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How Is The Stock Market Different From The Commodity Market?

10 Jun 2024

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Introduction

A wide range of asset classes are available in today’s financial markets. Most investors desire to leverage the trading opportunities of the stock market to fetch inflation-beating returns. But you must know that the commodity market is also an alternative to help you diversify your portfolio.

Although stocks and commodities function similarly, it’s vital to understand that they represent distinct forms of investment. Understanding their differences enables you to develop your investment strategy.

Stock market: Meaning

The stock market refers to a market where shares of listed companies are traded. These trades are between investors. Stock trading lets you own a part of the company in exchange for your investment.

There are many stock exchanges in the Indian stock market. The two prominent ones are:

National Stock Exchange (NSE)
Bombay Stock Exchange (BSE)

Commodity market: Meaning

A commodity market refers to a marketplace where commodities like metals, gold, wheat, agricultural produce, energy resources, livestock, etc., are traded. There are three ways in which you can trade in the commodity market:

Physical purchase of the product
Entering into a futures contract
Investing in a commodity-focused stock or Exchange-Traded Funds (ETF)

The six commodity exchanges in India are:

National Commodities and Derivatives Exchange (NCDEX)
Ace Derivatives Exchange (ACE)
Indian Commodity Exchange (ICEX)
Multi Commodity Exchange (MCX)
National Multi Commodity Exchange of India (NMCE)
The Universal Commodity Exchange (UCX)

Differences between the stock market and commodity market

The stock market and the commodity market are two primary types of markets. Here’s a detailed comparison between the two:

1. Investment purpose

Stock market investing is for earning profits on the capital and gaining dividends. Conversely, commodity investing is for portfolio diversification and hedging against fluctuating prices.

2. Ownership

When you buy a stock, you own a part of the company. However, commodity investing does not give you an equity stake. It provides ownership rights with the flexibility to buy or sell the item in the future.

3. Price

Stock market prices rely on factors like economic conditions, company performance, government policies, etc. Commodity prices, on the other hand, depend on demand and supply dynamics, inflation, seasonality, etc.

4. Product

Stocks provide fractional ownership of a company, whereas commodities provide ownership of a physical product like wheat, gold, etc.

5. Supply

The stock market has a fixed supply of stocks unless there is a new listing. The supply in the commodities market is not fixed and depends on production, demand, and other factors.

6. Dividends

Stock market investors receive a share of the company’s profits as dividends. These dividends serve as an income stream. However, there are no dividends in commodities since you don’t have ownership of the underlying physical asset.

7. Associated risks

The level of risk in the commodities market is higher than in the stock market. Stocks are exposed to a systematic risk, with all stocks bearing the impact of market-wide events. Commodities are subject to idiosyncratic risk, which only affects the commodity in trade.

8. Liquidity

Stock markets offer high liquidity, making it easier for you to buy and sell assets. The commodity markets are comparatively less liquid, barring exceptions like crude oil and gold.

9. Margin requirements

The margin requirement for stock markets is lower than for commodities.

10. Volatility

The equity market is relatively less volatile. A company’s underlying fundamentals, prevailing market sentiments, and the economy’s condition determine its stock prices. Commodities are highly volatile because the demand and supply dynamics influence them.

11. Trading strategies

Stocks are used in intraday trading and long-term investing. In the commodity markets, futures and options contracts have a monthly expiry, appealing to many trading strategies.

12. Regulatory bodies

The Security and Exchanges Board of India (SEBI) regulates the Indian stock market, whereas the Forward Markets Commission (FMC) is the regulatory body for the Indian commodity market.

Wrapping up

The stock and commodity markets cater to different types of investors and investment strategies. Learning the differences between the two can help you determine which is a more suitable option for you based on your investment goals. Trading in stocks is excellent for long-term investments, whereas trading in commodities is best for short-term investments.

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