Commodities are materials that are used to create the products that people buy and sell. Commodities are the raw materials; products that come out of the earth. These include agricultural products such as corn, wheat, coffee, and sugar, often known as “soft” commodities, as they cannot be stored indefinitely so must be traded within a certain time frame before they lose their value. Other commodities such as precious metals, coal, and crude oil may be stored for longer periods, and allowed to appreciate in value. These commodities, which are usually mined, are called “hard commodities.”

Most commodities markets deal in futures. The producer of a commodity will sell a futures contract, which is an agreement to sell the product harvested or mined at a certain time in the future, for a price agreed upon at the time of sale. Some of the major commodities exchange markets in the United States include the Chicago Board of Trade (www.cbot.com), Chicago Mercantile Exchange (www.cmegroup.com/), and New York Mercantile Exchange (www.nymex.com). Worldwide major commodities markets include NYSE Euronext (www.euronext.com) and the Tokyo Commodity Exchange (www.tocom.or.jp)

Commodities are perennially popular with investors because, unlike stocks and bonds, they represent “real assets.” That is, the investor is purchasing (although not necessarily accepting delivery of) an actual amount of corn, hogs, or some other tangible product, instead of shares in a company, which may or may not turn a profit from one quarter to the next. Commodities are often used to provide a portfolio with a hedge against inflation, because their prices tend to rise as the rate of inflation increases.