For the investor with the keen eye, making the right investment within the right financial market can open doors to highly rewarding returns. Particularly, in today’s time, when the internet has made trading in just about any market easier and more accessible than ever. However, the key to succeeding with anu market investments is in fact by first determining which type of financial market to invest in.
For this purpose, we will be taking a look at the difference it can make by comparing two incredibly popular markets: stock market vs commodity market. It is through understanding these two types of securities and markets better, that the debate of investing in commodities vs stocks can become more apparent.
Let us start by reviewing the two types of markets as well as recapping how to invest in commodities and stocks:
What is the Stock Market?
The type of security that is an indication that an individual has an ownership stake in a publicly-held company, is known as a stock. A person’s stock in a company is represented by the number of shares he has of the company, which he can then sell or buy from other stock owners. The collection of markets where this sale and purchase of stocks takes place is known as the stock market.
A person can invest in the stock market by opening a trading and demat account with a brokerage firm. The brokerage firm can then get you connected with the relevant stock exchanges and carry out the trades on your behalf.
What is the Commodity Market?
The term commodity refers to a type of resource or goods that are essential to our everyday life, and can be traded with other goods of the same type. They can be of two types: hard commodities such as gold or oil, and soft commodities such as agricultural products and livestock.
A commodity market can be a type of physical or virtual market where such commodities can be bought and sold from one trader to another. There are various ways to invest and trade in commodities. These include direct commodity investment as well as purchasing commodity future contracts as an investment.
Differences Between Stock Market and Commodity Market
Now that we have understood the distinction between commodities vs stocks, let us take a closer look at the differences between their respective markets. Here are the prime factors that distinguish stock market vs commodity market:
- Ownership: After buying stocks in the stock market, an investor gains a fraction of ownership of a company. The most popular strategy of trading in a stock market is to hold a stock that you own and wait for a favourable turn of the market.In the case of commodity markets, however, the most common type of trading is done via the means of 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.
- Volatility: Out of all asset classes and financial markets, commodities and commodity markets tend to be the most volatile. When comparing the stock market with the commodity market, the latter is certain to have far more volatile trends. This is because the commodity market is known for having lower liquidity and is affected by ever-changing external factors such as supply-demand and geopolitics.
- Time Horizon: Investors in the stock market can hold their stocks for a short period of time, going as short as a trading day. However, stocks can also be held over years and decades, making them an ideal long-term investment. However, the time horizon on commodity trading is very different. The commodity market typically trades in contracts that are typically 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.
All in all, the debate between investing in commodities vs stocks can be settled by figuring out one’s investment priorities. If you are looking for a short-term, non-ownership investment, and making the most of a volatile market, investing in the commodity market is the way to go. On the other hand, for long-term, ownership-based investments that require time and patience, the stock market might be the ideal choice for you.