The difference between equity and commodity trading starts with the structure of both the markets in India and ends with the speed at which transactions are executed. Here is an in-depth look at the equity vs commodity debate, focusing on the key differences, major factors to consider, and which one a budding investor should choose.
Equity Vs Commodity Trading - Key Differences
An investor buying a security in the equity market gains a fraction of ownership of the listed company. Traders also have ownership of the company's assets. However, it is not the same for commodity trading.
There is no company in the picture in the commodity market, and there's no actual commodity that is bought. Instead, traders invest in future contracts that reflect the value of the commodity. These future contracts are rarely owned.
Duration of the Trade
Equities can be held for not only a single day but also for years. Unlike future contracts in the commodity market, equities do not have an expiry. You can hold the stocks of a particular company for a lifetime until the company is listed for exchange or until the company reaches its solvency. There is no requirement to buy or sell the shares.
Commodity trading is better suited for short-term investors since commodity futures have an expiration date. Before the expiry date, investors need to buy or sell the underlying commodity. The same applies to options as well.
Therefore, long-term investors choose equities to create considerable wealth, which occurs due to capital appreciation in the portfolio's overall value.
Producers of the commodities prefer commodity trading in an attempt to protect themselves from price fluctuations. Through future contracts, they lock in a set price for the commodity.
While the purpose of commodity trading is hedging against adverse fluctuation, the purpose of equity trading is wealth creation. At times, even equities are used for hedging. However, the main goal is to place bets on high potential companies to churn out profits.
In a traditional sense, equities are not dealt with on margins. To purchase equity shares, investors need to pay the entire value of the trade.
Commodity trading is famous for the kind of leverage it provides. It requires extremely lower margins. A part of the total trade needs to be deposited as the initial margin to get exposure to higher trades. Since the total value of the trade decides profit and loss, marginal movements in the commodity price can result in significant profits or colossal losses.
Being influenced by the supply and demand dynamics, commodities are highly volatile. The supply and demand chain is affected by unforeseen circumstances such as war, riots, man-made disasters, natural disasters. etc. These unpredictable events tend to cause heavy fluctuations in the prices of the commodities, majorly because the market was not prepared to combat the sudden change in supply and demand.
Comparatively, the equity market is less volatile. A company's stock prices tend to fluctuate based on the status of the economy, current market sentiments, and underlying fundamentals of the company. Due to the constant change in prices, the degree to which the price changes in the equities is far less volatile.
Moreover, temporary economic shifts, either boom or bust, hardly affect the price of the equities because such events had been anticipated and factored into the share price already.
Equity trading operates in fixed hours from morning 9.15 am to afternoon 3.30 pm while commodity trading is available for longer hours, example - 9.30 am to
Commodity Trading vs Equity Trading in India
Trading gurus consider commodity trading to be slightly easier since its performance largely depends on the demand and supply dynamics. On the other hand, equity requires a much more detailed investment decision.
For example, buying an equity share would require you to analyze the company's past profits and earning trends. However, if you need to invest in copper as a commodity, you mostly need to measure the industrial growth scene in the copper market. Therefore, there are lesser factors to consider in commodity trading than equity trading, which could be an ideal bet for an amateur investor.
Equity vs Commodity - Which One To Choose
Depending on their risk appetite, investors can choose between trading in the commodity market vs the equity market. One of the popular strategies in trading is to buy and hold the trade for a long time which is not viable in commodity trading.
Therefore, investors who have long-term wealth creation goals should look at equity investment. While those investors eyeing short-term gains should trade in the commodity market. In the bottom line, it is important to understand the basic difference of ownership and to hold time frames between the two markets.