Commodity

A physical good that is substitutable unit for unit, so it trades at a single global price rather than on the merits of any particular producer.

Example

An ounce of a refined metal is an ounce of that metal wherever it came from, which is what makes it a commodity - and makes a share in the company that mined it something else entirely.

Important

It is not a claim on anybody: no issuer, no income, and nobody to pursue. That is the whole of its appeal and the whole of its cost, because storage and insurance have to be paid out of your pocket rather than out of what it produces.

Related terms

• Spot price — The price at which the physical good changes hands today, set by how much of it exists and how much is being used.
• Cost of carry — What it costs to hold a physical good until a future date: financing on the capital tied up, plus storage and insurance.
• Futures contract — An exchange-traded agreement to take or make delivery of a stated quantity of a good on a stated future date, held on a deposit far smaller than the notional amount.
• Inflation hedge — A holding expected to keep pace with the general price level, so that its owner's purchasing power is preserved rather than merely their currency balance.

Lessons that explain it

• A physical good, and three very different ways to own it — Metal in a vault, a listed product that holds metal, and a dated contract on metal are not three versions of one investment. They differ in minimum size, cost, storage and who owes you what. (9 min)
• The only class here that charges you for holding it — There is no income at all - no coupon, no dividend, no rent. The return is the price change minus the cost of carry, which means a flat price is a loss, and the loss compounds. (10 min)
• Appraising one exposure: the drivers, the carry and what the product holds — Six checks. Two of them - the curve and what the product actually holds - decide more of a five-year outcome than any view about supply and demand, and both have exact published answers. (13 min)
• Nothing arrives while you wait, and the wrapper sets the tax — Large declines with no income to cushion them, a running charge on an asset that pays nothing, a roll cost that hides inside a price - and in the United States, three wrappers around the same metal taxed three different ways. (12 min)
• Sometimes the only thing that rose, sometimes the thing that fell furthest — It genuinely protects a portfolio in some shocks and genuinely makes them worse in others, and the average of those two behaviours describes neither. That is the honest case, and it is a case for a small deliberate position. (10 min)

All 578 terms in the Investing glossary