Financial markets consist of a number of instruments that you can invest in. From a company listed on the exchanges, to agricultural products to oil or gold, an investor can put his money in a vast range of financial instruments. Among the most popular assets that are traded are equities and commodities.
Equity can be understood as a shareholders’ stake in a company. It is the sum that a shareholder is supposed to get after subtracting the liability from the total asset of the company. Commodity, on the other hand, refers to raw materials — bought and sold in bulk — such as cotton.
Equity vs Commodity
Ownership: In equity trading, an investor buying security, gets a fraction of ownership of a listed company, however, the same is not true in commodity trading. In the commodity market, traders most often deal with futures contracts. These futures deliveries are rarely owned.
Duration of Trade: An equity can be held for a day or even for years. Unlike a contract in the commodity market, equities do not have an expiry. Therefore commodities are suited for short term investors while trading in stocks is usually taken up by long term investors.
Trading hours: Commodity trading usually goes on for longer hours compared to equity trading. Stock markets are open for trade from morning to afternoon but the commodity trading is nearly round the clock.
Bid-ask spread: The bid-ask spread — a measure of liquidity– for stocks are lower. In stock market parlance bid-ask spread is the difference between the highest price a buyer is willing to pay and the lowest a buyer is willing to accept.
Margins: Margin requirement for commodity trading is lower compared to the equity. Therefore it allows the traders to take higher exposures which could prove very risky during sudden and sharp movements.
Factors: Commodity market vs Equity market
There are a number of factors that have a bearing on the equity and commodity market alike. For instance, interest rates. A change in interest rate impacts the rate-sensitive stocks and the overall stock market. Commodity rates are also impacted as the interest rate alters the holding cost of the inventory to an extent.
However, there are certain points of difference. Equity traders and analysts are mostly concerned about the quarterly numbers, dividends given by the company and the general macroeconomic conditions in the country. Commodity market traders focus on the demand and supply scenario more than other factors, in order to get a sense of the market.
The recent movement in oil prices explains the point aptly. The rising cases of Covid-19 and the lockdown that followed depressed the oil prices significantly. This came after the demand for oil fell dramatically and the market proved to be hugely over-supplied.
Similarly, the movements of agricultural products can be judged by the kind of monsoon the country saw.
Commodity market vs equity market in India
Traders and market pundits considered an investment in commodities slightly easier as it mostly depends on the demand and supply scenario. The analysis required in the equity market to make an investment decision is more detailed. For instance, buying security would require you to go through the earning numbers, and past trends but to make a sense of the copper market, you mostly need to monitor the industrial growth scenario. Therefore there are fewer variables to be monitored in the commodity market than in the stock market which could be ideal for a new investor.
Choosing between equity vs commodity
Investors can choose between trading in the commodity market vs equity market depending on their risk appetite. A popular strategy in the stock market is to buy and hold for long-duration which is not possible in case of commodity trading. Choosing between the two — equity vs commodity — trading largely depends on your risk appetite.
Equity investment is more likely to suit long term goals while the commodity market can be a better choice for investors eyeing short term gains. Therefore an investor most importantly should keep in mind the basic difference of ownership and holding time frame between equities and commodities.