Stock Market vs Commodity Market: What Are the Differences?

A wide variety of asset classes are available in today’s financial markets.Stocks and commodities are amongst some of the most popular asset classes.

Although they may function similarly, there are significant differences between the two asset classes. While investors in stock markets focus more on capital gains, traders use commodities mainly for hedging against price fluctuations (in the underlying commodities).

In this article, we will cover the differences between the stock market and the commodity market, understand all relevant concepts pertaining to them and visit the main parameters to be considered while choosing the more suitable option for you.

What Is the Stock Market?

The stock market is a financial market where shares are bought and sold.When you purchase a stock, you get partial ownership of the company proportional to the number of shares/units of stock you purchase.

Since stocks represent an individual’s ownership in a company, they grant voting rights to the stock-holder/shareholder regarding company issues. Shareholders gain access to the company’s earnings when the company issues dividends. Shares are tradable, and investors can make capital gains by selling their stock investments when the stock’s value increases.

Since one cannot directly buy stocks from already listed companies, stocks are to be purchased via a stock exchange from investors who already hold shares.

The stock market or equity market is the marketplace where buying and selling of equities, derivatives, exchange-traded funds, mutual funds, and other assets occurs. Stock markets are highly volatile. This means that price movements of securities can change anytime depending on factors such as supply and demand, inflation, interest rates, geo-political factors, etc.

There are multiple stock exchanges present within a country’s stock market. Stock exchanges are marketplaces where shares are listed and exchanged between buyers and sellers. The two major stock exchanges in India are National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). The Securities and Exchange Board of India (SEBI) regulates the Indian stock markets and exchanges.

You must have a Demat account and a trading account with a SEBI-regulated broker to trade in stock markets. Knowing the basic principles of stock markets is vital before diving into the differences between stock markets and commodity markets.

What Is the Commodity Market?

Commodity markets deal in the buying and selling of commodities. Commodities are physical resources that hold intrinsic value and include all tradeable objects, excluding cash. The value of commodities depends upon several factors, such as geopolitics, supply and demand, seasonality, etc.

Commodity markets deal in both hard and soft commodities. These two categories are described below.

Hard Commodities: These are the goods which are used in the production of more refined products. For instance, iron and coal are hard commodities since they are further processed during manufacturing.
Soft Commodities: On the other hand, these commodities can be used/consumed immediately. For instance, you can consume food products such as rice and wheat without further processing.

You can trade commodities electronically via derivatives in a marketplace. The various ways to trade in commodities are listed below.

Differences in the Stock Market and Commodity Market

Now that we have gone through the basic principles of stock and commodity markets, we will briefly probe into the differences between the two. The table below draws a comparison of stock markets vs commodity markets.

Basis of Comparison	Stock Markets	Commodity Markets
Purpose of Investment	The purpose is to invest in company shares that provide capital gains and dividends.	In contrast, the primary purpose is to trade physical resources such as iron, wheat, gold, etc. Investors use commodities to hedge against fluctuating prices and diversify their portfolios.
Ownership of Assets	Investing in stocks gives you partial ownership of the company.	Direct exposure to commodities gives the investor ownership rights.
Product Types	Stocks represent fractional ownership of a company.	Commodities represent actual physical products, such as gold, wheat, etc., with qualitative differences.
Supply	Stock supplies are almost fixed.	No fixed supply of commodities.
Pricing Factors	Equity prices largely depend upon factors such as the company’s performance, economy, government policies, etc.	Commodity prices depend on factors such as supply and demand, seasonality, inflation, etc.
Risks Associated	Stocks are subjected to systematic risk, which affects all stocks equally.	On the other hand, commodities are subject to idiosyncratic risk, which is commodity specific.
Dividends	Profits made by the company are distributed to the shareholders in the form of dividends.	Due to the lack of ownership of the underlying asset, commodity trading does not offer dividends.
Liquidity	More liquid assets as compared to commodities.	Less liquid than stocks.
Margin Requirement	Lower margin requirement.	Higher margin requirement than the stock market.
Trading Hours	Trading hours for the stock market are 9:15 AM – 3:30 PM for both BSE and NSE.	You can trade Agri Commodities from 10:00 AM – 5:00 PM.All others can be traded from 9:00 AM – 11:30 PM.
Tools Available	Stocks, Futures and Options.	Physical Commodities, Futures and Options.
Trading Strategies	Stocks are used in day trading as well as long-term investing.	Commodities are often traded in futures contracts which expire every month.
Diversification	Prices of equities can be correlated to other equity instrument(s).	The risk profile is diversified due to commodity prices being unrelated to one another.
Regulatory Bodies	The Security & Exchanges Board of India (SEBI) regulates the stock market.	The Forward Markets Commission (FMC) regulates the commodity market.

Also Read: Trade in the Indian Commodity Markets

Final Word

The differences between stock markets vs commodity markets discussed above can help you decide which would be more suitable for your investment goals. While commodity trading is excellent for short-term investments, stock trading is ideal for long-term investments.

Frequently Asked Questions

Is there any similarity between stock and commodity markets?

Yes, one factor that affects both the stock market and commodity market similarly is interest rates. A change in interest rates impacts rate-sensitive stocks and the holding costs of commodity inventories.

Among stocks and commodities, which are considered riskier?

Stock markets are considered risky investments. However, compared to commodity markets, they are said to be less risky since stock investing is more long-term.

What are the major stock exchanges in India?

The two major stock exchanges in India are National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).

As an enthusiast with a deep understanding of financial markets and trading, let's delve into the concepts presented in the article and provide additional insights.

Stock Market:

Definition: The stock market, also known as the equity market, is a financial marketplace where shares of publicly traded companies are bought and sold.
Ownership and Voting Rights: Purchasing stocks grants partial ownership of a company and provides voting rights on company matters to the shareholder. Dividends, a share in the company's earnings, are distributed to shareholders.
Market Dynamics: Stock markets are characterized by high volatility, influenced by factors like supply and demand, inflation, interest rates, geopolitical events, and more.
Stock Exchanges in India: The major stock exchanges in India include the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). These exchanges are regulated by the Securities and Exchange Board of India (SEBI).
Trading Accounts: To participate in stock markets, individuals must have a Demat account and a trading account with a SEBI-regulated broker.

Commodity Market:

Definition: Commodity markets involve the buying and selling of physical goods, known as commodities, which have intrinsic value. Commodities include both hard and soft categories.
Hard Commodities vs. Soft Commodities: Hard commodities, like iron and coal, are used in the production of refined products. Soft commodities, such as rice and wheat, can be consumed immediately.
Ways to Trade Commodities: Commodities can be traded through physical trading, futures contracts, commodity stocks, Exchange Traded Funds (ETFs), Exchange Traded Notes (ETNs), and mutual funds based on commodities.
Commodity Exchanges in India: The major commodity exchanges in India, regulated by the Forward Markets Commission (FMC), include the Multi Commodity Exchange of India (MCX), National Commodity & Derivatives Exchange (NCDEX), and National Multi Commodity Exchange of India (NMCE).
Purpose and Risks of Commodity Trading: Investors in the commodity market use commodities for hedging against price fluctuations, diversifying portfolios, and as a hedge against inflation.

Differences Between Stock and Commodity Markets:

Purpose of Investment: Stocks for capital gains and dividends, commodities for trading physical resources and hedging against price fluctuations.
Ownership of Assets: Partial ownership of a company with stocks, direct exposure to physical products with commodities.
Product Types: Stocks represent fractional ownership, while commodities represent actual physical goods with qualitative differences.
Supply: Stock supplies are almost fixed, while there is no fixed supply of commodities.
Pricing Factors: Equity prices depend on company performance, economy, and government policies. Commodity prices depend on supply and demand, seasonality, and inflation.
Risks Associated: Stocks face systematic risk, affecting all equally; commodities face idiosyncratic risk, which is commodity-specific.
Dividends: Stocks offer dividends based on company profits; commodity trading lacks ownership of the underlying asset, and therefore, doesn't offer dividends.
Liquidity: Stocks are more liquid than commodities.
Margin Requirement: Commodity trading generally has a higher margin requirement than stock trading.
Trading Hours: Different trading hours for stock and commodity markets.
Tools Available: Stocks, Futures, and Options for stocks; Physical Commodities, Futures, and Options for commodities.
Trading Strategies: Stocks used in both day trading and long-term investing; commodities often traded in futures contracts with monthly expiration.
Diversification: Equities can be correlated; commodities provide diversification due to unrelated price movements.
Regulatory Bodies: SEBI regulates the stock market; FMC regulates the commodity market.

Conclusion:

Understanding the distinctions between the stock and commodity markets is crucial for making informed investment decisions. While stock trading is often associated with long-term investments, commodity trading can be suitable for short-term goals and hedging strategies. Investors should consider their financial goals, risk tolerance, and investment horizon when choosing between these two asset classes.

Stock Market vs Commodity Market: What Are the Differences? - Wint Wealth (2024)