Is Commodity Trading Profitable If Compared to Equity?
While there are various financial instruments in the market, every trader has different goals, which means different trading options are compatible with different financial goals. Two of the most commonly sought trading methods are commodity trading and equity trading.
As a trader, if you are debating which of these trading options is right for you, this blog is for you. Keep reading to find out what differentiates commodity trading from equity trading and whether it is actually more profitable or not.
Contents
What is Commodity Trading?
Commodity trading involves the purchase and sale of commodities as well as their derivatives in the markets. Commodities are any raw materials that are required for the production of finished goods, and they can further be divided into:
- Hard commodities: These are extracted or mined from the land, and examples include gold, copper, rubber, etc.
- Soft commodities: These are raw materials such as wheat, cocoa, and agricultural products that are grown or cultivated.
These commodities can either be traded in spot markets, where physical deliveries of goods are obtained. In the derivative markets, where you can buy and sell contracts to make profits.
What is Equity Trading?
Equity trading usually involves buying and selling equity stocks of companies in the share markets. When you purchase stocks of a certain company in the share market, you own a piece of that company.
Equity trading helps companies generate funding and capital while it helps investors grow and prosper through stock growth and profits.
You can trade equity stocks on exchanges and make a profit based on the difference between entry and exit points.
Also Read: The Secrets of Cryptocurrency Trading: Essential Tips for Beginners
Commodity Trading vs Equity: Key Differences
| Characteristics | Commodity Trading | Equity Trading |
| Nature of the financial instrument | These are undifferentiated raw materials required for the production of finished goods. | These represent an investor’s ownership in the company. |
| Trading Hours | 9 AM to 11.30 PM | Normal session from 9.15 AM to 3.30 PM |
| Margin Requirements | Margin requirements are lower. | Margin requirements are higher. |
| Volatility | Commodity markets are highly volatile. | The volatility in equity markets is comparatively lower than in commodity markets. |
| Dividends | No dividends are obtained on commodities. | A part of company profits may be declared as dividends. |
| Pricing Mechanism | Pricing is determined by demand and supply forces, weather conditions, geopolitical factors, etc | Pricing is determined by investors’ sentiments, company financial performance, sales, etc. |
Is Commodity Trading Better than Equity?
Before determining which of these is more profitable. It is important to remember that commodity trading and equity trading meet different financial goals.
Commodity markets are based on futures and options contracts with an expiry date, while equity stocks can be traded for perpetuity. Hence, commodity trading is a great option for generating profits in the short run. However, if you are looking for long-term, equity markets should be your pick.
Additionally, another important aspect you need to consider is your risk tolerance. If you are risk averse, commodity markets may not be the right option. However, if you have a high-risk tolerance, you can carefully enter market positions and have a better chance of obtaining higher returns.
Lastly, the margin requirements are lower for commodity trading. Therefore, you may have a better chance of getting a higher rate of returns on your investment. However, if the market moves in the opposite direction, your losses would be significant as well.
Equity markets are relatively less volatile and offer stock options with varying risk levels. Hence, you can pick the one that fits your risk profile.
Conclusion
The decision of whether you should go for the equity or commodity market completely depends on your financial goals and risk tolerance levels. If you conduct careful analysis and maintain a diverse portfolio, you can always minimize risk and get better returns.
Always keep in mind that research is the most crucial step whether you want to enter commodity trading or equity trading. If you are looking for a trading platform to trade various securities, consider opening an account with Dhan.
