Equity Market Vs Commodity Market - What Is The Difference

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It is no secret that investing your money into profitable avenues is instrumental to growing your wealth. With the passage of time, the number of investment options at your disposal has considerably increased. You can, therefore, choose from a wide variety of financial products ranging from bank instruments like Fixed Deposits and Recurring Deposits to market-linked instruments such as equity shares, debentures, and commodities. 

The investment instrument/s you opt for should ideally be selected based on your financial goals, risk appetite, investment horizon, and income, to name a few. In this article, we shall shed light on two of the most popular investment options in the modern age, namely equity and commodities, discussing the workings of an equity market and a commodity market and how the two are different from each other. 

What is an equity market?

Equity market is a common term used to describe a financial marketplace wherein the equity shares of listed companies can be purchased and sold. You can assess and compare the performance of various companies’ stocks and choose the equity shares you want to purchase and eventually hold or sell. By purchasing the equity shares of a company, you become a partial owner of said company, and are eligible to receive benefits such as dividend (in case the company declares dividend), voting rights, and potential profit during the sale of shares. 

Equity trading is an important and widely used mode of investment and capital appreciation across the globe, and India is no exception. In India, equity trading takes place on registered stock exchanges, the primary ones being the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). You can find the shares of the companies listed in India on either or both of the aforementioned stock exchanges. It is worth noting here that the Securities and Exchange Board of India (SEBI) is the primary regulatory body for the equity market in India. 

Since the introduction of online trading, the process of purchasing and selling stocks in the equity market has become extremely hassle-free. The advantages of online trading include ease of access, availability of the latest market information, and safety and transparency in order placement and settlement. All you need to start your foray into equity trading is open a demat account with a registered Depository Participant (DP) in India, analyse your investment goals and desired risk exposure, and choose your preferred stocks. 

You can hold your equity shares for any length of time depending on your investment goals and overall financial plan. Usually, equity investments are considered valuable long-term value creators. It is possible to safeguard your equity investment basket against market fluctuations; you can diversify your investment portfolio by buying the shares of companies from various sectors and scales.

Additional Read: What are Equity Shares? 

What is a commodity market?

A commodity market is a financial marketplace wherein you can purchase and sell commodities. There are two main categories of commodities traded in the aforementioned market, namely, hard commodities and soft commodities. Whilst hard commodities include, amongst others, precious metals and crude oil, soft commodities include agricultural and allied products, etc. In the Indian context, commodities are classified into five major categories, namely, agricultural commodities, metals, precious metals (gold and silver), energy, and services. 

You can either purchase/ sell commodities at their spot price or enter into a futures contract that results in purchase/ sell obligations at a predetermined future date and price. Another type of contract in the commodity market is an options contract. Unlike a futures contract, an options contract does not entail purchase/ sell obligations; instead, it offers the parties an option to buy or sell a commodity at a specific price at a pre-decided future date. 

Investments in commodities are considered to be an excellent hedge against inflation and a means to diversify your portfolio. However, commodity prices can be extremely volatile, and sometimes dependent on various geopolitical factors, thereby making commodity trading highly volatile. For individuals with high risk tolerance, commodities trading can be a suitable route of investment. 

In India, commodity market trading is conducted at six major exchanges, namely, the Indian Commodity Exchange, the National Multi Commodity Exchange, the Multi Commodity Exchange, the National Commodity and Derivatives Exchange, the Ace Derivatives Exchange, and the Universal Commodity Exchange. SEBI is the regulatory body overseeing the operations of commodities trading in the country. 

Additional Read: Commodities Market Today

Commodity vs Equity Market - Key differences

There are several differences between the equity market and commodity market. Not only are the assets traded in both markets markedly different, but the factors that affect prices and volumes therein are also vastly varied. The following table sheds light on the major differences between equity and commodity markets. 

Commodity vs Equity - At a glance

Parameter 

Equity Market 

Commodity Market 

Degree of risk 

Although exposed to an array of fluctuations, the equity market is considered to be relatively less volatile as compared to the commodity market, particularly over the long term. 

The commodity market is considered to be highly volatile, particularly owing to the impact of global and national factors such as supply and demand variables, trade equations between countries (affecting export and import), and substantial fluctuations in price. 

Element of ownership 

Equity investment entails ownership privileges; shareholders are entitled to voting rights, dividend, etc. 

Aside from spot contracts, commodity trading does not necessarily result in ownership of commodities for the parties involved. 

Quantum of margin 

The margins required in equity trading are generally higher than those for commodity trading. 

Commodity trading usually has lower margins as compared to equity trading. 

Timeline for investment 

Equity trading is ideal for long-term value creation by way of capital appreciation. However, it can also be profitable in the short run. 

Since commodities come with an expiration date, the contracts in commodities trading are usually for the short to medium term. 

Hedge against inflation 

Equity trading does not necessarily offer protection against inflation. 

Commodity trading is usually considered to be an effective hedge against inflationary pressures. 

Factors to consider before investing in the equity market or commodity market 

Equity trading and commodity trading have their own sets of advantages and disadvantages, some of which are common and some distinct. When it comes to investment strategies, there is no one size fits all. Whether you opt to invest in equity shares or commodities, or a combination of the two, there are several key factors you should be mindful of, prominent amongst which are:

  1. Investment objective: One of the first factors to consider before investing in the equity market or the commodity market is your investment goal. You must gain clarity on what you wish to achieve with your investment plan and what your priorities are. Should you be focussed on having ownership in corporations and access to dividend and potential capital appreciation, equity investment is ideal for you. On the other hand, if you wish to trade in commodities, you can opt for that route. 
  2. Risk tolerance: Another significant factor to consider for investment in the equity market or commodity market is the degree of risk you are willing to undertake. If you are open to a highly volatile investment instrument, the commodity market may be a good option. If, however, you wish to undertake moderate to high risk, equity trading may be a better option, particularly if you diversify your investment across sectors.
  3. Investment horizon: All planned investments must be made after taking into account the time factor. While equity investments can be effective options for any length of time, investments in the commodity market are usually for the short term. 
  4. The bigger picture: Since neither the equity market nor its commodities counterpart operates in a silo, it is critical to consider macro economic factors prevailing in the country as well as globally before investing in either market. While the equity market is vulnerable to political and corporate events happening in the country, the commodity market is affected by the demand and supply of commodities, and international events such as wars, trade sanctions, etc. 

To sum it up

There are different pros and cons of investing in the equity market and the commodity market. It is important to take stock of your investment goals, risk tolerance, investment horizon, and the overall market scenario and global status quo before making your investment decisions.  While both equity and commodities can help you diversify your investment portfolio, both assets have different value drivers and risk exposures. All investment decisions should, therefore, be made after meticulous thought and analysis. 

Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.

This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

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