Stock Market vs. Commodity Market Profitability (2024)

Created December 30, 2020
AuthorClarice Mendonsa
Category Markets
Reading Time: 4 minutes

Indian investors today have a wide range of investment options. From stocks to agricultural products to oil and gold, an investor can diversify his investments across asset classes. With commodity trading getting popular, it is important for investors to understand which is the most profitable investment option for them - Stock Market or Commodity Market! In today’s article, we will understand the differences between the stock market and the commodity market on the basis of volatility, liquidity, time horizon, risk profile and more! So let’s begin!

What is the Stock Market?

A Stock market is a place where stocks of listed companies are traded. A stock or share is a financial instrument that represents ownership of an individual in a company. Like the owner, even the stockholder has voting rights and gets a share in profits along with capital appreciation.

What is the Commodity Market?

A commodity market is a place where commodities are bought and sold. The term commodity refers to basic resources or goods that are traded in the commodity market. Commodities are of two types:

Hard commodities such as gold or silver
Soft commodities such as agricultural products and livestock.

[Suggested Reading: What is commodity Trading]

Basis	Stock	Commodity
Nature of Product	Stock refers to an investors' stake in a company.	Commodity refers to basic products that are required for day to day survival.
Usefulness	Stocks are mainly long term investments for gaining ownership and profit share for an emerging or growing business in the long term.	Commodities are short term trades used mainly for hedging making quick profits based on speculation.
Mechanism of trade	Stocks are traded on stock exchanges through various means like cash, futures and options contracts.	Commodities are traded on commodity exchanges mainly through futures and options contracts.
Time	Stocks of companies remain listed on stock exchanges for a long duration, where you can own and hold a stock for decades.	Commodities are mainly traded through contracts. These contracts are priced based on future prices for a particular duration of time beyond which they expire and are worthless.
Examples	Listed companies like Infosys, Reliance, etc.	Sugar, wheat, gold, silver, cotton, crude oil, etc.

The Difference Between The Stock Market and The Commodity Market

Now that you understand what are stock markets and commodity markets, let us take a closer look at the differences between these two markets. Here are the key factors that distinguish stock market vs commodity market:

1. Ownership

Stock Market: After buying stocks in the stock market, an investor gains ownership of the stock. The most popular long term strategy of stock market investing is coffee-can investing.

[Suggested Reading: Best stocks to buy in India Now!]

Commodity Market: In commodity markets, the most common type of trading is done via futures contracts. With futures contracts, there is no ownership exchanging hands between people. Instead, these contracts deal with future deliveries of commodities that are traded but rarely ever owned.

2. Volatility:

Stock Market: The equity market is comparatively less volatile as the stocks have a price range and small spreads, plus they are highly liquid. The investors in the stock market take collective risk and gain significant rewards.
Commodity Market:Out of all asset classes and financial markets, commodities tend to be the most volatile. This is because the commodity market is known for having lower liquidity and is affected by ever-changing external factors such as geopolitical tensions, demand and supply of commodity, etc.

3. Time Horizon

Stock Market: The stock market investors have an option to hold shares for a long duration, popularly known as coffee can investing strategy. Investors in the stock market can hold their stocks for a short period of time, or even short sell. Alternately, stocks can be held over years and decades, making them an ideal long-term investment.
Commodity Market: The time horizon on commodity trading is very different. The commodity market typically trades in contracts which are short-term. Also, unlike stocks, they come with a time limit or expiry, meaning they must be traded within the given time frame. Therefore, the commodity market is ideal for short-term investment.

4. Risk

Stock Market: Trading in the stock market is risky as your investment is prone to market volatility. Also, many investors refrain from taking risks in the stock market as there are more than 5000+ stocks to trade in and it is comparatively tough decision of selecting the right share.
Commodity Market: Commodities carry higher risk than the Stock Market. The main reason is that they trade on futures markets that offer a high degree of leverage and come with an expiry. A commodity trader normally only has to put up a small percentage of the contract value in futures margin.

5. Trading hours

Stock Market: Stock exchanges operate for shorter hours compared to commodity exchanges. E.g. NSE functions from 9.15 am to 3.30 pm.
Commodity Market: Commodity exchanges are open for longer hours such as the MCX which functions from 9.30 am to 11:30 pm.

Stocks vs Commodity Comparison Table:

The basis of Comparison between Stock vs Commodity	Stocks	Commodity
Ownership	Share holder is considered as the owner of the company.	Ownership privileges are not available with the commodity holder.
Volatility	The Stock market is comparatively less volatile.	Commodity market is highly volatile.
Risk	Stock market trading is comparatively less risky.	Commodity Trading is highly risky.
Dividend	Stock holders are the owner. Hence they are eligible for the dividend as a return.	Commodity instrument holders do not receive dividends.
Expiry	Stocks have no expiry date	Commodity instruments expire at the end of the month. In India, commodity contracts expire on the last thursday of every month.
Liquidity	Stocks have comparatively better liquidity	Commodity instruments have comparatively low liquidity.
Margin Requirement	You need to pay the complete amount for buying stocks.	Commodity market requires high margin, which varies based on the nature of the commodity.
Lot Size	Shares do not have lot size.	Commodity instruments get traded in lots.

[Recommended Reading: Tips and Rules of Commodity Trading]

Conclusion

These differences between commodity markets and stock markets will help you determine whether you should invest in stocks or commodities in line with your financial goals. If you are looking for short-term investments, and want to make profits in a volatile market, investing in the commodities is the way to go. On the other hand, for long-term investments that require time and patience, the stock market might be the ideal choice for you. Whether you choose to invest in the stock markets or commodity markets, Samco provides the best trading account in India which gives you access to trade across equity, commodity and currency markets to create infinite wealth!

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About The Author

Clarice Mendonsa

The author has done a Bachelors in Banking and Insurance (BBI). She is a budding financial content writer. Her strength lies in simplifying financial jargons. Her goal is to help readers make better investment decisions.

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Stock Market:

Nature of Product:
- Definition: Stocks represent an investor's stake in a company.
- Usefulness: Stocks are primarily long-term investments, providing ownership and profit share in a company's growth over time.
Mechanism of Trade:
- Trading: Stocks are traded on stock exchanges through various means like cash, futures, and options contracts.
Time Horizon:
- Duration: Stocks can be held for a long duration, even decades. Investors have the option for short-term or long-term strategies.
Risk:
- Risk Level: Stock market trading is considered less risky compared to commodities. Investors face market volatility.
Trading Hours:
- Operational Hours: Stock exchanges operate for shorter hours (e.g., NSE functions from 9.15 am to 3.30 pm).

Commodity Market:

Nature of Product:
- Definition: Commodities are basic resources or goods traded in the commodity market, classified as hard or soft commodities.
Mechanism of Trade:
- Trading: Commodities are traded on commodity exchanges mainly through futures and options contracts.
Time Horizon:
- Duration: Commodity trading involves short-term contracts with a specified time frame. They expire and become worthless.
Risk:
- Risk Level: Commodities carry higher risk due to market volatility, lower liquidity, and the use of futures markets with high leverage.
Trading Hours:
- Operational Hours: Commodity exchanges have longer hours (e.g., MCX functions from 9.30 am to 11:30 pm).

Additional Comparisons:

Ownership:
- Stock Market: Investors gain ownership of the stock.
- Commodity Market: Ownership privileges are not transferred with commodities.
Volatility:
- Stock Market: Comparatively less volatile.
- Commodity Market: Highly volatile.
Dividend:
- Stock Market: Stockholders are eligible for dividends.
- Commodity Market: Commodity instrument holders do not receive dividends.
Expiry:
- Stock Market: Stocks have no expiry date.
- Commodity Market: Commodity instruments expire, typically at the end of the month.
Liquidity:
- Stock Market: Better liquidity for stocks.
- Commodity Market: Lower liquidity for commodity instruments.
Margin Requirement:
- Stock Market: Complete amount required for buying stocks.
- Commodity Market: High margin requirements vary based on the nature of the commodity.
Lot Size:
- Stock Market: Shares do not have lot size.
- Commodity Market: Commodity instruments are traded in lots.

In conclusion, understanding these differences can help investors align their financial goals with the characteristics of either the stock market or commodity market. For short-term, volatile markets, commodities might be suitable, while the stock market offers options for long-term investments requiring patience.