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Commodity vs. Product: What is the Difference?

Although commodities and products are often confused, with both concepts being frequently used interchangeably, the words product and commodity are different, somewhat. The difference lies in the way that both terms are used by commodity traders while undertaking commodities trading, and also in their inherent definitions.

Both products and commodities play a role in the process of manufacturing and production, but the key difference lies in their locations in the chain. Typically, commodities are found in early production stages, while the latter stages of production deal with actual products or goods. Knowing about each of these separately will give you an idea about how they differ and parts they play in online commodity trading.

What is a Commodity

A basic good which is used to form an input in the process of production of services and goods is called a commodity. What this essentially means is that companies make use of commodities in the process of manufacturing final goods. The manufacturing process turns commodities into goods that are bought and sold for daily use. Commodities can be found in almost all goods that find their way to consumers, including tires, ground meat, tea, clothing, orange juice, etc. Therefore, commodities are raw materials.

Commodity trading takes place in commodity markets, and the commonest commodities today are crude oil, wheat, copper, gold, and coffee beans. Further, you can break commodities down into two separate categories: soft and hard commodities. Soft commodities are grown. These cannot be stored for long periods. Examples of such commodities include cocoa, coffee, sugar, etc. Hard commodities are mainly those that are extracted from the earth or mined, like petroleum products and metals. Futures of soft commodities may be more volatile than those of hard commodities. This is because there is an uncertain amount of risk in trading these, including that of the weather. Today, commodities trading is catching up with other trading sectors.

Commodity Trading

Right now, in India, if you wish to engage in online commodity trading, you can trade on the MCX (Multi-Commodity Exchange), but with futures contracts only. When your contract ends, the future is a settlement of cash. Hence, there is no need to open a Demat account for trading in commodities. Commodities can be traded via stocks as well, and investors may partake in online commodity trading by purchasing and selling the shares of companies that are linked to a particular commodity. The main things that drive the prices of commodities are the factors of supply and demand. Other circumstances like economic uncertainty, politics and the weather can impact commodity prices too.

What is a Product?

A product is the finished final good that is made by using a specific commodity. Products are differentiated from each other by the value of these, added by manufacturers. Moreover, marketing and branding goes into the inherent value of a product. They are bought for consumption by average consumers. Furthermore, products may also be categorised as durable and consumable goods. Durable goods include furnishings, appliances, jewellery, etc, while consumable goods are groceries, gas, etc. Products are also found in investment portfolios as stocks of the companies that produce them.

Clear Differences

Commodities trading may prove to be fruitful for some investors, but companies which produce consumable products are considered safer investments, in general. If you wish to purchase shares of a company that sells a product, then you have to open a Demat account. Alternatively, you can allocate to any company whose products and services you wish to invest in by applying for an upcoming IPO.