Key difference between Equity and Commodity Markets: All investors need to know
Meaning of Equity and Commodity Market
Equity Market
Equity market is a place where anyone can buy or sell equities of companies from a recognized stock exchange like the National Stock Exchanges (NSE) and Bombay Stock Exchange (BSE). Not only buying and selling equities, but here investors can also trade in derivative contracts like futures and options. In this market, an investor gets a fraction of ownership when he buys the shares of any company
Commodity Market
In the commodity market, on the other hand, anyone can buy or sell commodities like gold, petrol, silver, copper, cobalt, etc. These commodities can be bought and sold only through commodity futures and forward contracts. Moreover, these commodities are not traded physically on any exchange.
How does the Equity and Commodity Market Work?
The process of working in the equity market in India can be classified into 3 stages :
Stage 1: This is the primary stage where the company needs funds and for that, they issue equities in return for a certain percentage of ownership
Stage 2: In this stage, investors are subscribing to the equities of the company. If equities are oversubscribed then the company may sometimes return or allot equities based on the pro-rata method
Stage 3: In the last stage, investors who are getting allotment of the equities become the equity
holders or we can say a part-owner in the company
Commodity markets work based on the law of demand and the law of supply. When the demand is equal to the supply of the commodity it reaches equilibrium.
Commodity markets work in four stages and they are as follows:
Stage 1: The process starts with the production of commodities where producers are miners and cultivators. This process is also known as the primary process where producers bring their products to market
Stage 2: The next process is known as a secondary process where the raw materials are converted into finished goods like sugarcane into sugar
Stage 3: The third stage is all about distribution and trade where all the finished goods are bought by consumers from the traders and wholesalers
Stage 4: The last stage is basically for use of goods or uses in further processing or production
Differences between Equity and Commodity Market
| Basis | Equity Market | Commodity Market |
| Time frame | Investors can be invested in equity market for the long term as well as short term | The commodity market is only for short-term investors |
| Risk | Risk is slightly lesser than the commodity market | Risk is high if compared to the equity market |
| Ownership | In the equity market, equity holders hold ownership in a company | While in the commodity market there is no ownership |
| Volatility | It is less volatile | It is more volatile |
| Trading hours | From 9:15 am to afternoon 3:30 pm | Trading can be done for long hours for example 9:30 am to 6:30 pm |
| Liquidity | Comparatively, it has better liquidity | Commodity have lower liquidity compared to equity |
Types of Exchanges in Equity and Commodity Markets
Equities are mainly traded in two exchanges :
- NSE - National Stock Exchange
- BSE - Bombay Stock Exchange
Commodities are traded on the following exchanges :
- Multi Commodity Exchange of India it is also known as MCX
- National Commodity and Derivatives Exchanges of India
- National Multi Commodity Exchange
- Indian Commodity Exchange
- Universal Commodity Exchange, Limited
- Ace Derivatives and Commodity Exchange Limited
Factors you Should Remember While Investing in Equity and Commodity Market
- If you are concerned about ownership of the company then you should go for equities because here you will get the ownership of a company. Whereas if you want are not concerned about ownership you should invest in commodities as these contracts are hardly ever owned
- If you are someone who wants to earn profit in short term then you should invest in the commodity market as the contract period is short-term in nature. Whereas equity can give more profits if you hold it for a longer period
- If you are someone who has a low risk appetite then you should consider equity compared to commodity as the risk in equity is less than the risk in commodity
- If you are concerned about margins then you should invest in equities as they give more returns in comparison to commodities.
Both the markets have their own particulars that make them different from each other. This further differentiates the risks associated with investing, returns one can expect, and other key factors. You can use any of the two based on your own financial goals, ability, and the understanding of the market.
Where should I invest my money in the equity market or commodity market?
- If you are someone who prefers long-term investing go for the equity market
- The commodity market is for short-term traders.
Which is more risky: equity or commodity?
- The commodity market is slightly risky and volatile in comparison to the equity market.
Where should I invest if I want returns quickly?
Go for the commodity market because here the contract period is short term and you can expect a minimal return in a short period.
Where can I expect more returns?
The margin in the commodity market is less than the margin in the equity market.
Where can I get a dividend?
In equities, you hold part ownership in a company so you can expect dividends. But in the case of commodities, you will not be entitled to any kind of dividend.