Equity Vs Commodity: Detailed Comparison

Introduction

Where should I invest my money? Which is the best way to grow my wealth?

Like every individual, you may have often had these questions in your mind. These questions often lead you to look for different investment avenues, understand them, and eventually park your funds according to your investment goals. Two such avenues that are often talked about are equity and commodity. Both come with some unique advantages and risks.  

This blog will provide a detailed comparison between equity vs commodity markets to help you enhance your investment choices.

What is Equity?

Equity refers to ownership in a company. When you buy equity shares, you purchase a part of that company and become a shareholder. This means you have a claim on the company’s assets and profits. The value of these shares can increase if the company performs well, leading to potential capital gains for you. 

For example, if you bought shares of Reliance Industries a decade ago, you would have seen substantial growth in your investment, given the company's strong performance.

Equities can be broadly classified based on:

• Market Capitalisation: This refers to the total market value of a company's outstanding shares. For example, companies can be categorised as large-cap, mid-cap, or small-cap, depending on the size of their market capitalisation.
• Sector: This refers to the specific industry a company operates in, such as technology, healthcare, or finance.
• Stock Type: Stocks can also be classified as common stock or preferred stock. Common stock are regular shares that give you voting rights in the company and the potential for dividends. Preferred shares typically don't offer voting rights but may provide fixed dividends and have a higher claim on the company’s assets and earnings than common stock.

In India, equity shares are traded on stock exchanges like the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). You can buy and sell shares on these exchanges using your Demat account. The equity market in India operates from 9:15 AM to 3:30 PM (Indian Standard Time), Monday to Friday.

What is Commodity?

Commodities are goods that can be bought and sold. Common examples include gold, silver, crude oil, natural gas, and agricultural products like coffee, wheat, etc. When you trade commodities, you're buying and selling these raw materials.

Unlike stocks, commodities are physical items. For instance, if you trade gold, you are dealing with a real, tangible asset (something you can touch and see) with intrinsic value, meaning it has inherent worth due to its physical properties and uses.

Commodities can be broadly categorised into four groups:

Placeholder for infographic / image - make a graphic representation of below-mentioned types

1. Metals can include gold, silver, copper, etc.
2. Energy can include Crude oil, natural gas, etc.
3. Agricultural commodities can include Wheat, coffee, sugar, etc.
4. Livestock may include Cattle, pork bellies.

In India, the two main commodity exchanges are Multi Commodity Exchange (MCX) and National Commodity and Derivatives Exchange (NCDEX). The regular trading hours on both these exchanges are 10:00 AM to 11:30 PM (Indian Standard Time) from Monday to Friday.

Just like stocks, you can trade in commodities through spot and Futures & options transactions. Spot trading involves buying and selling commodities for immediate delivery, while Futures & options allow you to trade contracts that agree to buy or sell commodities at a future date and price.

Difference Between Equity and Commodity

While both equity and commodity markets offer investment opportunities, they differ significantly in their nature and operations. Here’s a quick comparison to help you understand the core differences:

Which is Better: Equity or Commodity?

Choosing between equity and commodity investments depends on your financial goals and risk appetite.

Equity investment is suitable for you if you are looking for:

• long-term growth and 
• are comfortable with market volatility

As an equity investor, you gain partial ownership of companies and can benefit from their performance and dividend payouts. Also, investing in equity is straightforward once you have a Demat and trading account. To invest in equities, you must know the basics of the stock markets and have a strategy for selecting stocks and managing your portfolio. 

Commodity investment is ideal if you are looking for:

• portfolio diversification and 
• protection against inflation/rising costs

Commodities like gold, oil, and agricultural products can provide a hedge or protection against rising costs and economic downturns. But, it is important to note that, this market is largely dominated by institutional investors and traders. 

As a retail investor, you can invest in commodities through various methods, such as:

• Buying shares in commodity-focused mutual funds
• Investing in exchange-traded funds (ETFs) that track commodity prices
• trading commodity futures & options contracts, which allow you to buy and sell commodities at a future date for a pre-decided price

If you plan to trade in commodities through futures and options, you must have a commodity trading account with a broker registered with commodity exchanges like MCX or NCDEX. It can be slightly more complex than equity trading, especially if you are new to it. You must have a deeper understanding of commodities market before starting to trade in them. 

The Serious Truth You Should Know About Equity vs Commodity

The Securities and Exchange Board of India (SEBI) has issued warnings to retail investors regarding the risks associated with heavy trading in futures and options (F&O).

SEBI's concerns are underscored by the substantial growth in the F&O segment, which saw monthly turnover surge to Rs 8,740 lakh crore in March 2024 from only Rs 217 lakh crore in March 2019. The daily turnover in F&O averaged Rs 330 lakh crore, far exceeding the Rs 1 lakh crore turnover in the equity cash segment. The regulator now plans to curb excessive speculation and potential market manipulation by implementing measures such as higher margin requirements for options contracts. 

It's crucial to note that similar risks apply to commodity markets, where the predominant investment format also revolves around futures and options.