The term “commodities” is a catch-all term for hard assets and raw materials used in industrial applications and as ingredients for food products. Everything from feeder cows to coffee, and steel to oil falls under this broad heading.
Investors are interested in commodities because the prices are always changing. As such, there’s an endless number of opportunities to take a shot at the age-old goal of buy low/sell high.
The commodities markets are massive. There are individual commodities which have markets larger than the entire US stock market, and collectively there is literally nothing on Earth which can compare size-wise. Which makes sense if you think about it: these are the markets that deliver the raw materials for what gets built or produced all over the world.
Commodities markets also move differently than stock and bond markets. While it is true that the same economic events impact all of these, the impact is not always the same. There is even a high degree of difference between individual commodities. High price levels in corn might spell good fortune for soy beans, as hog and cattle producers switch from one to the other as a source of animal feed, for instance.
So commodities make up large, global markets that often move according to their own whims. Investors utilize these factors for earning returns and accomplishing diversification. They most often do this with futures contracts, rather than by taking actual physical delivery of these materials. Futures contracts are much easier to deal with than freight car loads of goods. They also have the advantage of leverage: an investor can control a larger portion of material through a contract than they could receive as a delivered good for a given amount of cash.
Unfortunately, these advantages come with a pretty significant cost. Since leverage is involved, the mechanism which can lead to more quantity control and return potential can be a means to massive losses if prices go the wrong way. And commodity prices often move notoriously fast. As such, futures investors can find themselves in the bizarre condition of losing more than 100% of what they invested (if all of their capital is wiped out, they may be legally obligated to put up even more to cover the call).
As you might imagine, this keeps a lot of investors out of commodities. Wisely so. These investments are generally best suited for those who have taken the time to really learn the terrain; and even then, only in measured amounts.