Difference Between Equity and Commodity Trading

What is the Difference Between Equity and Commodity Trading

There are two market participants: investors and traders. Investors buy securities for the long term to build wealth. While traders try to make the best of short-term fluctuations in the securities prices. Investors primarily relate themselves to Equities, with occasional forays into hard assets like real estate, traders have more options.

The two popular asset classes are equity and commodities. Both asset classes are widely tracked and traded in large quantities.

Difference Between Equity Trading vs Commodity Trading

However, they are fundamentally different. Remember that trading is essentially a zero-sum game; your loss is someone else’s gain and vice versa. Following are the main differences and similarities between Equity and Commodities Market:

Equity Trading

It refers to buying and selling shares of listed companies and derivatives futures and options. Traders guess which way the prices of shares will move and buy or sell accordingly to take advantage of the movement.

In the long term, prices fluctuate mainly because of how the underlying businesses perform. In the short term, market conditions, executive exits, order wins, or any other news flow impacts share prices.

There are two ways to trade equities: directly buying or selling and betting on derivatives. Both can either be Intraday strategies or for multiple days.

Trading in derivatives is entirely cash-settled in India, but direct selling and buying could be delivery trades if a multiple-day strategy.

Cash settlement means you need not take delivery of shares compared to delivery of settled trades.

For example, if you buy futures, a type of Equity derivative bets on the underlying price of Reliance Industries at Rs. 2,000 today with the hope that it will be worth Rs. 2,200 in two weeks.

If the price moves as expected, after you sell it after two weeks, you get Rs 200. There is no actual buying or selling of shares; you only get the difference.

There is another concept in trading called short selling. This strategy takes advantage of the potential fall in share prices.

This involves selling shares at a high price and buying them later at a low cost, with the difference between selling and buying price being your profit.

Commodity Trading

Commodities refer to the primary raw materials that industries process to build finished goods. It can be agricultural goods like cotton, and wheat, energy commodities like crude oil, industrial metals like steel, and aluminum, or bullion like gold. Commodity Investment refers to buying or selling derivative products based on such commodities.

In India, commodities get traded on exchanges like MCX, NCDEX, etc. There are two products: Futures & Options that traders use to take ‘positions’. Unlike Equities, most are delivery settled.

That means, if you buy Gold Futures Contracts intending to benefit from a price rise but did not sell them before it expired, you must take physical delivery of gold. However, some brokers may not allow such trades where you want to take physical delivery.

Commodity prices are determined based on actual movement in market prices that are influenced by demand and supply dynamics. The supply or demand is further affected by geopolitical issues, wars, natural disasters, health epidemics, or navigation blockades. Some of these factors move commodity prices to an extreme length.

For instance, in April 2020, when the world suddenly went under lockdown, Crude Oil Futures prices turned negative, meaning sellers were willing to pay buyers to take oil from them!

Hence, the Commodities Market can be riskier than Equities but more rewarding if you bet on the commodities you understand, and your calculations prove correct.

See More: 10 Best Investment Ideas for Millennials

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