It is often difficult to choose the right asset for your investment goals from a plethora of investment options. From listed companies to precious metals like gold and also from crude oil to Agri produce, you can invest in anything. Stock markets focus on capital appreciation and profits, while commodity markets focus on hedging against price fluctuations.
What is a Stock Market?
A stock market is an online marketplace where buying and selling shares or stocks of listed companies happen. When you buy a stock, you get part ownership of the company in return for the capital invested.
A stock is a financial instrument that reflects an individual’s ownership in a corporation.
Hence, the stockholder, like the owner of the company, has voting rights. Also, receives a portion of the earnings as dividends and enjoys capital appreciation.
You will not be able to buy the stocks directly from the company, instead, you purchase the shares through a stock exchange from other investors.
The stock price movements are highly volatile, therefore, it depends on multiple internal and external factors. There are multiple stock exchanges in India where you can buy and sell securities, following are the two primary stock exchanges:
- National Stock Exchange
- Bombay Stock Exchange
Furthermore, it is mandatory to have a trading and demat account with a registered broker to deal in stock markets.
What is a Commodity Market?
As the name suggests, the commodity market deals in buying, selling and trading of commodities. It deals in both hard and soft commodities like gold, silver, crude oil, coffee, rubber, etc.
The commodities are traded in a virtual as well as a physical marketplace.
Dealing in commodities includes the following:
- Physically purchasing the commodity
- Entering into a futures contract
- Either investing in a stock or ETF that focuses on commodities
A futures contract is the simplest and most convenient way of investing in the commodities market. Moreover, the futures contract is entered into at a predetermined price and a specified date. Furthermore, a futures contract is an obligation between the two parties to execute the transaction at the predetermined price and prefixed date. Also, manufacturers and farmers leverage the futures contract to hedge their potential losses. Following are the commodity exchanges in India:
- Ace Derivatives Exchange (ACE)
- Indian Commodity Exchange (ICEX)
- Multi Commodity Exchange (MCX)
- National Commodity & Derivative Exchange (NCDEX)
- National Multi Commodity Exchange of India (NMCE)
- The Universal Commodity Exchange (UCX)
Difference Between Stock Market and Commodity Market
Following are the key differences between the stock market and commodity market:
|Basis of Difference||Stock Market||Commodity Market|
|Purpose||Capital Appreciation in addition to Dividend||To hedge against fluctuating prices of the commodity.|
|Ownership||Shareholders get the ownership of the company for their investment.||No ownership of the commodity. However, has a contract that reflects it.|
|Price||It largely depends on the performance of the company, economy, policy, and also news.||Depends on the demand and also the supply of the commodity.|
|Product||One unit of security doesn’t vary from another unit of the same type in terms of its face value and also other characteristics.||Commodities have several grades and varieties. Therefore prices vary based on the grade.|
|Supply||Almost fixed.||Not fixed.|
|Risk||In comparison to the commodity market, the stock market is less risky.||High risk|
|Dividend||Profits made by the company are passed onto the shareholders as dividends.||No dividends|
|Tools||Stocks, Futures and also Options.||Real commodities, futures and also options.|
|Trading||Intraday trading and also long term investing.||Futures and options contracts expire every month.|
|Trading hours||9:15 am – 3:30 pm||9 am to 11:30 pm for metals and energy. 10 am to 5 pm for Agri commodities.|
|Expiry||Last Thursday of every month for the F&O segment.||Different expiry for each commodity.|
|Lot Size||Equities do not trade in lots.||Commodities only trade in lots.|
|Exchange||NSE, BSE, CSE, etc.||MCX, NCDEX, NMCE, etc.|
|Participants||Investors, arbitragers, hedgers and also speculators.||Manufacturers, producers, dealers, traders and also speculators.|
Things To Consider While Choosing Between Stock Market and Commodity Market
Investing in the stock and commodity market has its own challenges. As a result, you should consider the following things before investing:
- Interest Rates: Interest rates have an impact on rate-sensitive stocks and also on the entire stock market. Interest changes also affect the commodity prices as the inventory holding cost changes.
- Prices: The stock prices depend on the performance of the company, quarterly, half-yearly and annual results and also, on dividends, macroeconomic factors like inflation and interest rates (RBI), etc. Therefore, you should carefully analyse all the parameters before investing. On the other hand, commodity traders analyse the demand and supply of the commodity to understand the market sentiment.
- Risk Tolerance Levels: Stock markets are risky but when compared to commodity market, they are less risky. Since stock investing is more long term. Therefore, before investing, understand your risk levels and choose the right market that suits your investment needs.
- Investment Objective: Stock markets are suitable for long term investment objectives such as retirement. While commodity markets are suitable for short term objectives.