Sharekhan Blog

What is the Difference Between an Equity vs Commodity?

  • Mar 11, 2024

Commodities and stocks are the most widely used assets that many investors use as investing vehicles these days. Depending on their goal for portfolio diversity, gold, oil, or any other raw material product may be the most desirable commodity for each investor today. So, let’s explore the difference between equity and commodity.

What are Equity and Commodity?

If you are a shareholder with a stake in any particular corporation, you can understand what equity means. The amount that shareholders receive in total after all liabilities are subtracted from the entire assets of the business is its equity. Conversely, any product that serves as a raw material for a final product is referred to as a commodity. Gold, agricultural products, and crude and refined oil are examples of commodities.

These are bought and sold in large numbers; take cotton as an example. Both with regard to commodities and stocks, we say that the stock markets are "open" when we trade in stocks and the markets are open. When commodity exchanges are available for trading, we refer to the commodity market in the context of commodities.

What is the Difference Between Equity Commodity?


Aspect

Equity

Commodity

Definition

Ownership in a company represented by shares

Raw materials or primary agricultural products

Market

Stock market

Commodity market

Examples

Stocks, mutual funds, ETFs

Gold, silver, crude oil, agricultural products

Risk

Market risk, company-specific risk

Market risk, geopolitical risk

Returns

Dividends, capital appreciation

Price appreciation, dividends (for some)

Influence on Economy

Reflects economic health, investor sentiment

Influenced by supply and demand dynamics

Trading Hours

Typically limited to market hours

24-hour trading (varies by commodity)

Regulation

Regulated by securities authorities

Regulated by commodity exchanges

Investment Purpose

Long-term growth, income generation

Portfolio diversification, hedging against inflation


Key Differences between Commodity vs Equity

1.    Possession and Authority

Ownership in a corporation is provided by equity, giving shareholders a voice in its decisions. They are entitled to vote on significant issues, take part in shareholder meetings, and get dividends if the business is profitable. Conversely, investors in commodities lack physical assets and have little influence over the direction of the market.

2.    Potential Returns

Investments in commodities and stocks have different potential returns. When it comes to equity, investors may profit from dividends or from selling their shares for more money than they were originally purchased. But, in the event that the business performs poorly, there is also a chance of financial loss. Conversely, commodities have a higher degree of volatility and risk, but in the right market circumstances, they can yield substantial gains quickly.

3.    Liquidity

Generally speaking, equity investments are more liquid than commodities. This indicates that, in contrast to commodities, it is simpler to purchase or sell corporate shares. Investors in commodities may have to wait for buyers or sellers, which could cause transactions to be delayed and reduce their profits.

Which Investment Is Better For You?

For this, you have to consider various factors. They are: -

1.    Consider Your Risk Tolerance

When deciding between commodities and stocks, the first thing to think about is your risk tolerance. If you're a risk adverse person who values stability, equity might be a better fit. Conversely, investments in commodities can be more appropriate if you can handle volatility and have a larger risk tolerance.

2.    Time Horizon

Your investment time horizon is another important consideration. Equity investments may be a suitable option if you have a long-term objective, such as retirement planning. Commodities can be a superior option, though, if your financial objectives are short-term and you seek rapid profits.

3.    Diversification

Adding equities and commodities to your portfolio might aid in portfolio diversification. This implies that in the event that one market underperforms, the other can provide higher returns, so lowering risk overall. Having a diverse and well-balanced investing portfolio is essential.

The Bottom Line

In conclusion, there are differences between investing in commodities and stock in terms of liquidity, possible returns, and ownership. Compared to commodities, equity is more liquid and provides ownership in a company as well as prospective dividends. Commodities, on the other hand, are less liquid and can yield large rewards at greater risk.

Which is preferable for you will rely on your investing objectives, level of risk tolerance, and approach to portfolio diversification. Ultimately, before making any investment decisions, it is crucial to investigate and comprehend both options thoroughly. If necessary, you should also seek the advice of a financial expert.

Team Sharekhan
by Team Sharekhan

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