Indian investors today have a wide range of investment options. From stocks to agricultural products to oil and gold, an investor can diversify his investments across asset classes. With commodity trading getting popular, it is important for investors to understand which is the most profitable investment option for them - Stock Market or Commodity Market! In today’s article, we will understand the differences between the stock market and the commodity market on the basis of volatility, liquidity, time horizon, risk profile and more! So let’s begin!
What is the Stock Market?
A Stock market is a place where stocks of listed companies are traded. A stock or share is a financial instrument that represents ownership of an individual in a company. Like the owner, even the stockholder has voting rights and gets a share in profits along with capital appreciation.
What is the Commodity Market?
A commodity market is a place where commodities are bought and sold. The term commodity refers to basic resources or goods that are traded in the commodity market. Commodities are of two types:
- Hard commodities such as gold or silver
- Soft commodities such as agricultural products and livestock.
[Suggested Reading: What is commodity Trading]
| Basis | Stock | Commodity |
| Nature of Product | Stock refers to an investors' stake in a company. | Commodity refers to basic products that are required for day to day survival. |
| Usefulness | Stocks are mainly long term investments for gaining ownership and profit share for an emerging or growing business in the long term. | Commodities are short term trades used mainly for hedging making quick profits based on speculation. |
| Mechanism of trade | Stocks are traded on stock exchanges through various means like cash, futures and options contracts. | Commodities are traded on commodity exchanges mainly through futures and options contracts. |
| Time | Stocks of companies remain listed on stock exchanges for a long duration, where you can own and hold a stock for decades. | Commodities are mainly traded through contracts. These contracts are priced based on future prices for a particular duration of time beyond which they expire and are worthless. |
| Examples | Listed companies like Infosys, Reliance, etc. | Sugar, wheat, gold, silver, cotton, crude oil, etc. |
The Difference Between The Stock Market and The Commodity Market
Now that you understand what are stock markets and commodity markets, let us take a closer look at the differences between these two markets. Here are the key factors that distinguish stock market vs commodity market:
1. Ownership
- Stock Market: After buying stocks in the stock market, an investor gains ownership of the stock. The most popular long term strategy of stock market investing is coffee-can investing.
[Suggested Reading: Best stocks to buy in India Now!]
- Commodity Market: In commodity markets, the most common type of trading is done via futures contracts. With futures contracts, there is no ownership exchanging hands between people. Instead, these contracts deal with future deliveries of commodities that are traded but rarely ever owned.
2. Volatility:
- Stock Market: The equity market is comparatively less volatile as the stocks have a price range and small spreads, plus they are highly liquid. The investors in the stock market take collective risk and gain significant rewards.
- Commodity Market: Out of all asset classes and financial markets, commodities tend to be the most volatile. This is because the commodity market is known for having lower liquidity and is affected by ever-changing external factors such as geopolitical tensions, demand and supply of commodity, etc.
3. Time Horizon
- Stock Market: The stock market investors have an option to hold shares for a long duration, popularly known as coffee can investing strategy. Investors in the stock market can hold their stocks for a short period of time, or even short sell. Alternately, stocks can be held over years and decades, making them an ideal long-term investment.
- Commodity Market: The time horizon on commodity trading is very different. The commodity market typically trades in contracts which are short-term. Also, unlike stocks, they come with a time limit or expiry, meaning they must be traded within the given time frame. Therefore, the commodity market is ideal for short-term investment.
4. Risk
- Stock Market: Trading in the stock market is risky as your investment is prone to market volatility. Also, many investors refrain from taking risks in the stock market as there are more than 5000+ stocks to trade in and it is comparatively tough decision of selecting the right share.
- Commodity Market: Commodities carry higher risk than the Stock Market. The main reason is that they trade on futures markets that offer a high degree of leverage and come with an expiry. A commodity trader normally only has to put up a small percentage of the contract value in futures margin.
5. Trading hours
- Stock Market: Stock exchanges operate for shorter hours compared to commodity exchanges. E.g. NSE functions from 9.15 am to 3.30 pm.
- Commodity Market: Commodity exchanges are open for longer hours such as the MCX which functions from 9.30 am to 11:30 pm.
Stocks vs Commodity Comparison Table:
| The basis of Comparison between Stock vs Commodity | Stocks | Commodity |
| Ownership | Share holder is considered as the owner of the company. | Ownership privileges are not available with the commodity holder. |
| Volatility | The Stock market is comparatively less volatile. | Commodity market is highly volatile. |
| Risk | Stock market trading is comparatively less risky. | Commodity Trading is highly risky. |
| Dividend | Stock holders are the owner. Hence they are eligible for the dividend as a return. | Commodity instrument holders do not receive dividends. |
| Expiry | Stocks have no expiry date | Commodity instruments expire at the end of the month. In India, commodity contracts expire on the last thursday of every month. |
| Liquidity | Stocks have comparatively better liquidity | Commodity instruments have comparatively low liquidity. |
| Margin Requirement | You need to pay the complete amount for buying stocks. | Commodity market requires high margin, which varies based on the nature of the commodity. |
| Lot Size | Shares do not have lot size. | Commodity instruments get traded in lots. |
[Recommended Reading: Tips and Rules of Commodity Trading]
Conclusion
These differences between commodity markets and stock markets will help you determine whether you should invest in stocks or commodities in line with your financial goals. If you are looking for short-term investments, and want to make profits in a volatile market, investing in the commodities is the way to go. On the other hand, for long-term investments that require time and patience, the stock market might be the ideal choice for you. Whether you choose to invest in the stock markets or commodity markets, Samco provides the best trading account in India which gives you access to trade across equity, commodity and currency markets to create infinite wealth!
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