What is the Difference between Commodity and Equity

Last Updated: 27 Dec 2024

When it comes to making investment decisions, equity markets and commodity markets are distinct forms of investment. Both types offer different opportunities, yet each one is suited to particular objectives, risk appetites, and market scenarios. Each market also varies in terms of volatility, liquidity, and regulation. 

The key differences between commodities and equities can help investors navigate these two investment avenues better and choose the one that best fits their objectives. In this article, we shall discuss the key differences between equity and commodity markets, thus enabling you to understand which investment avenue may be more suitable for your financial goals.

Difference Between Equity and Commodity

Equity and commodity are two different investment alternatives that have their own sets of characteristics, risks, and opportunities. While equity reflects ownership in a company, commodities are raw materials or primary goods traded in markets. Knowing the differences between them will help investors make an informed decision based on the goals of their financial activities and risk tolerance. Below is the comparison of equity and commodity investments:

Aspect	Equity	Commodity
Definition	Equity refers to ownership in a company, represented by shares or stocks.	Commodity refers to raw materials or primary agricultural products traded in markets.
Type of Asset	A financial asset that represents partial ownership in a company.	Tangible assets, such as oil, gold, wheat, etc.
Market	Traded on stock exchanges like the NYSE and  NASDAQ.	Traded on commodity exchanges like the MCX, NCDEX, or NYMEX.
Volatility	Generally more volatile due to company performance and market sentiments.	It can be volatile based on supply-demand factors, geopolitical events, and weather conditions.
Returns	Returns come in the form of dividends and capital appreciation.	Returns come from price fluctuations and the physical delivery of goods.
Liquidity	Highly liquid, as stocks can be bought or sold at any time during market hours.	Liquidity can vary, especially for less commonly traded commodities.
Investment Horizon	Typically long-term, as investors hold stocks for growth and dividends.	It can be both short-term and long-term, often used for hedging or speculation.
Risk	Risk is linked to company performance, market trends, and economic conditions.	Risk is linked to external factors like climate change, political instability, and market speculation.
Regulation	It is regulated by financial authorities like SEBI (Securities and Exchange Board of India) or SEC (Securities and Exchange Commission).	It is regulated by commodity trading authorities, such as the CFTC (Commodity Futures Trading Commission) in the US or SEBI in India.
Types of Participants	Investors, traders, mutual funds, institutional investors.	Farmers, traders, speculators, producers, and consumers.

Commodity Market vs Equity Maket in India

Here is a quick look at the equity vs commodity markets in India. Remember, both equities and commodities are essential investment mediums. However, while commodities are generally undifferentiated, equities can be differentiated on several factors. Also, equity provides ownership as well as other benefits like dividends, rights, stock splits, bonuses, buybacks, etc. Now for some key equity vs commodity differences.

• Stocks and commodities trade on different types of exchanges. In the US, stocks trade on NYSE and NASDAQ, while commodities trade on CME. In India, stocks trade on NSE and BSE while the commodities are traded on the Multicommodity exchange (MCX) or NCDEX.
• Stocks can be held to eternity if you go by what Warren Buffett says. The point is they can be held for as long as you want. Commodity futures or forward contracts have a shorter expiry period referred to as the delivery date and are for a limited period only.
• The commodity is the generic form of a product that is undifferentiated and copper is largely the same everywhere. Equity refers to the ownership stake in a company you are invested in with a proportionate share of the business and net assets of the company.
• Commodities are traded on a commodities exchange through futures and forwards like the MCX or the NCDEX. Equity refers to shares that are traded on a stock exchange like the NSE or the BSE.
• One final point in the equity vs commodity debate is that commodities tend to be driven by international prices. For example, most of the liquid commodity futures in India like gold, silver, crude oil, copper, zinc are all driven by global factors. Equity is more driven by domestic and company-specific factors.

Equity vs Commodity – Which One to Choose?

The choice between equity and commodity depends on your investment goals, risk tolerance, and market outlook. Equity investments offer long-term growth potential through company ownership and dividends, making them suitable for those seeking capital appreciation. However, they come with volatility tied to company performance. 

Conversely, commodities are often more influenced by external factors like weather, geopolitical events, and supply-demand dynamics. They can offer hedging opportunities and short-term profit potential but carry higher risks due to price fluctuations. If you want stability and growth, equity is best suited, while commodities are suitable for more active, speculative investors.

Conclusion

Both equity and commodity investments have distinct characteristics that appeal to different types of investors. While equities offer ownership in companies with long-term growth potential and stability, commodities provide opportunities for short-term gains, which are often driven by external factors such as weather, geopolitical events, and supply-demand dynamics. The choice between equity and commodity should align with your financial goals, risk tolerance, and market outlook.

Frequently Asked Questions

Which is better equity or commodity?

It is hard to say which is better since the intent is more important. Commodity derivatives are normally used by traders with an underlying. For example and automobile manufacturer buying copper futures to lock in the future price and delivery of copper is a case of hedged exposure. In such cases, the commodity derivative works better.

When it comes to taking a view on the market as a whole or in creating more complex strategies in the derivatives market, the equity derivatives work out better. Also, the liquidity is much higher in the equity derivatives market in India, compared to the commodity derivatives market.

Which are more volatile equities or commodities?

Both commodities and equities can be volatile. For example, we have seen equity markets move wildly in a single day. Similarly, in the case of crude oil, we have seen crude go as low as negative in April 2020. However, broadly, it must be said that the hug bouts of volatility in commodity prices are more exceptional than routine. In the equity markets, the volatility is a lot more routine and happens more frequently.

How do risk profiles differ between the two markets?

Equity markets are inherently more risky because they are linked to company performance and market sentiment. On the other hand, commodity market risks are determined by weather, geopolitical factors, and supply-demand imbalances, hence experiencing more volatility but distinctive risk profiles.

Which market offers better opportunities for diversification?

Equity markets provide better diversification opportunities because stocks span different industries and sectors, thus reducing exposure to specific risks. Commodities are useful for hedging purposes but are usually more concentrated in specific sectors (for example, metals or agriculture), thus providing less diversification potential than equities.