Difference between Stock Market & Commodity Market | Espresso

Difference Between Stock Markets Vs Commodity Markets

You must be well aware of the stock trading concept. It involves buying and selling stocks in the stock markets to generate profits. However, the stock markets are not the only option where you can trade and make good profits.

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There are several other financial markets where you can invest in different asset classes to generate decent returns.

The commodity markets are one such option. Although both the stock markets and commodity markets function in a somewhat similar manner, they are very different from each other. This article will tell you about the differences between the stock markets and commodity markets. Let’s start with the definitions of both types of financial markets.

What are the Stock Markets?

The stock markets are the marketplaces where you can buy and sell stocks or shares of various companies. The term stock markets typically refer to the stock exchanges where the trading of shares happens. It means that you can place your buy and sell orders for stocks that are listed at these exchanges only.

As per the Securities and Exchange Board of India (SEBI), there are nine active stock exchanges in India, with the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) being the two prominent ones.

What are Commodity Markets?

The commodity markets are the marketplace or commodity exchanges wherein you can trade in various commodities, just like the stocks in the stock exchanges. Commodities are the products derived from primary economic activities, including agriculture, poultry, mining, drilling, etc. The most commonly traded commodities across the world are gold, silver, copper, crude oil, natural gas, corn, soybean, milk, rice, etc.

Amsterdam stock exchange is considered the world’s first stock exchange that acted as a commodity trading marketplace. At present, the Chicago Mercantile Exchange (CME) is the world’s largest commodity exchange, handling approximately three billion trades annually.

In India, there are six commodity exchanges, with the National Commodity and Derivatives Exchange (NCDEX), the Multi Commodity Exchange (MCX), and the Indian Commodity Exchange (ICX) being the most prominent ones. Commodity trading in India occurs on these exchanges only under the regulations of the Securities and Exchange Board of India (SEBI).

Differences Between the Stock Markets and Commodity Markets

By now, the primary difference between the stock markets and commodity markets must be clear to you. While the stock markets allow you to trade in stocks or shares of various companies, commodity markets facilitate trading in commodities. Apart from this, there are plenty of other differences between these two types of financial markets.

Parameter

Stock Market

Commodity Market

Nature of the product

You can trade in equity stocks in the stock markets. When you buy a share of a company, you become an owner in that company.

You can trade in commodities or raw materials in the commodity markets. When you buy a commodity, you become the owner of a certain quantity of that commodity. You don’t have any ownership stake in its company.

Liquidity

Liquidity is very high in the stock markets. You can buy and sell your stocks within minutes or even seconds.

Liquidity is lower in the commodity markets, except for a few very popular commodities such as crude oil, gold, etc.

Volatility

Though the stock markets are highly volatile, they are still more stable as compared to commodity markets.

Commodity markets are highly volatile and less stable than stock markets. Commodity market prices can see wild movements and swings.

Risks

Since the stock markets are more stable than commodity markets; they involve relatively fewer risks.

Commodity markets can be highly volatile and risky. You should trade in commodities only if you have a high-risk appetite.

Duration

You can purchase the shares of various companies from the stock markets and hold them for an indefinite period.

You can trade only in derivatives in the commodity markets. These derivatives come with an expiry date, and hence, you are required to sell them off before their expiry.

Dividend

By buying the shares of a company, you may become eligible to receive dividends when that company makes profits.

You will not be getting any dividends for investing in the commodity markets.

Trading hours

The stock markets are available for trading only during a fixed period between morning to evening.

The commodity markets are usually available 24x7 for trading.

Purpose

You can invest in the share markets to grow your money and build a corpus for your future.

You can invest in the commodity markets to earn high profits in a short span by hedging against fluctuating commodity prices.

Regulations

As the stock markets are free; they are governed by lesser regulations.

Commodity markets are derivatives markets and are hence, regulated by strict SEBI regulations.

Price

The prices of stocks in the stock markets depend on factors such as the company’s performance, policies, and market news.

The prices of commodities in the commodity markets depend on factors like demand and supply, geopolitical developments, and speculations.

Supply

The supply of the shares remains fixed until the parent company decides to dilute a greater percentage of its equity.

The supply of commodities is never fixed. It can change as per the prevailing geopolitical market and climatic conditions.

To Conclude

Investing in both the stock market and the commodity market has its share of advantages as well as risks. You should carefully consider various factors, including your risk appetite, market knowledge, and investment objective, before investing your hard-earned money in any of the two financial markets.

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Frequently Asked Questions

Yes. You can invest your money in both – the share market and the commodity market. However, before investing your money in any of these financial markets, you need to be well-informed about the risks associated with them. Be diligent and smart while making your investment decisions.

You need to open a Demat and trading account with a stockbroker if you want to start investing in the stock markets. Similarly, you need to have a commodity trading account to trade in the commodity markets.

Both stock markets and commodity markets allow you to make good returns within a short period. However, they both are different from each other and have their pros and cons. You need to consider various factors, such as your risk appetite, investment objective, and market knowledge, to decide which financial market would suit you better.