Commoditization

What Is Commoditization?

Commoditization alludes to the most common way of making something into a commodity. All the more comprehensively, commodification is taking something that recently was not available in the market and working everything out, for example the commoditization of the food chain has brought a lot more foods to the market, however has abandoned small producers in favor large, low-cost producers.

Commoditization in addition frequently eliminates the individual, unique attributes, and brand identity of the product so it becomes interchangeable with different products of a similar type. Making commodities interchangeable allows competition with a basis of price just and not on various qualities.

At the point when a financial contract, for example, a mortgage becomes commoditized, the contract turns out to be more liquid since it tends to be bought and sold promptly. This liquidity advances trading in that market on the grounds that the agreements don't need to be assessed individually and treated uniquely.

Grasping Commoditization

A commodity is a fundamental decent utilized in commerce that is interchangeable with different commodities of a similar type.

Commoditization is an action changes over products, including financial products, into such an interchangeable and marketable thing, to such an extent that it strips a decent or service of separating qualities. The great or service becomes indistinguishable from others in that equivalent category.

Commoditization might occur with a product, service or security, yet in all cases three conditions must be met for a decent or service to turn into a commodity:

1. Normalized eliminates varieties. Agricultural products must be in a raw state. For instance, corn is a commodity, yet light corn syrup isn't.
2. The thing must be usable when purchased, without requiring processing or modifications. Corn is a commodity, however stalks of fresh corn in the husk isn't.
3. Products must change sufficient in price that a market creates for it. Corn is a commodity in light of the fact that the price vacillates and changes, yet a thing which costs similar amount without regulation or tensions isn't.

Commoditization loans itself when a decent or service can be standardized enough to be purchased as a transaction rather than redid. In finance, a financial contract, for example, a bond or loan goes through commoditization when becoming engaged with every one of the differed terms of the bond or loan is at this point excessive. Envision an illustration of a mortgage, where the loan can be unique to the borrower, yet a commodity to an investor who buys mortgages as investments and afterward pools them together in mortgage backed securities (MBS), which are then cut up and sold to new investors. At the point when financial products are commoditized, it frequently goes by the name securitization.

Effects of Commoditization

Commoditization makes a more liquid market since it makes it simpler to buy and sell anything the commodity is. Without involved sales processes in light of differentiation and brand personalities or individual qualities, purchases of the commodity become transactional and more direct, and they increase in volume. This increased selling volume might make greater variability in the price of the commodity, yet it likewise produces greater activity and infuses cash into the market.

Getting back to the case of mortgage loans, the rise in buying and selling of these loans increases the amount of cash circulating and available. Increases in cash flows allow banks and different lenders to compose more loans to additional borrowers. This increase is beneficial for the industry as a whole as well with respect to borrowers.

Pundits, in any case, contend that commoditization can make a few negative impacts, by taking out unique or modified products large corporations come to overwhelm while small or specialty producers are presently not able to contend. Commoditization of certain things may likewise be considered corrupt or deceptive, for example by making a market for body parts, companions, or even something a silly as adding a fee to a formerly free town park.

Features

• Financial products can likewise be commoditized, for example through the securitization of mortgages or other individual loans into pooled investment products.
• Commoditization is the method involved with changing over products or services into normalized, marketable items.
• This cycle will in general strip away unique or distinguishing characteristics of the commodity for indistinguishable, lower cost things that can be traded with each other.