How Do Commodities Work?
Commodities are basic goods used in commerce that are interchangeable with other goods of the same type. They are primarily classified into two categories: hard and soft commodities.
Types of Commodities
- Hard Commodities: Typically natural resources that are mined or extracted, such as oil, gold, and copper.
- Soft Commodities: Agricultural products or livestock, including wheat, coffee, and cattle.
How Commodities Are Traded
Commodities are traded on various exchanges, such as the Chicago Mercantile Exchange (CME) and London Metal Exchange (LME). Investors can trade actual commodities or futures contracts, which are agreements to buy or sell a commodity at a future date for a specified price.
Commodities and Dividend Investing
While commodities themselves do not pay dividends, companies involved in their production (like mining or agriculture firms) can be dividend-paying stocks. Value investors might look at these companies when assessing potential income streams through dividends while capitalizing on commodity price fluctuations.
Conclusion
Understanding how commodities work is crucial for investors focusing on value and dividend investing. Tracking commodity prices can provide insights into market trends that affect related stocks, thus enhancing investment strategies.