Do you know the real differences between equity and commodity market? Knowing the differences between these two essential components of the financial market is essential when you plan to make any sorts of investments for your future. The following guide will help you understand the definitions of both of these components as well as the key differences between equity and commodity.
Equity vs Commodity Market
The financial market is comprised of multiple types of instruments that investors can use to invest their money and other finances. The end goal of any investment is to earn a profit, which requires essential knowledge of these available financial instruments that are accessible to investors.
Both equity and commodity are two types of common financial instruments that investors consider when they are planning out their investment options. Although they are not the only two instruments available on the financial market, they are certainly the most popular and well-known. Equity, in particular, is the most common type of investment made in today’s financial world.
The benefits and disadvantages, features, regulations and other characteristics of each type of financial instrument all play a role in whether or not they are considered a good investment for a particular person or a particular financial portfolio. Both equity and commodity can be affected by a variety of factors and need to be carefully monitored and tracked in order for investors to make the best decisions regarding their investments.
Now, let’s take a closer look at each of these two instruments before exploring the key differences between the two that will help investors understand which of these two options is best for their current financial decisions.
What is Equity?
The simplest definition of equity is that equity refers to the common stock of a company. Equity is listed on stock exchanges and can be easily traded on the said exchange. Equity shares provide a percentile amount of ownership to the equity holders; equity shares are considered important in the overall financial market since these equity shareholders can take part in a number of managing and other decision-making aspects of the company they hold equity in.
Examples of common equity include common stock, preferred stock, and so on.
What is a Commodity?
The simplest definition of a commodity is a raw material that can be bought, sold or traded on the market. The commodity is purchased and sold either through the physical delivery of the commodity or through cash settlement. in general, traders who choose the physical delivery option are those who will have regular daily transaction exposure within the scope of a specific commodity. Cash settlements for commodities are a type of speculation which involves entering into contracts for transactions that will occur at a pre-determined date; when that date arrives, then the difference between the original contract price and the current actual price will be settled.
Examples of commodities include grains, precious metals, oil, beef, and so on.
Now that we’ve explored the basic definition of each type of financial instrument, it’s time to compare them in order to explore other primary differences between the two.
So, what is the difference between commodity and equity markets?
Top Differences Between Equity and Commodity: A Breakdown
The best way to tackle the key differences between equity and commodity is through a breakdown of their most important characteristics. These characteristics play a key factor in the overall risk associated with equity and commodity and will influence the number of investments made in each type of instrument, depending on an investor’s financial status, current financial holdings, and overall goals for their financial future.
First, we will take a look at 14 key differences between equities and commodities that can be compared head-to-head. Sometimes, these differences can vary on a case by case basis; however, they are considered to hold true as a general rule of thumb.
Holder
The holder of equity is considered a shareholder. The holder of a commodity is considered an option holder.
Ownership
Equity holders are partial owners of the company due to their holding of company stock. The holder of a commodity is not considered an owner of the company.
Volatility
The equity market is not notably volatile compared to other financial markets. The commodity market is considered highly volatile compared to other financial markets.
Associated Risks
Trading in equity is considered a relatively less risky venture. Trading in the commodity is considered a high-risk venture. Beginning investors are recommended to steer clear of high-risk ventures, particularly if they are just now getting a strong financial footing.
Dividend
Since equity holders are owners, they are eligible for receiving the dividend as a return. Commodity holders are not entitled to any dividends because they are not considered to be owners in the company.
Exchange-Traded
Equity shares can be traded on a variety of different exchanges; the same applies to commodities, though they may be traded on different exchanges than equities. The exact regulations and rules regarding each exchange will vary on a case by case basis.
Expiry
Equity shares do not have an expiration date and are considered valid for as long as the equity holder owns their equity shares. Commodity shares, on the other hand, expire at a pre-determined date depending on the market and commodity in question.
Liquidity
Equity has an overall higher liquidity rate compared to other types of financial instruments. Commodities, on the other hand, have a relatively low liquidity rate when compared to equity and other financial instruments.
Time Frame
Equities are long-term contracts that are expected to last for a long time. Some people may hold onto their equity shares for literal decades, depending on the nature of the equity and the individual person. Employer-given equity tends to be one of the most held-onto types of equity out there today. Commodity contracts are short-term and may end in as little as 30 days, depending on a case by case basis. The time frame for commodities is therefore much shorter than the time frame for equity.
Period End Valuation
The period-end price difference for equity is recorded in the profit and loss account. The period-end price difference for the commodity is recorded as comprehensive income and, when the expiry date approaches, recorded in the profit and loss account.
Regulations
The market for equity is a free market and there are relatively few associated regulations compared to other types of financial instruments. The commodity market is highly supervised and regulated; it is considered one of the most strict financial instrument markets in operation today.
Margin Requirement
There is no margin requirement for equities, other than the need for equity to be purchased at market price. The commodity has a high margin market requirement that varies on a case by case basis, depending on the commodity, company and current market trends.
Diversification
The price of one equity in the equity market will correlate with the price of other equities, which means less diversification overall. The price of one commodity in the commodity market has a higher diversification risk since the prices of commodities are not related to one another.
Lot Size
There are no lot sizes for equity shares. Commodities are traded in a lot size which can vary depending on the commodity being traded.
Commodity vs equity which is safe
Choosing Equity vs. Commodity
When it comes to choosing equity versus commodity, investors have a lot of factors to consider before they can make their final decision. They will need to take into account the above-listed differences between equity and commodity in order to determine which investment option is best for them.
As a general rule of thumb, equity is much less risky and easier for beginning investors to get into than commodity trading. There are much higher risks associated with commodity trades, and since the market is so volatile it is much more difficult to maintain a stable footing, especially if the investor is new to the market and doesn’t fully understand what they are invested in.
One of the best things that new investors can do is consult with financial planners and advisers who can help them make the best decisions for their investments. Most advisors will recommend choosing equity as a starting investor, because equities have an overall lower risk and have a higher potential for profit or at least, a higher potential for no significant loss when compared to the riskier commodities.
Commodity markets do have their benefits, however, especially when it comes to risk vs. reward. Although there is a higher risk associated with commodity investments, the potential for a greater reward is there as well. Investors with more experience may want to consider choosing commodity investments as part of their overall investment portfolio, especially if they want to diversify their investments across a variety of different financial instruments.
It is possible to have both commodity and equity investments, of course; this is typically recommended only for experienced investors who understand the market and who are willing to play with riskier stakes than trading in equity alone.
Final Thoughts
Understanding the key differences between equity and commodity is essential for anyone with a serious interest in investing and the financial market. While some of the differences are small, many of them play a key role in the overall risk, reward, and profitability of these two different types of investments.
Investors should carefully consider the above differences when it comes time to make that serious financial decision regarding what financial instruments they want to play on the market. Hopefully, the above guide has helped you understand the very basics about commodity vs. equity to help you get started on the journey towards making more informed investment and other financial decisions.
