Table of contents
- What are equity investments?
- Characteristics of equity investments
- Advantages of equity investments
- Drawbacks of equity investments
- What are commodity investments?
- Characteristics of commodity investments
- Advantages of commodity investments
- Drawbacks of commodity investments
- What are commodity and equity differences?
- Bottomline
- FAQs
Investing is crucial in growing your wealth and ensuring your financial future is safe and sound. When you think about investing, there are different types of things you can invest in, and two of the big ones are stocks and commodities.
In this blog, we will delve into the key differences between equity vs commodity investments, exploring each of their characteristics, advantages, and drawbacks, to help you make informed decisions in your investment journey.
What are equity investments?
When you buy shares of a company’s stock, you become an owner of the company. Equity also known as shares or stock are traded on stock exchanges like the NSE or BSE, where the prices change based on demand and supply of that share.
Characteristics of equity investments
- Ownership
When you invest in equities, you buy a piece of the company. Your ownership stake can give rights, such as voting at shareholder meetings and receiving dividends (a portion of the company’s profits).
- Volatility
Equities can be highly volatile, with their prices influenced by factors like economic conditions, company performance, and market sentiment. Volatility leads to both heavy gains and losses.
- Long-term growth
Throughout history, equities have consistently showcased the ability to appreciate over extended periods. Numerous investors choose to retain their stock holdings for many years, and sometimes even decades, enabling their investments to steadily increase in worth over time.
Advantages of equity investments
- Equities possess the capacity to yield substantial returns over extended periods, surpassing the impact of inflation and outperforming various other asset categories.
- Stocks typically exhibit high liquidity, enabling investors to readily purchase or sell them on the stock market, granting them a degree of flexibility in their investment strategy.
- Numerous corporations allocate a share of their earnings as dividends to their shareholders, offering investors a consistent source of income.
Drawbacks of equity investments
- The volatility that leads to high profits can also result in higher losses. Stock prices are heavily influenced by speculation and big trades made by institutions.
- Shareholders have low or zero control over a company’s operations and decision-making.
What are commodity investments?
Commodity investments involve buying and holding physical goods or investing in financial instruments linked to the prices of commodities. Commodities are categorised into two groups: hard commodities (tangible goods like gold, oil, and agricultural products) and soft commodities (coffee, sugar, and cotton to name a few).
Characteristics of commodity investments
- Tangibility
A key characteristic of commodity investments lies in its association with tangible assets. To illustrate, when you invest in gold, you possess actual physical gold bullion.
- Price sensitivity
Weather conditions and geopolitical tensions affect the prices of commodities.
- Diversification
Incorporating commodities into an investment portfolio is a strategy for achieving diversification. Frequently, these assets exhibit low correlation with conventional investment categories such as equities and fixed-income securities. This lack of correlation suggests that commodities can potentially serve as a protective measure against fluctuations in the stock market.
Advantages of commodity investments
- Including commodities in your portfolio can help reduce risk through diversification, especially during times of economic uncertainty.
- Commodities serve as a hedge against inflation.
- Investing in assets like gold or real estate can provide security and ownership.
Drawbacks of commodity investments
- Commodities cannot provide income from dividends. Investors rely on price movements to gain from commodity investments.
- Investing in physical commodities may involve storage costs, especially for items like gold or oil. These costs can eat into your returns.
What are commodity and equity differences?
| Basis | Commodity | Equity |
| Trading hours | They remain open from 9:30 am to 6:30 pm | They operate between 9:30 am to 3:30 pm |
Purpose of investment | Ideal for short-term trading, aims to minimise losses and capitalise on profits. | Focused on long-term to acquire ownership in companies and gain capital appreciation and steady returns through dividends. |
Expiry of instruments | Commodities are primarily exchanged through derivative contractual agreements whose value becomes zero after the expiration date. | Equity remains listed on stock exchanges for extended periods. The companies experience economic cycles of growth and downturns. Their stocks typically remain listed on the exchange throughout these fluctuations. |
| Trading instruments | Derivative contracts like futures, options and forward contracts | Derivative contracts or through stock delivery |
| Examples | Sugar, corn, wheat, minerals, gold, silver | Shares of companies like Reliance Ltd, and HDFC Bank Ltd |
Bottomline
In conclusion, the choice between equity and commodity investments depends on factors like your goals, risk tolerance, and time horizon. Equity offers ownership, growth potential, and dividends but comes with stock market volatility. Commodities, like gold and oil, provide diversification and inflation protection but are sensitive to price fluctuations.
FAQs
Equity investments are risky, but trading in commodities is riskier. Commodities are subject to high volatility, making them risky. So, commodities might suit better for investors who are willing to take high risks. Equities are more suitable for those looking at long-term investment options.
India has six major commodity exchanges – Multi Commodity Exchange (MCX), National Commodity and Derivatives Exchange (NCDEX), Indian Commodity Exchange (ICEX), National Multi Commodity Exchange (NMCE), ACE Derivatives Exchange (ACE) and Universal Commodity Exchange(UCX).
Besides, NSE and BSE also allow trading in commodities.
Commodities are majorly traded in derivative instruments. Not just futures but commodities also use forwards, swaps, options and more. Most investors use such derivative contracts to speculate the prices and make profits, rather than taking the actual delivery of commodities.
To trade in commodities, one must open an account with a commodity broker. The broker must be registered with one of the commodity exchanges in India.
Yes, intraday trading is allowed for commodities. Traders actively involve in intraday trading of commodities. Intraday trading happens during the regular trading hours on the commodities exchange.