Commodity Definition: The Beginners Guide to Understanding Commoditities.

The commodity definition is a business that the product whose price is single most important motivating factor in the consumers buy decision. The most simple and obvious commodity type business that we deal with in our daily lives are: Textile manufactures, Producers of raw foodstuffs such as corn and rice, steel producers, gas and oil companies, the lumber industry, paper manufacturers.
All these companies sell a commodity for which there is considerable competition in the marketplace. The price is the single most important motivating factor for the consumer making a buy decision.

Commodity definition and how competition happens
It really doesn’t matter where the corn you buy in the store comes from, as long as it is corn and it tastes like corn. The intense level of competition leads to very competitive markets and in the process very low profit margins.

In the commodity type business the low cost provider wins. This is because the low cost provider has a great freedom to set prices. Costs are lower, therefore profits margins are higher. It’s a simple concept but it has complicated implications because to be the low cost producer usually means that the company must constantly make manufacturing improvements to keep the business competitive.

Commodity definition and how to spot a commodity type business
Identifying a commodity type business is not that difficult; they are usually selling something that a lot of other business is selling. Characteristics include low profit margins, low returns on equity, difficulty with brand name loyalty the presence of multiple producers the existence of substantial excel production capacity in the industry, erratic profits and profitability almost entirely dependent upon management’s abilities to efficiently utilize tangible assets.

Commodities are very simple things that are consumed or processed in the manufacture or production of products. Most everything you look at or use is a commodity, many of them traded on commodity exchanges throughout the world. Commodities are typically described as agricultural or mining products, however in todays market the term commodity has come to describe many agricultural, food, energy and financial products.

To learn more about the commodity definition and how commodity trading works see investing strategy notes

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