Commodity Market vs Stock Market: The Differences

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Commodity Market vs Stock Market: The Differences

Commodity Market vs Stock Market: The Differences

Summary

  • The commodity market is a marketplace where tangible goods like oil, wheat, gold, etc. are traded. These goods are called commodities.

  • There are two types of commodities: Hard commodities and Soft commodities.

  • The stock market is a marketplace where investors can buy and sell shares of publicly traded companies.

  • Both commodities and stocks are asset classes that can be bought or sold in the financial market.

Table of Contents

Introduction

The financial market is a large marketplace where diverse types of securities are traded daily. Part of those securities traded include commodities and stocks, which are part of the major asset classes available in the financial market.

The commodity market is primarily focused on trading basic items like crops or metals, whereas the stock market is more about buying and selling pieces of companies, thereby allowing individuals to become stakeholders in various enterprises.

Knowing the differences between these two markets is important as it helps investors make the right choice of the best asset to trade and know how much risk you can take.

What is a Commodity Market?

The commodity market is a marketplace where tangible goods like oil, wheat, gold, and natural resources are traded. These goods are called commodities.

History of Commodity Trading

The earliest commodity trading can be traced back to Ancient Mesopotamia between 4500 BC and 4000 BC. In this era, people traded livestock and forms of commodity money like shells – gold and silver started being traded later on.

  • Commodity markets spread across Europe as Gold and silver became popular.
  • Urbanisation made it easy to transport livestock and agricultural commodities.
  • In 1700, the first futures market was established in Japan for the trading of rice.
  • Financial futures became a tradable commodity in 1970.

Also, stock market index benchmarks like the S&P 500 and government debt instruments were added to the list of tradable futures in the 1980s and 1990s.

The early 21st century marked the creation of online trading systems, which led to heightened interest in commodities and futures.

Today, there are two types of commodities available in the commodity market:

  • Hard Commodities: These are refined or extracted goods.
    Examples include Copper, Oil, Gold, Silver, and coal.
  • Soft Commodities: These are goods that are produced through proper methods. They are mainly agricultural or livestock goods.
    Examples are corn, pork, coffee and so on.
Key Features of Commodity Market

The commodity market boasts a good number of features:

  • Price Fluctuations
  • Durability
  • Open Supply
  • Homogeneity

The commodity market operates through various channels, including futures and spot trading. Futures trading involves agreements to buy or sell commodities at predetermined prices and dates.

This provides a mechanism where price fluctuations are prevented. Spot trading involves buying and selling commodities at the prices they are currently being traded for in the market. This form of trading is done without any agreements for future transactions.

What is a Stock Market?

Also known as Equity Market, it is a marketplace where investors can buy and sell shares of publicly traded companies. The stock market gives people the ability to become a partial owner of the company (which is mostly a publicly traded company or companies).

A Quick Look at History

This marketplace dates to 13th-century Europe.

The first modern stock trading market was created in Amsterdam and Dutch East India company was the first publicly traded company.

In order for the company to increase its capital, it decided to sell stock and pay dividends of the shares to investors. In 1611, the Amsterdam Stock Exchange was created and in 1790, the Philadelphia Stock Exchange was created. After that, other stock exchanges were invented.

Today, almost every country in the world has its own stock market where public companies within those countries trade their stocks.

The most popular stock market examples are:

  • New York Stock Exchange
  • Nasdaq
  • Tokyo Stock Exchange
  • Shanghai Stock Exchange
  • Euronext Europe
Stock Trading: Main Features and How it Works

The key features of stock markets are:

  • The stock market is organised, all stock exchanges have a management committee.

  • Investors are allowed to buy securities on the stock exchange through authorised members called brokers.

  • The price of a stock can fluctuate at any time depending on its demand.

People buy a company’s shares or stock because they believe the company will perform well financially. By largely buying into a company’s stock, prices get positively affected.

However, if the company is performing poorly financially, investors might be sceptical and be quick to sell off their shares, thereby causing the prices of the stocks to drop.

Note: The fluctuations in buying and selling shape how the whole market moves.

Basically, the stock market shows how well the economy is doing and how confident investors feel about companies growing.

However, it is always important to remember that markets can be unpredictable, hence why having the required financial knowledge is crucial.

Commodity Market vs. Stock Market

Similarities

The commodity and stock market share some attributes:

  • Both commodities and stocks are asset classes that can be bought or sold in the financial market.

  • Both markets require that every investor make use of various risk management strategies while trading.

  • Commodity and stock markets experience price fluctuation due to various factors such as inflation, economic crisis, bear and bull seasons, etc.

  • For both markets, positive or negative news can change investor sentiments, affecting trading decisions.

  • Regulatory bodies manage the affairs of both markets to ensure fairness.

  • Both asset classes can be traded via futures or options contracts.
Differences

Features 

Commodity Market  

Stock Market  

Definition  

                                                                                                                                  The commodity market boasts many features, including price fluctuations, durability, open supply, and homogeneity.  
 

The stock market is a marketplace where investors can buy and sell publicly traded company shares.

Underlying Assets  

In the commodity market, tangible goods or raw materials are the assets that are being traded.  These include items like gold, crude oil, wheat, coffee, and even livestock.  

 

                                                                                                                        The primary assets that are traded in the stock include shares or equity ownership in publicly traded companies. When you buy a stock, you’re essentially buying a piece of that company. 

 
 

Ownership and Returns 

In the commodity market, you don’t own a piece of a company; you own a physical commodity or a contract. Returns come from price changes in the commodity itself. 

Investing in stocks means owning a part of a company. Returns come in the form of capital appreciation (the stock’s value increases) and dividends, a share of the company’s profits. 

Influence of Supply and Demand 

Here, prices of commodities are directly affected by supply and demand dynamics. For example, if there’s a shortage of wheat due to a poor harvest, wheat prices can rise. 

                                                        Here, prices are influenced by factors such as a company’s financial performance, management decisions, and market sentiment. Supply and demand of the company’s shares also play a role. 

Risk Factors  

                                               Commodities can be influenced by various factors like weather, geopolitical tensions, and global demand. Natural disasters, political instability, or changes in consumer preferences can impact commodity prices. 

                                                         The risk in the stock market is tied to the performance of individual companies, market sentiment, and other economic conditions. Companies can face financial troubles, and stock prices can be highly volatile. 

Market Hours  

                                                 Commodity markets often have more extended trading hours, including weekends and holidays, to accommodate global demand for these essential goods. 

The stock market has set trading hours, often during regular business days. Some stock exchanges close on weekends and holidays. 

Trading Units  

                                                                                                                      Commodity contracts usually have standardized sizes, which means you might need to trade a minimum amount of the commodity, making it less flexible for small-scale investors. 

Stocks are typically traded in lots or individual shares. You can buy as many or as few shares as you like. 

Liquidity  

                                                  Commodity markets have very little liquidity when compared to stocks, and this makes them have longer trading times. 

Stocks are liquid assets, and investors can easily trade their stocks on various stock exchanges. 

Best to Trade?

Trading either stocks or commodities depends on your risk appetite, your investment goal, and market knowledge.

Trading commodities is an excellent option for short-term investments like a few months to 5 years. However, if you’re interested in long-term investment, stock trading is much better because you can trade and own a company’s stock for as long as 10 years.

Which is riskier?

Both the commodity market and the stock market have their own risks.

  • The commodity market can have price fluctuation because of things like bad weather, political tensions, and demand for products.

  • The stock market’s risk comes from how well a company does, what people feel about the market, and when rules change.

You need to know these risks so you can make smart choices about your money and how much risk you can handle.

Where to Trade Commodities and Stocks Today?

Trading commodities and stocks has been made relatively easier thanks to BitDelta.

With a diverse range of asset classes from commodities, stocks, crypto, indices etc. BitDelta traders are able to create holistic investment decisions whilst leveraging the multiple financial markets available on the platform.

Sign up to BitDelta today to ignite your financial journey into making Every Trade Count.

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