
Investors can trade these futures contracts in an effort to benefit from the movement of the price of the underlying commodity. They’re not looking to take delivery of the physical commodity—the last thing an investor living in a luxury condo in Chicago’s Gold Coast wants is a herd of live cattle delivered to the front door of the building. They’re simply speculating on the future price of these items.