When it comes to investing, several options are available, such as equity and commodity markets. Each of these investment options provides different opportunities and suits your investment objectives, market scenarios and risk appetite. Hence, the key difference between equity and commodity markets can help you navigate these two investment opportunities. In addition, you can get the best fit for your investment objective, as each market differs in volatility, liquidity and regulation.
Equity refers to ownership in a company, usually in the form of stocks or shares. Investing in equity makes you a partial owner of the business, entitling you to a share of its profits and losses.
In addition, equity trading refers to buying and selling equities listed on the stock exchange. The main determinants of equities value are performance, earnings, industry trends and market sentiment. You can receive returns through capital appreciation, that is, the rise in stock prices or dividends, a share of the company's profits.
Commodities are raw materials or basic agricultural products that usually come in standard quantity terms. Some examples of commodities include gold, natural gas, wheat, oil, corn and coffee.
Commodity trading is primarily understood as being governed by supply and demand relationships, influenced by global economic conditions, weather patterns, geopolitics and production levels. Traders participating in commodity markets generally seek to make a profit from price fluctuations, benefiting from either rising or falling prices.
Although equity and commodity markets provide investment opportunities, they vary greatly in their characteristics and functioning. Here are the core differences between commodities & equity:
Equity vs Commodity |
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Parameters |
Equity |
Commodity |
Nature |
It is the stock in a company, whereby ownership is taken by people. If you purchase equity, you become a shareholder in that company and get to own that portion of the assets of the company and earnings. |
These are tangible commodities like oil, gold or wheat that can be bought and sold. Their price varies depending on the market state. |
Price |
Factors like company performance, industry trends and overall market conditions drive equity prices |
The interplay of supply and demand, weather conditions, geopolitical factors, etc., affects commodity pricing |
Trading Mechanism |
Traded on commodity exchanges such as MCX and NCDEX |
|
Investment Horizon |
Described as a long-term investment, equity investment is for companies that grow and make profits over time. |
Commodity trading can be either short-term or long-term based on the trend in the markets and the financial aims of the trader. |
Returns |
When you invest in equity, you earn by way of dividends (profits distributed to shareholders) and capital gains (rise in stock value). |
Commodity trading earns profit through price fluctuations from changes in supply and demand in the commodity market. |
Cost |
Investment in stocks comes along with costs like brokerage, SEBI Fees, Securities Transaction Tax (STT) and Goods and Services Tax (GST). In case you trade in equity derivatives (future and options), you need to fulfil the margin requirements of the trade size. |
Trading in commodities carries costs such as brokerage, SEBI fees, transaction charges and GST. The minimum margin refers to the amount that must be maintained with a broker, based on the contract size. |
Also Read: Most Traded Commodities In India
After understanding the difference between equity and commodity, you must know which is better for you in the long term. You can choose between trading in the commodity and equity markets, depending on your risk appetite. One common strategy in trading is to buy positions and hold them for a prolonged time, which becomes less likely in commodity trading.
Hence, long-term wealth creation leads you to invest in equities, while if you seek short-term gains, you can focus on the commodity market. Ultimately, it is essential to find and understand the broad disparity between ownership and time horizon for these two markets.
Here are a few things you must focus on when investing in an equity or commodity market:
Interest rates greatly influence both the equity and commodity markets. Lower interest rates reduce the cost of holding inventory, enhancing demand for commodities and increasing prices. On the contrary, higher rates create a cost burden for carrying stock, making it more expensive and forcing prices downward, in the same way, affecting equity market performance, too.
Equity prices are driven fundamentally by earnings, macroeconomic factors and dividends, and investors lack the luxury not to consider these factors while making their investments. Commodity prices depend largely on basic supply and demand interaction. Hence, one must also realise core supply and demand issues before entering the commodity trading market.
Investing is inherently risky in the equity market. However, investors must evaluate their risk tolerance to determine the market that suits their investment horizon and risk exposure, given that commodities are generally considered riskier.
As a rule, the equity market is better suited for long-term investments. Whereas, the commodity market attracts traders who speculate on short-term price changes using derivatives. It means that investment objectives must be properly aligned with the respective market.
Disclaimer: The content of this blog is solely for educational purposes. Any securities/investments mentioned in this blog are not recommendatory.