Commodity vs 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 classes 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.

The commodity 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.

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.

The key differences are as follows –

#1 - Nature of Product

• Commodity refers to a basic and undifferentiated product like corn, potato, and sugar. They were introduced mainly for hedging and limiting losses from unexpected market movements due to unavoidable and unforeseen circumstances. For example, consider the case of a farmer who has cornfields. He expects his product (corn) to be ready for sale in three months. For our understanding, let's assume the price of corn for a 3-month futures contract is trading at 500 per unit, and the current spot price is 400 per unit. The farmer can hedge its position using a 3-month futures contract and avoid any uncertainty arising because of any change in the demand-supply equilibrium like a reduction in demand due to slowing growth or an increase in supply due to less production, which might eventually affect the selling price. Hence, a commodity contract helps producers limit any downside risk arising because of any unavoidable circumstances.
• Equity, on the other hand, is ownership of a listed firm or a business. An investor might be influenced by a company's growth and earning potential. He can invest in the firm by buying some equity (per risk appetite), which will allow him to claim a share in the profits. Unlike commodity trading, there are no contracts. An investor can continue to hold the equity for as long as he wants to be provided; the company is still listed on stock exchanges. For example, an equity investor holding Infosys shares can continue to hold them if the company is solvent and is listed on stock exchanges. During this period, the investor has voting rights and claim to share in profits in the form of dividends.

#2 - Mechanism of Trade

• Equity and commodity differ a lot in the mechanism of their trades. Commodity one can trade by taking positions on the short side or going long through futures in the listed exchange and forwards in the OTC market. These contracts will be traded on a day to day basis, and hence the price will be dynamic based on the available information.
• On the other hand, equity is like an investment for longer periods. Here the investors are more interested in the stable returns not bounded by a time horizon, and hence there is no concept of the expiry date. Investors invest their money in equity by buying stocks and taking delivery. However, they can hedge their delivery positions through options and futures to weather short periods of high volatility.

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 speculators 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.

This has been a guide to Commodity vs. Equity. Here we discuss the top differences between commodity and equity, infographics, and a comparison table. You may also have a look at the following articles –

• Examples of Derivatives
• Liability vs Debt - Differences
• Equity vs Fixed Income
• Equity and Shares