Investors have multiple options to choose from when it comes to investments. Be it stocks to agricultural products to oil and gold, investors have the option of diversifying their portfolio by investing in multiple asset classes. Visit multibank
Now that commodity trading is becoming popular, investors should be able to understand which one suits their trading needs better: Stock Market or Commodity Market!
In this piece, we’ll go over some major differences between the stock market and the commodity market based on volatility, liquidity, time horizon, risk profile and other such factors.
What is the equity market?
Equity has more in common with an investment than a trade. It is where an investor looks for long-term gains rather than day-to-day movements within a short time frame. They are therefore searching for better and less volatile returns. An equity holder operates like an owner of a company and has voting rights, share in profits, and even profits in case the stock value appreciates while they’re holding onto it.
What is a commodity market?
A commodity market refers to the platform where commodities can be purchased and sold. The term commodity indicates the commonly used resources or goods typically traded in the commodity market.
There are two main types of commodities:
- Hard commodities like gold or silver
- Soft commodities like agricultural products and livestock.
Key differences between commodity and equity
Commodities and equities can be compared on the basis of many factors. You can choose your equity broker, or the commodity broker which suits you well to carry out trades.
- Based on Ownership
Stock Market: Once you purchase stocks in the stock market, you become a direct owner of those stocks.
Commodity Market: In commodity markets, futures contracts are the most commonly traded tools of investment. With futures contracts, you don’t exactly exchange ownership of the asset. Rather, these contracts are all about the delivering commodities at a preset date in the future. These commodities are mostly traded but hardly ever owned directly.
Stock Market: The equity market has low volatility because of their price range and small spreads and also their highly liquid nature. Stock market investors take collective risk and earn considerable profit.
Commodity Market: The commodity market is the most volatile of all financial markets. It is because of the fact that there is relatively low liquidity and external factors like geopolitical tensions, demand and supply can also affect them.
- Time Horizon
Stock Market: The stock market investors can choose to hold shares for long, known as coffee can investing strategy. Investors in the stock market could even choose to keep their stocks for a short duration or in other words, short-sell. They can even be held onto for years at a stretch, which makes them well suited to long-term investment.
Commodity Market: Timing in the case of commodity trading operates differently. They are generally traded in short-term contracts. Additionally, contrary to stocks, they have an expiry date and need to be traded within that timeline. Therefore, these suit short-term investors better.
Stock Market: Stock market trading can be risky since it can be subject to market risks like volatility. Additionally, many investors avoid risks in the stock market as there are over 5000+ stocks to trade in, and therefore, choosing the right share can be very difficult.
Commodity Market: Commodities tend to be riskier than the stock market. This is mainly because commodity markets trade on futures markets where there is a much higher degree of leverage which is accompanied by an expiry date. A commodity trader would generally have to use a small part of the contract’s overall value in the the futures margin.
- Trading hours
Stock Market: Stock exchanges typically have shorter operation hours when compared to commodity exchanges.
Commodity Market: Commodity exchanges have longer hours of operation which means more time to trade.
Stock Market: Stockholders are direct owners of the asset they invest in. It makes them eligible for the dividend as a return.
Commodity Market: Commodity instrument holders are not eligible to get dividends on their investments.
Stock Market: Stocks do not come with an expiry date.
Commodity Market: Commodity instruments generally expire on a monthly basis.
Stock Market: Equity shares offer relatively better liquidity.
Commodity Market: Commodity instruments tend to have low liquidity if you see it in comparison to equity.
- Period-end evaluation
Stock Market: Period end price difference is taken into account when calculating the profit and loss account.
Commodity Market: Period end price difference is taken into account for the other comprehensive income. When it expires, it is included in the profit and loss account.
Stock Market: The equity market does not have a lot of regulation and is a free market.
Commodity Market: The commodity market is a derivative market that’s well-regulated.
- Margin requirement
Stock Market: Equity instruments don’t need any margin, they have to be purchased at market price.
Commodity Market: The commodity market needs high margins, which would keep changing depending upon the instrument’s nature.
- Lot size
Stock Market: There are no lot sizes with equity shares.
Commodity Market: Commodity instruments have to be traded in lot size.
Stock Market: The investor who holds an equity instrument is known as a shareholder.
Commodity Market: The investor who holds a commodity instrument is known as an options holder.
Which one is for you?
No matter what you pick, be cognizant of your own personal financial goals and your investment behaviour. If you’re open to taking risks, you could choose to invest in commodities on a multi-commodity exchange. Equities could meet your long-term goals as you could purchase and hold onto stocks until they bring profit. Know more multibank broker
Equity vs commodity markets is very different from one another. They have their own set of specifications, features, as well as investment terms. To look at it from the market’s point of view, it is wiser to have balanced investments. Yet if you do not have a lot of market exposure, you may find it easier to start with equity and then expand your portfolio.