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Commodity vs Equity

Updated on April 19, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

Difference Between Commodity and Equity

The key difference between commodities and equity is that commodities are the undifferentiated product in which the investors invest. As a result, the commodity contracts have a fixed date of expiry. In contrast, equity refers to the capital invested by the investors to acquire the company’s ownership, and the contracts in the equity have no date of expiry.

Both are asset classesAsset ClassesAssets are classified into various classes based on their type, purpose, or the basis of return or markets. Fixed assets, equity (equity investments, equity-linked savings schemes), real estate, commodities (gold, silver, bronze), cash and cash equivalents, derivatives (equity, bonds, debt), and alternative investments such as hedge funds and bitcoins are examples.read more that investors trade worldwide to generate profits or get a better return on investments. However, the difference lies in how they are bought or sold primarily because of their inherent properties.

What is a Commodity?

The commodityCommodityCommodity derivatives refer to those financial instruments that use the price or price volatility of the underlying commodities as the base for change in their price to amplify, hedge, or invert, in a way that the investors can track these underlying assets' performance. It includes commodity futures and commodity swaps.read more is not traded like physical holdings but is based on contracts for a particular duration of time. These contracts have defined standards like future price, time duration, and quantity. An important point to note is that these trading positions are contracts valid only for a particular period. Beyond which, they expire and are worthless.

For example, Gold futures 1-month contract trading at $ 100 will expire one month from now. Assuming the expiry date is the 1st of next month, beyond this date, all open positions in the contract will close, and it will cease to exist from the 2nd when a new contract for the next month starts trading on the exchange.

Commodity vs Equity

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What is Equity?

Equity is more like an investment where an investor is more interested in the long-term horizon than the day-to-day movements in the short term, hence looking for much better and less volatile returns. An equity holder is like an owner of the firm who has voting rights, share in profits, and also gains due to stock appreciation during the holding period. Equity investments are mainly listed firms like Infosys, TCS, Tata Motors, etc.

On the other hand, commodity trading can be on any commodity like consumption – gold, wheat, sugar, or non-consumption based like weather contracts. Irrespective of the type of commodity, the trade mechanism is the same – through standard contracts valid for a particular duration that ceases to exist after the expiry date.

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Commodity vs. Equity Infographics

Commodity vs. Equity Infographics

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Key Differences Between Commodity and Equity

The key differences are as follows –

#1 – Nature of Product

#2 – Mechanism of Trade

Comparative Table

BasisCommodityEquity 
Nature of ProductCommodity refers to a basic and undifferentiated product on which traders can invest or take positions.Equity refers to an investment or some form of capital that is invested into a firm or a listed entity to acquire ownership and share in profits.
UsefulnessThese are short term trades used mainly for hedgingHedgingHedging is a type of investment that works like insurance and protects you from any financial losses. Hedging is achieved by taking the opposing position in the market.read more to limit losses or making quick profits based on speculative bets.These are mainly long term investments for gaining ownership and profit share for an emerging or growing business for long term sustenance.
Mechanism of trade These are traded on commodity exchanges mainly through futures and options contracts.These are traded on stock exchanges through various means like forwards and options contracts but mainly through delivery.
TimeCommodities are mainly traded through contracts. These contracts are priced based on future prices for a particular duration of time beyond which they expire and are worthless.Equity remains listed on stock exchangesStock ExchangesStock exchange refers to a market that facilitates the buying and selling of listed securities such as public company stocks, exchange-traded funds, debt instruments, options, etc., as per the standard regulations and guidelines—for instance, NYSE and NASDAQ.read moreStock exchange refers to a market that facilitates the buying and selling of listed securities such as public company stocks, exchange-traded funds, debt instruments, options, etc., as per the standard regulations and guidelines—for instance, NYSE and NASDAQ.read moreStock exchange refers to a market that facilitates the buying and selling of listed securities such as public company stocks, exchange-traded funds, debt instruments, options, etc., as per the standard regulations and guidelines—for instance, NYSE and NASDAQ.read more for a long duration. The respective companies might go through economic cycles of expansion or recession, but their stocks might continue to list on the exchange.
Examples Sugar, wheat, gold, silver, cotton, weather contractsListed firms like Infosys, Reliance, etc.;

Conclusion

Both commodity and equity are different mechanisms by which investors are looking to generate profits and good returns on their investments. However, these asset classes differ in the mechanism they are traded. Since commodity contracts only allow one to take positions and do not grant any ownership in the underlying, they are mainly used by traders or speculatorsSpeculatorsA speculator is an individual or financial institution that places short-term bets on securities based on speculations. For example, rather than focusing on the long-term growth prospects of a particular company, they would take calculated risks on a stock with the potential of yielding a higher return.read more to make quick profits.

Equity, on the other hand, provides ownership without any time-bound contract or liability and is popular among long-term investors. It is perhaps the most popular asset class with stable, less volatile, and better returns for investors across the globe.

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