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Asset Classes within the Financial Markets
A commodity is a basic physical asset, often used as a raw material in the production of goods or services. A commodity is used in commerce that is interchangeable with other goods of the same type. The quality of a given commodity may differ slightly, but it is essentially uniform across producers.
That means that to a trader, gold is gold: no matter where it was mined, or which company mined it. The term for this quality in commodities is fungible.
When they are traded on an exchange, commodities must also meet specified minimum standards, also known as a basis grade. They tend to change rapidly from year to year.
What are commodities?
Commodities are the basic building blocks of the global economy, and as such are hugely important. Commodities refer to primary goods such as wheat, gold or oil, and are traded on dedicated exchanges around the world. Technological advances have also led to new types of commodities being exchanged in the marketplace. For example, cell phone minutes and bandwidth.
They are ordinarily split into two varieties.
- Hard commodities are metals or energy resources, mined or extracted from natural resources.
- Soft commodities are agricultural, farmed or grown. Soft commodities tend to be seasonal, and prone to spoilage.
Examples of traded commodities by sector are:
The buying and selling of commodities for profit is known as commodities trading. Commodities trading is split into two types, the spot market and the Futures market. The spot market is used for commodities that will be delivered immediately, and the futures market is for commodities that will be delivered at some point in the future.
Futures contracts are traded on exchanges that standardise the quantity and minimum quality of the commodity being traded.
Buyers and producers of commodities use commodity futures contracts for the hedging purposes for which they were originally intended. These traders make or take delivery of the actual commodity when the futures contract expires. For example, the wheat farmer that plants a crop can hedge against the risk of losing money if the price of wheat falls before the crop is harvested. The farmer can sell wheat futures contracts when the crop is planted and guarantee a predetermined price for the wheat at the time it is harvested.
Speculators are traders who trade in the commodities markets for the sole purpose of profiting from the volatile price movements. These traders never intend to make or take delivery of the actual commodity when the futures contract expires.
Many of the futures markets are deemed to be very liquid and therefore have a high degree of daily range and volatility, making them typically attractive markets for intraday traders. In addition, many of the index futures are used by brokerages and portfolio managers to offset their own or their client’s risk. Since commodities do not typically trade in tandem or mutuality with equity and bond markets, it can be said that some commodities can also be used effectively to diversify an investment portfolio.
Commodity prices typically rise when inflation increases at an accelerated pace, which is why investors often flock to them for their protection during these times – particularly unexpected inflation. This is because as the demand for goods and services increases, the price of goods and services rises, as the underlying commodities are what’s used to produce these goods and services.
Because commodities prices often rise with inflation, this asset class can often serve as a hedge against the decreased buying power of the currency overall.
If you would like to know more about some of the common terms within the Financial Markets sector than please feel free to explore our Glossary of Terms
Our sister company Imperium Commodity Search is a specialist provider of Retained, Bespoke and Contingent Recruitment Search Solutions to the worldwide commodity markets.
For full details on how the dedicated team at Imperium Commodity Search can support your career aspirations or hiring needs please click on one of the Imperium company logos or contact them directly by phone to +44 (0) 203 927 5090 or by email to firstname.lastname@example.org.
Typical Jobs in Commodities
- Physical Trader
- Proprietary (Prop) Trader
- Futures Broker
- Risk Manager
- Sourcing Manager
- Trade Finance
- Financial Control
- Operations Control
- Letters of Credit
These are just a few examples of commodity jobs and positions we recruit for within the global commodity markets; other positions are available.
To see our latest commodity jobs and vacancies, please click here
Find out more about Asset Classes in the Financial Markets
Typical investments: Bonds, debentures, gilt-edge bonds
Risk profile: Low
Fixed-interest investments — sometimes known as fixed-rate securities — are an asset class that sees investors loan their money to a company or government in exchange for a security, in the form of a bond or similar product, that pays an agreed rate of interest. This rate remains the same throughout the duration of the investment. When the investment matures, you’ll also be paid back the original amount you put in.
Read more about Fixed Income here
Typical investments: Purchase of equity in a company listed on the stock exchange
Risk profile: Medium to high
When you buy shares — also known as equities — you are buying a small portion of ownership in a company. Each share represents a unit of ownership, so the company value is divided by the number of shares to give the share price. Shares are traded on the stock market, where the daily value of each company’s shares are listed.
There are a number of factors, such as if the company does well or undergoes a merger, that can cause the value of a business to increase and boost the worth of each share. On the other hand, if the company does badly, the shareholders can face a drop in the worth of their shares.
Find out more about Equities here
Typical investments: Physical currency, bank accounts, savings accounts, cash ISAs
Risk profile: Low
Cash is the asset class that you’re probably most familiar with, as we use it on a daily basis to pay for goods and services. The asset class for cash includes physical currency, the balances of savings and current accounts, cash ISAs, premium bonds, and money market funds.
Read more about Cash Equivalents here.
Typical investments: Commodity futures, Stock index futures, Currency futures, Precious metal futures, Treasury futures.
Risk profile: Medium
Futures are derivative financial contracts that obligate the parties to transact an asset at a predetermined future date and price. Here, the buyer must purchase or the seller must sell the underlying asset at the set price, regardless of the current market price at the expiration date.
Underlying assets include physical commodities or other financial instruments. Futures contracts detail the quantity of the underlying asset and are standardised to facilitate trading on a futures exchange. Futures can be used for hedging or trade speculation.
Find out more information on Futures here
Typical investments:, commodities, currencies, interest rates, market indexes, and stocks.
Risk profile: Medium to high
A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset (like a security) or set of assets (like an index).
Generally belonging to the realm of advanced investing, derivatives are secondary securities whose value is solely based (derived) on the value of the primary security that they are linked to. In and of itself a derivative is worthless.
Find out more about Derivatives here.
Typical investments: Oil, coffee, gold
Risk profile: High
Commodities are raw materials that are bought and sold on global markets where supply and demand, as well as other global issues, dictates the price. They can include fuels like oil and gas; precious metals like platinum, gold and silver; agricultural products like wheat, coffee, and dairy products; industrial metals like copper, iron, and steel; as well as many other things. A lot like shares, commodity markets regularly rise and fall, but they tend to be much more volatile.
Find out more about Commodities here
Typical investments: Buying your own home or a holiday home, investing in buy-to-let and commercial projects.
Risk profile: Medium
Investing in property can take many forms, such as buying your own home or getting involved in commercial property, like offices, warehouses, and retail space. There are opportunities to invest in both small and large-scale projects, ranging from a single buy-to-let to joining an investment fund that owns large-scale commercial sites.
Find out more about Real Estate here
Typical investments: Cryptocurrency, Art and antiques, wine, watches, peer-to-peer lending
Risk profile: Low to high depending on investment
Aside from the main five asset classes, there are other areas that you can invest in to really add diversity to your portfolio, though it’s worth remembering that each will have its own levels of risk and reward that you should research.
Although these fall outside of the traditional asset classes, many alternative types have been traded in for a very long time. Art, antiques, stamps, watches, wine, and jewellery are all examples of valuables that have been traded for centuries. On the other hand, there are many new asset classes that have only emerged in the last few years, such as cryptocurrencies and peer-to-peer lending, demonstrating just how diverse the investments marketplace can be.
To find out more about alternative investments here
FINCO Search is a specialist headhunter and recruitment agency to the global wealth management, private banking, financial markets and compliance sectors.
With offices in London and Stevenage we provide a full UK and International service across executive finance, wealth and asset management, compliance and private banking.
FINCO Search is experienced across all asset classes in the financial markets. Our consultants have successfully managed mandates for C-suite roles, traders, brokers and operational/technical personnel in the European and US markets.
If you are interested in finding out how we can assist you in finding your next opportunity in the global financial markets, or are growing your sales or trading team and looking to onboard financial markets specialists across any front, middle or back office position, then please call us now.
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