What exactly are commodities and how are they traded?

Commodities are items like Oil.

Actually they come in different classifications; there’s Wheat, Orange Juice, Pork bellies, Coffee – soft commodities.

Then there’s of course Oil, Gold, Silver, Copper etc.

The way they are traded is somewhat complex; they are traded against Futures contracts.

A futures contract is an agreement to buy/sell a specified commodity for a specified price, at a future date.

so for example, Oil can be bought on a July contract, or a December contract, the month denotes the date you get your Oil delivered; if you hold the futures contract till expiry then you will “take delivery” and obviously will either want to do something with it, or sell it on later… speculators commonly close out positions before expiry and many commodity firms may require you to do so… Obviously if you have short sold some oil, you have to cover your position otherwise you owe someone their commodity, which you don’t own, and you’re not allowed to do that.

There are dedicated exchanges for futures trading, known as “Mercantile” exchanges – the most well-known being NYMEX and the CME