Stock Market vs Commodity Market: What Are the Differences?
A wide variety of asset classes are available in today’s financial markets.Stocks and commodities are amongst some of the most popular asset classes.
Although they may function similarly, there are significant differences between the two asset classes. While investors in stock markets focus more on capital gains, traders use commodities mainly for hedging against price fluctuations (in the underlying commodities).
In this article, we will cover the differences between the stock market and the commodity market, understand all relevant concepts pertaining to them and visit the main parameters to be considered while choosing the more suitable option for you.
What Is the Stock Market?
The stock market is a financial market where shares are bought and sold.When you purchase a stock, you get partial ownership of the company proportional to the number of shares/units of stock you purchase.
Since stocks represent an individual’s ownership in a company, they grant voting rights to the stock-holder/shareholder regarding company issues. Shareholders gain access to the company’s earnings when the company issues dividends. Shares are tradable, and investors can make capital gains by selling their stock investments when the stock’s value increases.
Since one cannot directly buy stocks from already listed companies, stocks are to be purchased via a stock exchange from investors who already hold shares.
The stock market or equity market is the marketplace where buying and selling of equities, derivatives, exchange-traded funds, mutual funds, and other assets occurs. Stock markets are highly volatile. This means that price movements of securities can change anytime depending on factors such as supply and demand, inflation, interest rates, geo-political factors, etc.
There are multiple stock exchanges present within a country’s stock market. Stock exchanges are marketplaces where shares are listed and exchanged between buyers and sellers. The two major stock exchanges in India are National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). The Securities and Exchange Board of India (SEBI) regulates the Indian stock markets and exchanges.
You must have a Demat account and a trading account with a SEBI-regulated broker to trade in stock markets. Knowing the basic principles of stock markets is vital before diving into the differences between stock markets and commodity markets.
What Is the Commodity Market?
Commodity markets deal in the buying and selling of commodities. Commodities are physical resources that hold intrinsic value and include all tradeable objects, excluding cash. The value of commodities depends upon several factors, such as geopolitics, supply and demand, seasonality, etc.
Commodity markets deal in both hard and soft commodities. These two categories are described below.
- Hard Commodities: These are the goods which are used in the production of more refined products. For instance, iron and coal are hard commodities since they are further processed during manufacturing.
- Soft Commodities: On the other hand, these commodities can be used/consumed immediately. For instance, you can consume food products such as rice and wheat without further processing.
You can trade commodities electronically via derivatives in a marketplace. The various ways to trade in commodities are listed below.
- Physical trading
- Futures contracts
- Commodity stocks
- Exchange Traded Funds (ETFs), Exchange Traded Notes (ETNs), and mutual funds based on commodities
- Commodity pools
Futures contracts are the most popular way to trade commodities. Two parties participating in a futures contract are obligated to execute the transaction at a predetermined date and price. This is a more feasible way of trading commodities than physical trading.
Commodities are suitable as a hedge against inflation and thereby help diversify your portfolio. While learning about stock markets and commodity markets, it is also vital to know about the various commodity exchanges present in India. They are regulated by the Forward Markets Commission (FMC)The major exchanges are listed below.
- Multi Commodity Exchange of India (MCX)
- National Commodity & Derivatives Exchange (NCDEX)
- National Multi Commodity Exchange of India (NMCE)
Differences in the Stock Market and Commodity Market
Now that we have gone through the basic principles of stock and commodity markets, we will briefly probe into the differences between the two. The table below draws a comparison of stock markets vs commodity markets.
|Basis of Comparison||Stock Markets||Commodity Markets|
|Purpose of Investment||The purpose is to invest in company shares that provide capital gains and dividends.||In contrast, the primary purpose is to trade physical resources such as iron, wheat, gold, etc. Investors use commodities to hedge against fluctuating prices and diversify their portfolios.|
|Ownership of Assets||Investing in stocks gives you partial ownership of the company.||Direct exposure to commodities gives the investor ownership rights.|
|Product Types||Stocks represent fractional ownership of a company.||Commodities represent actual physical products, such as gold, wheat, etc., with qualitative differences.|
|Supply||Stock supplies are almost fixed.||No fixed supply of commodities.|
|Pricing Factors||Equity prices largely depend upon factors such as the company’s performance, economy, government policies, etc.||Commodity prices depend on factors such as supply and demand, seasonality, inflation, etc.|
|Risks Associated||Stocks are subjected to systematic risk, which affects all stocks equally.||On the other hand, commodities are subject to idiosyncratic risk, which is commodity specific.|
|Dividends||Profits made by the company are distributed to the shareholders in the form of dividends.||Due to the lack of ownership of the underlying asset, commodity trading does not offer dividends.|
|Liquidity||More liquid assets as compared to commodities.||Less liquid than stocks.|
|Margin Requirement||Lower margin requirement.||Higher margin requirement than the stock market.|
|Trading Hours||Trading hours for the stock market are 9:15 AM – 3:30 PM for both BSE and NSE.||You can trade Agri Commodities from 10:00 AM – 5:00 PM.All others can be traded from 9:00 AM – 11:30 PM.|
|Tools Available||Stocks, Futures and Options.||Physical Commodities, Futures and Options.|
|Trading Strategies||Stocks are used in day trading as well as long-term investing.||Commodities are often traded in futures contracts which expire every month.|
|Diversification||Prices of equities can be correlated to other equity instrument(s).||The risk profile is diversified due to commodity prices being unrelated to one another.|
|Regulatory Bodies||The Security & Exchanges Board of India (SEBI) regulates the stock market.||The Forward Markets Commission (FMC) regulates the commodity market.|
Also Read: Trade in the Indian Commodity Markets
The differences between stock markets vs commodity markets discussed above can help you decide which would be more suitable for your investment goals. While commodity trading is excellent for short-term investments, stock trading is ideal for long-term investments.
Frequently Asked Questions
Is there any similarity between stock and commodity markets?
Yes, one factor that affects both the stock market and commodity market similarly is interest rates. A change in interest rates impacts rate-sensitive stocks and the holding costs of commodity inventories.
Among stocks and commodities, which are considered riskier?
Stock markets are considered risky investments. However, compared to commodity markets, they are said to be less risky since stock investing is more long-term.
What are the major stock exchanges in India?
The two major stock exchanges in India are National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).