what is a commodity

A commodity is a basic good used in commerce that is interchangeable with other goods of the same type. Commodities are most often used as inputs in the production of other goods or services. They are raw materials that are typically used as input for producing other goods or services. The quality of a given commodity may differ slightly, but it is essentially uniform across producers. When they are traded on an exchange, commodities must also meet specified minimum standards, also known as a basis grade. Commodities are a distinct asset class with returns that are largely independent of stock and bond returns. Therefore, adding broad commodity exposure can help diversify a portfolio of stocks and bonds, potentially lowering the risk of an overall portfolio and boosting returns. Given their impact on consumer goods prices, commodities can also offer a hedge against inflation. Commodities that are traded are typically sorted into three broad categories: Metals (Industrial & Precious), Energy (Fossil Fuels, Renewables, & Nuclear), and Agriculture (Grains, Livestock, & Softs) .