What is a physical commodity?
Physical commodity is a real product that is sold or traded as a commodity, whether on the futures market or place. Physical commodities are usually things like oil, grain and precious metals. These products gain great attention from investors who often buy them as an investment, and then sell them in the futures market before contract and delivery.
In order to be considered a physical commodity, a number of conditions must be met. First, there must be many different manufacturers and the market must be relatively easily entered. There must also be an end market for this physical commodity. The commodity is often a raw material to which the processor adds value before it reaches the final user, even if it is not always the case.
Many physical commodities require some other work to be suitable for end users, but not others. Usually, as one example, gold must be created in some type of jewelry or another product for the purpose of consumer. A grain such as corn fields canbe brought to livestock while in raw form or can be processed for human consumption. Those who buy raw materials are usually bulk buyers who have specialized equipment or needs.
Most people who buy a physical commodity contract never intend to take over a real product. Rather, these individuals buy physical commodities when prices are low and try to sell when the market is higher. This type of investment often comes with a significant risk. Commodity prices may change higher or lower due to conditions such as weather, pests and illness, which is sometimes difficult to predict.
businesses that really want to use the physical commodity also monitor the futures market and hope to protect themselves from broad price fluctuations. For example, oil companies can buy heating oil contracts in the summer, when prices are usually lower but do not accept deliveryUntil the following winter. Of course, if the market floods a slight winter or suppliers, they could find that they bought at the wrong time.
If a person who has a contract for a physical commodity has no use to the product, then the person is eventually forced to sell or take over delivery. Some investors may therefore be caught in a situation where they have to get rid of the contract, take delivery or pay for storing a product they do not need. If this situation develops, the investor can sell with a loss simply in order to avoid having to take the product's supply.