Difference Between Stock Market and Commodity Market

While equity markets invest in shares of organisations, commodity markets trade raw materials, such as gold, wheat, and iron.
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Difference Between Stock Market and Commodity Market
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3 mins read
20-December-2024

Parking idle funds in the right financial markets can fetch inflation-beating returns, and it is important to note that trading opportunities extend beyond the stock market. Commodity markets are also a popular alternative to diversify your portfolio.

Knowing the differences between these two markets is essential to understand how to formulate your investment strategy. But before we move on to an equity vs. commodity debate, let's first review equity and commodity meanings.

Stock market

A stock market is a financial marketplace where shares of listed companies are traded. Traders and investors can buy stocks and gain ownership in the company’s equity for their investment. Each shareholder has voting rights on the company’s issues and is entitled to dividend payouts from the company’s profits.

You can buy and sell company shares only on stock exchanges where the company is listed. As such, the Indian stock market has several stock exchanges, but the following are the major ones:

However, to start equity trading, investors in India need to open Demat and trading accounts with a registered brokerage firm. Depending on your investment objectives, you can hold your equity position for anywhere between a few hours to a few months or even years.

Commodity market

A commodity market is a market for the buying and selling of commodities. Commodities traded on this market include hard commodities like gold and crude oil and soft commodities like rice, wheat, and other agricultural products.

The instruments of trade used in equity and commodity markets differ significantly. Investors and traders can purchase commodities in three ways:

  • Purchasing the commodity directly
  • Entering into a futures contract
  • Buying a commodity-focused stock or ETF

Among these, futures contracts are the most popular and convenient way of investing in the commodity market. A futures contract obligates the two parties involved to carry out a trade on a predetermined date and price. Future contracts are used by manufacturers and producers to hedge possible risks due to price fluctuations of commodities.

Much like equity trades, commodity trades also happen through specific exchanges. In India, there are six important commodity exchanges:

Differences between stock market and commodity market

Now that we’ve covered what is an equity and commodity market, here’s a comprehensive overview of the differences between equity and commodity markets.

Parameter

Stock market

Commodity market

Meaning

Stock markets focus on investing in company shares to earn capital gains and dividends

Commodity markets trade raw materialslike iron, wheat, and gold, helping investors hedge against price fluctuations and diversify their portfolios.

Investment purpose

To benefit from capital appreciation and gain dividends.

To hedge the adverse effects of the commodity’s price movements.

Asset ownership

Partial ownership of the company.

No actual equity stake. You have the right to buy/sell the commodity at a future date.

Pricing

Depends on how investors perceive the performance of a company and its growth prospects.

Depends on the forces of demand and supply, geopolitical situations, weather conditions, and global economic parameters.

Traded assets

Stocks represent fractional equity ownership in a company.

Products include actual commodities like gold bars, wheat, etc.

Margin needed

Lower than commodities.

Higher than stocks.

Time horizon

Both intraday and long-term investments are allowed since stocks don’t have an expiration date.

Futures and options contracts expire every month. Each contract has a specific expiration date.

Supply

Fixed.

Not fixed.

Liquidity

High, making the buying/selling of stocks easy.

Generally low, barring exceptions like gold and crude oil.

Dividend payment

Shareholders receive part of the company’s profit as dividends.

No dividends.

Exchanges

NSE and BSE.

MCX, NMCE, UCX, and others.

Risk factors

Systematic risks that affect all stocks equally.

Idiosyncratic risks that affect specific commodities.

Volatility

Less volatile and risky.

More volatile and risky.

Market hours

9:15 a.m. to 3:30 p.m.

Metals and energy: 9 a.m. to 11:30 p.m.

Agri commodities: 10 a.m. to 5 p.m.

Participants

Investors, hedgers, arbitragers, and speculators.

Manufacturers, dealers, traders, producers, and speculators.


Things to consider while choosing between stock market and commodity market

As an investor, understanding the differences between stock and commodity markets is not enough. You must also acknowledge the following factors to make an informed investment choice:

Investment goals

Before you choose between the stock and commodity market, you must outline your investment goal. If you have a long-term investment goal, like retirement planning or wealth creation, investing in the stock market may be a prudent choice. Remaining investing in stocks for the long run generally ensures better returns due to dividend payouts and capital appreciation. Conversely, if you are investing for quick short-term objectives, the commodities market may be a better alternative.

Interest rate

Interest rate fluctuations impact both the stock and commodity markets. Changes in the interest rates impact the stock market as a whole, especially rate-sensitive stocks. Interest rates and commodity prices share an inverse relationship. In simple words, if interest rates decline, stockpiling inventory becomes cheaper, and when interest rates are high, holding inventory becomes more expensive.

Price

Both the stock and commodity markets operate within the wider macroeconomic context. Therefore, it is crucial to understand how this context affects stock and commodity prices before investing in either of the two markets. As such, stock price volatility depends on a range of factors, including the performance of the company, issued guidance, annual financials, dividends, inflation rates, interest rates, and political events. Commodity prices, on the other hand, depend on the forces of demand and supply of the commodity.

Risk appetite

Investing in market-linked financial instruments always carries a certain risk. While stock markets are inherently risky, commodity markets are deemed to be even riskier. Historically, stock markets have proven to be more stable and predictable in the long run compared to commodity markets. Therefore, you should carefully evaluate how much risk you’re willing to shoulder before deciding between the two markets.

Conclusion

The equity vs. commodity debate outlines that these financial markets cater to different types of investors and investment strategies. Co-relating the risks and opportunities of each with your investment goals and risk tolerance levels can help you decide between the two or even opt for a diversified portfolio with investments in both markets.

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Frequently asked questions

Is it better to trade stocks or commodities?

Deciding between stock and commodity trading depends entirely on your investment objective and risk appetite. Due to the higher degree of volatility associated with commodity trading, stock trading is generally considered the better alternative. Since there are frequent fluctuations in the demand and supply of commodities, commodities tend to be more volatile than other assets like bonds and stocks. That said, the degree of volatility varies between commodities. Certain commodities, like gold, display higher stability than others.

What is the difference between a commodity trader and a stock trader?

Stock traders buy and sell shares of company stocks that are listed on the stock exchange. Purchasing a company’s stock gives them part ownership in the said company. Commodity traders, on the other hand, trade in various types of commodities like gold, silver, crude oil, etc. Trading with commodity contracts does not mean ownership of the underlying commodity since these commodities are not physically delivered to the trader.

What is a commodity vs a stock?

Stock represents equity in the company that grants part ownership to the stockholder. Commodities, on the other hand, represent goods like metals, minerals, oil, or agricultural products. Stocks are traded in the stock exchange, while commodities are traded in the commodity market.

Is commodity trading more profitable than stock trading?

While nothing can be said about the overall profitability of commodities over stocks, commodity trading is better for investors looking to score quick profits in the short term. Stock trading is more of a long game, where staying invested for longer may increase your potential for returns.

Are commodities riskier than stocks?

Yes. Commodity investments tend to be more riskier than stocks. This is simply because commodity contracts are subject to price swings due to changes in the demand and supply of the underlying commodity.

How is the commodity market different from the stock market?

The commodity market deals with the trading of tangible goods such as agricultural products, metals, and energy resources like oil. In contrast, the stock market involves buying and selling shares that represent ownership in companies. While both markets offer opportunities for profit, they operate within distinct trading platforms tailored to their respective asset types.

Is it better to invest in stocks or commodities?

The choice between investing in stocks or commodities depends on individual financial goals, risk tolerance, and market knowledge. Stocks generally provide long-term growth potential and may generate dividends, making them suitable for building wealth over time. Commodities, on the other hand, can act as a hedge against inflation and offer high returns during market volatility but are often more speculative. A balanced investment approach may involve a mix of both, depending on your strategy.

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