The stock and commodity markets are two systematic components of the larger financial system. The principal difference between the stock and commodity markets is
I. When you trade in the stock market, you buy and sell stocks.
II. When you trade in the commodity markets, you buy and sell commodities.
What are stocks and commodities?
Both stocks and commodities represent ownership of something valuable. In the case of stocks, something valuable is a company. Conversely, when it comes to commodities, it’s raw, tangible goods.
Why do investors trade stocks and commodities?
Investors and traders buy and sell stocks and commodities on organized exchanges, primarily to make profits and grow their wealth. Investing in stocks has pros and cons; the same goes for commodities.
So if you’re thinking of trading in either market, you must know how the markets differ in ways other than the fact that in one market, you trade stocks, and in the other, you trade commodities.
What Is The Stock Market?
The stock market is for trading stocks, and stocks are like shares or units of a company. So, when you buy a company’s stock, you become an owner. In India, you can invest in the stocks of companies like Reliance Industries, TCS, HDFC Bank, ITC, etc. (not investment advice).
Stock Exchanges in India
The stock exchanges facilitate the trading of stocks, like the ones taken above. In India, we have two main stock exchanges:
- The NSE (National Stock Exchange)
- The BSE (Bombay Stock Exchange)
What Is The Commodity Market?
The commodity market is a marketplace to trade commodities like copper, wheat, etc. Every commodity traded in India belongs to one of the following four categories.
Types of Commodities
Bullion: gold and silver
Base metals: copper, nickel, cobalt
Energy: natural gas and crude oil
Agri commodities: wheat, soybean, coffee
Commodity Exchanges In India
There are six commodity exchanges in India:
- Multi Commodity Exchange (MCX)
- Ace Derivatives Exchange (ACE)
- National Multi Commodity Exchange of India (NMCE)
- Indian Commodity Exchange (ICEX)
- National Commodity & Derivative Exchange (NCDEX)
- The Universal Commodity Exchange (UCX)
Stock Market vs Commodity Market: What are the differences between stock market and commodity market?
| Stocks Markets | Commodity Markets |
|---|---|
| Trade company shares. For example: shares of HDFC Bank or Infosys | Trade commodities like gold, wheat, copper, etc. |
| Stocks exist in e dematerialized form. | Commodities exist as physical objects (tangible objects). |
| To invest in this market, you need a demat account to store yourdematerialised shares. | To invest in this market, you require a commodity trading account. |
| Shares trade on stock exchanges like the NSE and BSE | Commodities trade in the physical markets and on commodity exchanges like the MCX. |
| Trading Session: 9:30 AM to 3:30PM | Trading Session: starts at 9:30 on weekdays but differs from commodity to commodity |
| On the stock exchanges, you can trade in the cash segment and derivatives segments. | On the commodity exchanges, you only deal with derivatives. |
| In the stock market, stock derivatives are physically settled (stock delivery). | In the commodity markets, the derivatives are settled in cash. |
| Stock markets are for both long and short-term investors. | Commodity markets are for short-term investors. |
| You can stay invested in stock for years. | You are invested as long as the contact is active, once the contract expires you are no longer an investor. |
| Lower barrier to entry | Higher barrier to entry |
| Relatively less volatile | Very volatile. |
Let’s expand on some of the latter points in the next section to help you understand which market is more suitable for you.
Investing In The Stock Market
Ways To Trade Stocks
Cash Segment:You pay cash upfront, and you get that much worth of stock. For example, if a company stock trades at Rs.1000, and you wish to buy three shares/units, you pay Rs.3000 (excluding brokerage fees).
Derivatives Segment
In the derivatives market, however, you trade futures and options contracts of an underlying asset, in this case, the stock.
- So, basically, when you trade derivatives like futures and options, you get into an agreement with a party to trade an underlying asset (the stock) at a mutually agreed price and quality on a future date.
- You do that by paying a portion of the entire transaction (for futures) or a fee contract fee(for options).
- One important thing to remember is that derivative contracts are traded in lots. Meaning, if you trade one lot of futures, you may be getting yourself to trade 500 shares/units of the stock.
Purpose Of Investing In Stocks
If you see growth in the company, you may hold its stock for several years and see its value appreciate as the company grows. As the value of the stock appreciates, your wealth grows, and you may also receive income in the form of stock dividends. If you are a short-term trader or speculator, you may even buy and sell the stock on the same day to make quick profits.
Investing in the commodity markets
Ways To Trade Commodities
In India, you can either trade commodities in the
- Spot Market:A physical marketplace.
- Commodity Exchange:A regulated exchange, similar to the stock exchange, but facilitating commodity trading.
However, as a retail investor, what will you do with a kilogram of copper or a gallon of crude oil? You are not going to a physical market to buy a commodity; you are concerned with capitalizing on the fluctuating price of the commodity. Therefore, as a retail investor, when you’re trading in the commodity markets, you’re trading over the commodity exchanges.
Commodity Derivatives
When you’re trading commodities over an exchange, you are buying or selling commodity derivatives —primarily futures contracts. They function similarly to stock derivatives in most ways, yet differ in a few key ways.
Difference Between Stock And Commodity Derivatives
The main difference is: unlike stocks, when a commodity contract is settled, the settlement is done in cash. This means you’ll be getting or losing the cash equivalent, depending on whether you made a profit or loss; you won’t be dealing with the physical commodity. Because, again, you have no use for something like a gallon of crude oil.
Purpose For Investing In Commodities
So, unlike stocks, you can’t be an investor in commodities for several years; you are only invested in the commodity if you hold the contract; contracts may last for 1-3 months. Once the contract expires, you receive the cash equivalent and will no longer be invested in the commodity.
So, investors mainly invest in commodities to hedge against commodity prices or inflation, which can affect their stock portfolio. Some may also speculate since commodity prices are extremely volatile.
Conclusion
- In the stock market, you invest in the stocks of companies while in the commodity market, you invest in tangible commodities.
- Stocks can be long-term as well as short-term investments. Commodities are short-term investments.
- The commodity markets have a higher entry bar compared to stocks since commodity trading takes place through derivatives.
Frequently Asked Questions (FAQs)
How to open a demat account and commodity trading account?
You can open a demat account online with a licensed stockbroker and a commodity account with a licensed commodity broker. That said, many stockbrokers are also licensed commodity brokers.
Is there a correlation between stock prices and commodity prices?
Yes, there is a correlation between stock prices and commodity prices. Generally, when commodity prices increase, stock prices decrease as it becomes more expensive for companies to procure the commodities to produce finished goods and services. However, companies selling commodities will do well.
What is a better investment option for beginner investors, stocks, or commodities?
Beginners should start out in the stock market since it is more stable and has lower capital requirements.
As a seasoned financial expert with an in-depth understanding of both stock and commodity markets, let's delve into the concepts discussed in the provided article.
Stock Market:
The stock market is a platform for trading stocks, which are essentially shares or units of ownership in a company. In India, notable stocks include those of companies like Reliance Industries, TCS, HDFC Bank, and ITC. These stocks are traded on major stock exchanges such as the NSE (National Stock Exchange) and the BSE (Bombay Stock Exchange).
Investors engage in the stock market to buy and sell stocks, aiming to make profits and grow their wealth. Stocks exist in dematerialized form, and investors need a demat account to store their dematerialized shares. The trading session in the stock market typically runs from 9:30 AM to 3:30 PM.
Commodity Market:
On the other hand, the commodity market is a marketplace for trading commodities, which are raw, tangible goods. Commodities in India fall into four categories: Bullion (gold and silver), Base metals (copper, nickel, cobalt), Energy (natural gas and crude oil), and Agri commodities (wheat, soybean, coffee). Six commodity exchanges in India facilitate commodity trading, including MCX (Multi Commodity Exchange) and NCDEX (National Commodity & Derivative Exchange).
Commodity trading involves physical objects, and investors require a commodity trading account. Unlike stocks, commodities are not traded in dematerialized form; they exist as tangible objects. The trading session for commodities starts at 9:30 AM on weekdays but varies from commodity to commodity.
Differences Between Stock and Commodity Markets:
-
Nature of Assets:
- Stocks Markets: Trade company shares.
- Commodity Markets: Trade commodities like gold, wheat, copper, etc.
-
Form of Assets:
- Stocks Markets: Stocks exist in dematerialized form.
- Commodity Markets: Commodities exist as physical objects (tangible).
-
Trading Platforms:
- Stocks Markets: Stocks trade on stock exchanges like NSE and BSE.
- Commodity Markets: Commodities trade in physical markets and on commodity exchanges like MCX.
-
Settlement of Derivatives:
- Stocks Markets: Stock derivatives are physically settled (stock delivery).
- Commodity Markets: Derivatives in commodity markets are settled in cash.
-
Investor Duration:
- Stocks Markets: Suitable for both long and short-term investors.
- Commodity Markets: More suitable for short-term investors.
-
Barriers to Entry:
- Stocks Markets: Lower barrier to entry.
- Commodity Markets: Higher barrier to entry.
-
Volatility:
- Stocks Markets: Relatively less volatile.
- Commodity Markets: Very volatile.
Investing in the Stock Market:
Investors can trade stocks through the cash segment, where they pay cash upfront for a certain number of shares, or the derivatives segment, where they trade futures and options contracts of the underlying stock. Long-term investors may hold stocks for years, benefiting from the growth of the company and receiving dividends.
Investing in the Commodity Markets:
Commodities can be traded in the spot market, a physical marketplace, or through commodity exchanges, which are regulated and facilitate commodity trading. Retail investors typically trade commodity derivatives, primarily futures contracts. Unlike stocks, commodity contracts are settled in cash, and investors are only involved as long as the contract is active.
Conclusion:
In summary, the stock market involves trading ownership in companies, while the commodity market deals with tangible goods. Stocks can be both long-term and short-term investments, while commodities are generally short-term investments. The commodity market presents a higher entry barrier due to derivative trading and is known for its volatility.
As a financial expert, I would advise beginners to start in the stock market, given its stability and lower capital requirements. However, it's essential for investors to understand the specific characteristics and risks associated with each market before making investment decisions.
