Commodity trading is buying and selling physical commodities such as metals or oil whereas Equity trading is buying and selling of equities (company shares or stocks) on the financial market.
- Commodity Market
A commodity market is a market that trades raw materials in the primary economic sector rather than manufactured products, such as vehicles, computers and sugar.
Hard commodities are mined, such as gold and oil. Futures contracts are the oldest way of investing in commodities.
- Equity Market
Equity market, often called as stock market or share market, is a place where shares of companies or entities are traded. The market allows sellers and buyers to deal in equity or shares in the same platform. (That is, through a stock exchange or over the counter).
Most equity trading refers to the buying and selling of public company shares through a stock exchange or as over-the-counter products.
Trading equities in the market is executed through a registered trading account.
How To Start Trading Equities and Commodities
To trade equities, you need a and a trading account.The equity trading takes place in the trading account but the shares are held in the Demat account. Transfer of shares from one Demat account to another Demat account does not qualify as stock trading as it does not go through the market mechanism.
Likewise, you also need a demat account for trading in commodities. Demat account functions like a bank account except that in this case, your holdings are the commodity futures or options position in the market.
Factors to consider when choosing between Equity and Commodity market
- Many factors impact both the equity and commodity markets. For example, interest rates, change in interest rates impacts rate-sensitive stocks along with the whole stock market. Commodity prices are also affected by interest rates, which fairly changes the holding cost of the inventory.
- However, there are a few factors where they differ. In equity trading, the traders concern are quarterly data, dividends paid by the company, and general macroeconomic conditions of the country. Whereas commodity traders focus more on the demand and supply scenario than other elements to get an idea about the market sentiment.
- Investors can evaluate their risk appetite and then choose between commodity and equities markets. In the equity market, traders buy equities and hold it for a long time, which is not preferable in commodity trading. So, your decision is mostly determined by your risk tolerance.
- Long-term financial objectives are better served by equity investments, but short-term objectives are best suited with commodity trading. In a nutshell, an investor must know the basic difference between equities and commodities in terms of ownership and holding period of the instruments.
Having a sufficient understanding of both financial markets helps in making the right decision.