ZuluTrade Blog

Commodities vs Stocks: 5 Differences You Should Know (2021)

Knowledge Crunch | Wednesday, August 4, 2021 3:31 PM GMT

In this blog we’ll be discussing five differences you should know about commodities and stocks. So first off, let's explain what they are. Stocks denote company ownership, while commodities represent goods that include agricultural products, metals, oil, etc. Both these asset classes reserve sizable profit-making potential. However, they are traded in different marketplaces. It is, thus, essential to grasp the differences between the stock market and commodity market before investing in either. 

Before we run down the main points in this blog, we have created a chart to explain in basic terms the main differences in stocks and commodities.

 

Characteristics

Stocks

Commodities

     

Nature of Product



Financial instruments that represent ownership in a company

Undifferentiated goods required for consumption and manufacturing of finished goods

Ownership

You are buying an ownership stake in the company

You don't buy an ownership stake or the Commodity

Purpose



To build wealth through long term capital appreciation and dividend income

To hedge against price fluctuation or benefit from price swings in the market

Trading hours



Stocks trade for limited hours such as NSE 9:15 am to 3:30 pm

Trading happens for long hours such as the MCX: 9:30 am to 6:30 pm

Duration



Can be held for posterity till the company is listed on the exchange

Traded for a shorter duration






Table of Contents

 

Difference #1: Nature of Product

Difference #2: Ownership

Difference #3: Duration

Difference #4: Trading Hours

Difference #5: Fundamental Drivers







#1: Nature of Product

Stocks trade on stock exchanges such as the New York Stock Exchange and trading platforms such as NASDAQ and the various other over-the-counter, or OTC, platforms. Each stock represents fractional share ownership in its issuing company. The value of one’s holding continually changes with alterations in the company’s equity, brought about by factors, both external and internal. A person can sell his/her stocks on the day they are bought, one year from the day, or even ten years from that day, depending on his/her investment objectives.

If you’d like to know more, we’ve covered the topic of the nature of stock trading in a previous blog post

On the other hand, Commodity markets enable the selling, buying, and trading of these products. One of the points in commodity vs stock is the trading process. Most traders enter into a futures contract to trade in commodities. These contracts obligate two parties to execute a transaction at a predetermined price on a prefixed date. Farmers or manufacturers for example often leverage futures contracts to hedge against potential losses. However, these also act as an exceptional instrument to realise a profit.

Certain commodities, such as precious metals, have been thought of to be a good hedge against inflation, and a broad set of commodities as an alternative asset class can help diversify a portfolio. Because the prices of commodities tend to move in opposition to stocks, some investors also rely on commodities during periods of market volatility. 

In the past, commodities trading required significant amounts of time, money, and expertise, and was primarily limited to professional traders. Today, there are more options for participating in the commodity markets.

Now let’s look at the relationship between the ownership of the financial instrument and the investor. When ownership is concerned, the relationships vary by a large margin between a stock and a commodity.

 

#2: Ownership

Owning stock gives you a portion of ownership within a company. It may give you the right to vote in shareholder meetings, receive dividends (which are the company’s profits) if and when they are distributed, and gives you the right to sell your shares to somebody else. What shareholders own are shares issued by the corporation, and the corporation owns the assets held by a firm.

The more shares you own, the larger the portion of the profits you get. Many stocks, however, do not pay out dividends and instead reinvest profits back into growing the company. These retained earnings, however, are still reflected in the value of a stock.

On the other hand, Most commodity traders do not take physical ownership of the goods. Commodity speculators or traders take a financial position (long or short) on a commodity. As previously said, traders enter into a futures contract to trade in commodities. These contracts obligate two parties to execute a transaction at a predetermined price on a prefixed date.

Both novice and experienced traders have a variety of different options for investing in financial instruments that give them access to the commodity markets. While commodity futures contracts provide the most direct way to participate in the price movements of the industry, there are additional types of investments with less risk that also provide sufficient opportunities for commodities exposure.

So how long should you hold a stock or a commodity? This next section will hopefully make this clearer for you.




#3: Duration

An important question that many traders and market investors ask themselves is, “How long should I hold on to my asset?“.

The best rewards on a stock are typically with a long hold time.  It takes time for good profits to develop, and they certainly do not happen overnight, unless you are fortunate. You should sell a stock when you stop believing it will make a profit for you, or if you believe it has reached its maximum profit potential. Perhaps you are making a loss on the trade, the stock price is in a severe downtrend, or it is receiving a lot of negative coverage from institutional stock analysts. 

A good reason to sell a stock is if the business fundamentals have changed since you made the initial investment, such as newer, better industry-disrupting products from competitors, or simply a significant drop in sales or profits.

Compared to stocks, commodities tend to be a short-term investment, especially if you enter a futures contract with a set deadline. This is in contrast to stocks and other market assets where buying and holding assets long term is more common. In addition, you have more time to make trades with commodities because markets are open nearly 24/7. With stocks, you primarily make trades during normal business hours, when the stock exchanges are open. You may have limited early access through premarket futures, but most stock trading occurs during normal business hours. 

Before making any trades, you need to carefully understand the commodity price charts and other forms of research. If you do invest in commodities, Make sure that it’s only a portion of your total portfolio. Now let’s look at the trading hours.




#4: Trading hours

Depending on the type of stock and the country they’re based in, stock market trading hours vary from the exchanges that the stocks are based in. There are also "after-hours" sessions, which typically span from 4 to 8 p.m EST. These trades are performed on "electronic communications networks," or ECNs, and directly pair buyers and sellers rather than using a middleman.

 

For example, the regular trading hours for the U.S. stock market, including the New York Stock Exchange (NYSE) and the Nasdaq Stock Market (NASDAQ), are 9:30 a.m. to 4 p.m. As for the weekends: There are no regular trading hours for stocks on Saturdays or Sundays. 

You can find out more about Stock Market Trading Hours in our other blog post here.

On the other hand, The huge range of commodity markets available on exchanges all over the world means that active commodity traders can find opportunities nearly 24 hours a day, five days a week. Depending on which market you choose, most close from Friday evening to Sunday. Unlike stock market trading hours, there are no global sessions to watch out for. Instead, commodity hours are generally split up by asset type and the commodity exchange in question. Here we have a couple of examples:

  • West Texas Intermediate Crude Oil: During the traditional pit trading hours of 9:00 am to 2:30 am EST WTI crude exhibits high trading volumes.
  • Agricultural Futures: Any release of the World Agricultural Supply and Demand Estimates (WASDE) report will have an influence on trading volume on agricultural markets – such as corn, wheat and soybeans – which will impact prices 
  • Gold: There’s usually greater volatility around the London session open at 8 am (GMT), and Wall Street opens at (1:30 pm GMT). 

So now that we’ve gone through nature, ownership, duration and hours to trade let’s look at the drive of these two financial instruments.

 

#5: Fundamental Drivers

Stock prices change every day by market forces. By this, we mean that share prices change because of supply and demand. More people want to buy a stock (demand) than sell it (supply), then the price moves up. Conversely, if more people wanted to sell a stock than buy it, there would be greater supply than demand, and the price would fall. 

Stock prices are also largely driven by the company's earnings, so this is a big difference to a commodity. Earnings essentially refer to the profitability of its business activities. Earnings are normally reported every quarter and provide essential information about how a company’s business is doing. A company with strong earnings provides proof that its business activities are profitable. 

As mentioned before, commodities are largely driven by supply and demand factors too but it is different to stocks. For example, large-scale infrastructure developments might increase the demand for copper, leading to its price rising or agricultural products, seasonality can affect the market heavily, meaning price rises or falls at a certain time of year. 

Oil prices can be influenced by factors such as political events, burgeoning industrial output and uptake of alternative fuels. Commodities are affected by uncertainties that are difficult, if not impossible, to predict, such as unusual weather patterns, epidemics, and disasters both natural and human-made. These types of fundamental drivers are all important for commodity traders to consider, so knowledge of how each market responds to each factor is key. 




Now Over to You

 

Those are the differences between stocks and commodities. Both are very different and vary from one another when investing. Start looking at what we’ve mentioned in this blog and have a go at investing in a stock or a commodity yourself. Why not try what you’ve learnt from this blog and head over to ZuluTrade. We have Traders that you can follow that invest in both and you may learn much more by copy trading.

We hope you enjoyed this edition of the knowledge crunch blog just as much as we enjoy writing them! Stay tuned for more and be sure to check out our other helpful blogs with advice and tips to reach your investment goals with ZuluTrade. 

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Disclaimer: The views expressed do not constitute investment or any other advice/recommendation/suggestion and are subject to change. Reliance upon information in this material is at the sole discretion of the reader. Opinions expressed in this article do not represent the opinion of ZuluTrade Social Trading Platform and do not constitute an offer or invitation to anyone to invest or trade. Every metric and the statistical number is a result of a past performance which does not constitute a promise or a certainty for a future one.

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