Equity vs Commodity Trading: Understanding the Difference | Espresso

Equity vs Commodity Trading

Most investors and traders have heard the terms Equity and Commodity. But is their trading in the stock market the same? Is the return for equity vs commodity the same? Is there any difference between equity and commodity?

 

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In this article, let us explore how the two instruments are different from each other.

What is Equity?

Equity is similar to an investment. The investor is interested in the long-term horizon instead of daily movements in the short term. The objective is to earn much better and less volatile returns.

Equity trading is simple. You buy the shares of a company, and you are like the owner of the company. You enjoy voting rights, a share in profits, as well as profits due to stock appreciation during the holding period. You can invest in equity for listed firms, such as Tata Motors, TCS, Infosys, etc.

What is a Commodity?

Commodity trading can be on any commodity. The consumption-based commodities include wheat, sugar, gold, while non-consumption-based commodities include weather contracts, etc.

Commodity trading isn’t for physical holdings but contracts for a particular period. There are defined standards, such as time duration, quantity, and future price for the contracts. Commodity positions are contracts valid for a definite time. After the period elapses, the contracts expire and are worthless.

For instance, Gold futures 1-month contract trading at $200 is valid for one month. If the expiry date is the 15th of the month, all open positions will close beyond this date. The contract will cease from 16th, and a new contract will start to trade on the exchange for the next month.

Equity vs Commodity: How are they Different?

Both equity and commodity are types of investment instruments. Apart from this, there is no similarity between the two. Listed below are the differences between equity and commodity:

1.Ownership

When you buy equity, you are its sole owner. You have an ownership stake in the company. However, with commodities, you are not the owner. There is no ownership stake, and you don’t even buy the commodities in physical form.

2.Time frame

The time frame for holding and trading equity vs commodity is different. Generally, commodity trading is short-term. Equities are long-term investments, and you can keep them till they list on the stock market exchange.

3.Goal

While the goal of investing in both equity and commodity is to earn profits, the purpose varies. Commodity helps to benefit from every price movement in the marketplace. Besides, the commodities help to offset the risk of any adverse price fluctuations.

On the other hand, investors consider equities as goal-based investing. Therefore, you can use the instrument to generate wealth with moderate regular investment as well.

4.Risks

Risk is a vital factor to consider when deciding to buy equity vs commodity. Commodity trading is highly risky because of its volatile nature. It witnesses unexpected market fluctuations. Thus, beginners should abstain from it. Conversely, equity trading is less risky.

5.Volatility

The commodity market is influenced by demand and supply factors. Unforeseen circumstances like riots, war, natural disasters can affect the supply and demand of commodities. Therefore, such unpredictable events trigger adverse fluctuations in commodity prices, majorly because the market is not prepared to handle such sudden changes in demand and supply. As a result, the commodities market is considered highly volatile.

The equity market is less volatile. There is a fluctuation in stock prices based on the status of the economy, market sentiments, and company fundamentals.

6.Trading hours

The operation hours of stock exchanges are from 9:15 am to 3:30 pm. This is comparatively shorter than commodity exchanges. The commodity market such as MCX is operational from 9:30 am to 6:30 pm.

In conclusion

Equity investment is more suitable for investors with long-term goals. Similarly, the commodity market is for those attracted by short-term gains. An investor must focus on the basic difference of ownership and holding time frame for equity vs commodity.
Also Read: What are Equity Shares?

Share Market Knowledge Centre

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Frequently Asked Questions

Trading of the commodity takes place in two ways - by taking physical delivery and by cash settlement.

The stock market is where companies issue shares to the public. It is an electronic platform. The stock market allows investors to trade various instruments apart from shares. These include mutual funds, ETFs, debentures, Futures and Options, and more. On the contrary, the commodity market allows investors to trade only in Futures & Options of commodities.

If we look at the risk appetite, equity trading is always a safer option. Commodity trading is highly risky since the market is volatile. High volatility results in severe fluctuations in market prices. These unanticipated changes can be dangerous for an investor. Consequently, beginners must stay away from commodity trading. Even when the rewards for commodity trading can be significant, you must proceed with the same only if you have sufficient experience and knowledge.

Both equity and commodity are asset classes traded by investors to generate profits or earn a better return on investments. The difference between equity and commodity lies in the way they are bought and sold.