What Are Fungible Goods? Meaning, Examples, and How to Trade (original) (raw)

What Are Fungible Goods?

Fungible goods refer to securities, or other items, that are equivalent or consist of many identical parts such that, for practical purposes, they are interchangeable. Material items, securities, and other financial instruments may be considered fungible goods. If goods are sold by weight or number, then they are probably not fungible goods.

Key Takeaways

• Fungible goods are items that are interchangeable because they are identical to each other for practical purposes.
• Commodities, common shares, options, and dollar bills are examples of fungible goods.
• Assets like diamonds, land, or baseball cards are not fungible because each unit has unique qualities that add or subtract value.

Understanding Fungible Goods

In finance and investing, commodities, common shares, options, and dollar bills are examples of fungible goods. The term "fungible" is not identical with barter or liquidity. A good traded by barter is not necessarily equivalent to the exchanged commodity in units. In other words, it is possible to barter products of different or incomparable value. An item is said to be liquid if you can easily exchange it for money or another good. A fungible good is not necessarily a liquid one.

A commodity must be fungible before it can be traded on a commodities exchange. A specific grade of commodity, such as No. 2 yellow corn, is a fungible good because it does not matter where the corn grew; it is essentially the same product. All corn designated as No. 2 yellow corn is worth the same amount.

Stocks are considered to be fungible goods. It makes no difference at all if Warren Buffett or another famous investor once owned the shares. Cross-listed stocks are also fungible goods. It does not matter if you purchased a share of International Business Machines (IBM: NYSE) in the United States via the New York Stock Exchange (NYSE) or in the United Kingdom through the London Stock Exchange (LSE).

Because listed options are considered fungible goods, it is possible to close out positions by taking offsetting positions. For example, if you sell (write) a call option, you can close out the position by buying a call with the same underlying asset, expiration date, and strike price—their components are equivalent. This is known as buying to close.

Fungible goods are not necessarily liquid—meaning that you can easily exchange something for money or another item.

Non-Fungible Goods

Assets like diamonds, land, or baseball cards are not fungible because each unit has unique qualities that add or subtract value. For instance, because individual diamonds have different cuts, colors, sizes, and grades, they are not interchangeable, so they cannot be referred to as fungible goods.

Real estate is never genuinely fungible. Even on a street of identical houses, each house experiences different levels of noise and traffic, is in varying states of repair, and has unique views of surrounding areas.

Fungibles and Enumeration

When fungibles are given numbers, they may no longer be fungible. Adding unique numbers to bars of gold, collectibles, and other fungibles makes it possible to distinguish them. Thus, they may no longer be fungible in some cases.

Gold is naturally fungible because one ounce of gold is equivalent to another ounce of gold. Gold bars may be given unique serial numbers and purchased by particular investors while still being held by a custodian. Under this arrangement, gold is said to be allocated. Allocated gold holders generally have better legal protections in the event of a bankruptcy. They own particular bars of gold, which are not considered to be fungible goods.