Investing is a very important aspect of financial planning, and understanding the various types of investments is definitely essential for making informed decisions. Two major categories of investments are equity and commodities, each with its own characteristics, risks, and potential returns.
In this article, we will delve into the key differences between equity and commodity investments to help investors navigate the diverse landscape of financial markets. Equity refers to a shareholder’s ownership in the company whereas commodity refers to the raw materials such as cotton that can be bought and sold in quantity.
Equity is the ownership or value of shares issued by a company. It is the amount that a shareholder will receive after deducting the liabilities from the company’s total assets.
Equity holders are considered as owners of that company. Holder of the equity instrument is termed as Shareholder. Equity holders are owners, hence they are eligible for dividend as a return.
- Equity Shares
Equity shares are traded on BSE, NSE, etc. They have no expiry date. The shares have comparatively better liquidity. Equity shares contracts are, generally, long term. Period end price difference will be recorded in the profit and loss account.
- Equity Market
The Equity market is comparatively less volatile. Thus, equity trading is comparatively less risky. Equity market is free market. Hence, comparatively less regulations are there. An equity instrument does not require margin. Only needed to be bought at market price.
In equity, market price of one equity instrument has correlation with price of other equity instruments. Equity shares do not have lot size.
Commodity is a raw material or primary agricultural product that can be bought and sold, such as copper or coffee. Basically, it is a good used in commerce that is interchangeable with other goods of the same type.
The holder of a commodity instrument is termed as Option trader.
Commodity instrument holder does not enjoy the privillege of company ownership. Also, they are not eligible for dividend as a return.
- Commodity Instruments
Commodities getting listed and traded on MCX, NCDEX and MCE, etc. Commodity instruments do expire at the end of the month. In India, such instruments get expired on the last Thursday of every month. The commodity instruments have comparatively low liquidity.
Commodity instruments’ contracts are for shorter period to take the advantage of price differences.
Period end price difference is recorded in other comprehensive income, and on expiry it is recorded in the profit and loss account.
- Commodity Market
Commodity market is derivative market and, hence, it is highly supervised Market under SEBI. It requires high margin which varies based on the nature of instrument. Commodity market is highly volatile. Thus, commodity trading can be highly risky.
Moreover, in the commodity market, your risk is diversified. Price of commodity has nothing to do with the price of other. Commodity instruments get traded in the lot size.