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:
- Ace Derivatives Exchange (ACE)
- Multi Commodity Exchange (MCX)
- Indian Commodity Exchange (ICEX)
- The Universal Commodity Exchange (UCX)
- National Multi Commodity Exchange of India (NMCE)
- National Commodities and Derivatives Exchange (NCDEX)
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.
Related Articles
Differences between equity shares and preference shares
Difference between shares and debentures
Difference between NSE and BSE
