Equity Market Vs Commodity Market - What's The Difference?
While the names themselves are a dead giveaway, the equity and commodity markets have a few further differences in functioning, reflecting the intricacies of their underlying assets that most participants should be aware of.
There are several places where the equity and commodity markets overlap and have a pronounced impact on one another. Still, beyond this, there are certain differences in how they operate, making it difficult to approach both with similar principles.
For traders, investors, market-makers, and producers, understanding the similarities and differences between equity and commodity markets remains crucial to forming strategies and their unique approaches to making the most of them. Despite existing side by side for nearly a millennia, there are still plenty of misconceptions when it comes to the inner workings of commodities markets vs equity markets.
In this article, we aim to provide a brief primer on equity vs commodity markets, their similarities, differences, and how they each overlap.
The Core Differences Between Commodities & Equity Markets
At their core, equity and commodities markets are exchanges where buyers and sellers come together to decide on a transaction's prices, quantities, and other terms. Each has respective derivative markets, composed of futures and options, to further aid in price discovery and hedging against market risks.
While the equity markets concern themselves with the buying and selling of share ownership in publicly traded companies, the commodity markets deal with raw commodities.
For equity shareholders, the stock they hold represents a piece of ownership in a company, whereas when it comes to commodities, traders and investors own the whole of a certain quantity of particular raw commodities.
These are some of the core differences evident by their names alone. Still, apart from this, both markets have certain subtle differences pertaining to ownership, delivery, trading mechanisms, market timings, margin requirements, and regulations, which we will cover in the next section of this article.
A key difference in equity and commodity markets pertains to the ownership of securities.
When dealing with equities, investors essentially own a piece of a company, with rights to participate in dividends, partake in whatever is left after paying off liabilities on the dissolution of a company, along with the ability to vote during shareholder meetings.;
Commodities, however, don't offer any such ownership. Being a derivative market at its very core, traders and investors in commodities own derivative contracts and securities, not the commodity itself.
While the physical delivery of a futures contract is possible, it is rarely opted for, given the additional costs and hassles involved. Several commodities also have expiry dates, making them difficult to hold onto for extended periods.
Trading on the equity markets essentially involves buying and selling several shares, which can be anywhere from 1 share to 1 million shares or more.
When it comes to commodities, however, trading is performed in lots, with each commodity, based on its type, price, and more, having a minimum number of lots in which it is traded.
Apart from this, the prices of commodities are heavily influenced by physical trade. Unlike shares in a particular company, commodities are physical goods bought, sold, and transported in the real economy.
Since commodity futures come with an expiration date, it further influences their trading mechanisms with respect to equities. Time decay is a significant force in the commodities market, similar to other derivatives markets.
A significant difference between equities and commodity markets is the market timings. While equity markets often trade for 8 hours a day on average, commodity markets, in general, remain open 24 hours a day, with breaks only during the weekend and or on public holidays.
This has a marked impact on volumes and volatilities, with commodity markets often less prone to big swings during the market's early hours and closing hours. At the same time, given the extended number of hours it trades, the markets have less depth than equity markets, leaving plenty of gaps and inefficiencies.
Margin requirements are higher when it comes to equities, with numerous efforts being made to de-risk the markets in recent years. Commodities, however, given the high prices of certain materials and the lot sizes, margin requirements remain a lot lower.
This also results in substantial risks for investors, with small movements in commodities such as gold either resulting in big profits or colossal losses.
While both markets see all kinds of investors and traders with different goals and objectives, commodity markets aim predominantly to add depth and support the physical trade of commodities.
Most participants in the equity markets remain in pursuit of gains, either short-term or long-term. In contrast, when it comes to commodities, even though speculative activities still exist, a bulk of the volumes are a result of hedging, market making, or procurement activity.
Commodity markets, in general, have a deeper connection with the real economy and are, thus, heavily relied upon by farmers, agricultural traders, retailers, and production or procurement managers at leading organizations.
While both markets are heavily regulated to ensure trust and transparency for investors, commodities, in particular, are more heavily regulated, given their massive real-world implications.
In India, both markets are regulated by SEBI, with different exchanges, depository partners, and brokers coming to the fore to help aid and facilitate trading across the markets while complying with extensive regulatory standards.
Both equity and commodity markets stand to add substantial value in helping reduce risks, smoothen out volatilities, and facilitate trade. While their performance is deeply intertwined with each other and the broader economy, one should not mistake them for being similar.
Their similarities end in that they are both financial markets for buying and selling securities. Beyond that, they each have extensive peculiarities and intricacies, of which we've only managed to scratch the surface.
Frequently Asked Questions
Which Is Better, Equity Or Commodities?
Each has different use cases, catering to a different class of investors, with equities mainly aimed at traders and investors looking for an ownership stake in a company. In contrast, when it comes to commodities, the users are mostly producers, traders, and purchasers of said commodity, with speculators in the midst.
Given the volatile nature of commodities and lack of any significant depth compared to equities, beginner traders and investors are often advised to stay clear of the same.
Also, given the predominant use of derivatives contracts in the commodities sector, most investments witness a time decay and are, thus, not assets similar to bonds or equities.
Which Are More Volatile, Commodities Or Equities?
Both these asset classes are known for their volatility. However, given the lack of depth and liquidity, coupled with the fact that Indian commodity markets remain at nascent stages, commodity markets are known for being exceptionally more volatile than equities.
Depth remains crucial for all markets, with liquidity helping cushion any sudden shocks, and avoiding wild price movements, without which investors are likely to be faced with big swings, making the market unpredictable.
How Many Commodity Markets & Equity Markets Are There In India?
Primarily, there are three operational commodities exchanges in India, namely the Multi Commodity Exchange Market (MCX), National Commodity & Derivatives Exchange (NCDEX), and the Indian Commodity Exchange (ICEX).
There are several markets and exchanges for equities, but the most important ones remain the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).
What Is The Biggest Commodities Exchange In India?
The Multi Commodity Exchange, or MCX, is the biggest commodities exchange in India. Many other up-and-coming exchanges, such as the NCDEX and the ICEX, are expanding their sphere of influence while growing volumes.
The value-added services and increasing reach have since helped transform Indian commodity markets from a predominantly unorganized segment to a sophisticated contributor to a resounding economy.