Traders have numerous choices when it comes to investing. Two of the most common markets are commodity trading and stock trading. They both have the opportunity for returns, however, they each have different principles, risks, and rewards. It is important to understand these differences when trying to meet your financial aspirations and risk appetite.
What is Commodity Trading?
Commodity trading is the buying and selling of physical goods and derivative contracts that cover raw materials like gold, oil, natural gas, agricultural products, and metals. They are usually traded on specialised exchanges like the Chicago Mercantile Exchange (CME), The London Metal Exchange (LME), and The Multi Commodity Exchange (MCX).
Key Features of Commodity Trading
Some key features of commodity trading include tangible assets, futures contracts and many more:
Underlying Asset Commodities
These are tangible assets with intrinsic value, meaning they have inherent worth due to their physical nature and utility. Gold, silver, oil, and wheat are examples of commodities that have demand and prices value that directly applies to the global market.
Futures Contract
Traders use futures contracts to purchase an asset at a set value for a future date. Most commodity trading occurs via futures contracts.
Market Influence
Global trade, weather conditions, and geopolitical events all impact the prices, along with supply and demand.
Leverage
With leverage, traders are able to control great positions with a small initial investment, which increases both potential gains and risks of the position.
What is Stock Trading?
Stock trading is the process of buying and selling shares in publicly traded companies. These shares are representations of the company’s ownership and are bought and sold in stock markets like the New York Stock Exchange (NYSE) and the Nasdaq Composite.
Key Features of The Stock Exchange
The stock exchange has multiple key features including ownership stakes, dividends and the behaviour of stock prices:
Ownership Stake
Ownership stakes are when a company issues stocks, it gives investor’s partial ownership in the company’s business.
Dividends and Growth
There is also the possibility of earning through growth in capital and payments of dividends by investors.
Market Influences
The behaviour of stock prices changes due to the performance of a company, earnings, economic statistics, and general investor trends and attitudes.
Major Differences Between Commodity and Stock Trading
Here we have outlined the main differences between commodity and stock trading, from different asset types; physical or equity ownership and regulatory requirements for each:
Asset Type
Commodity trading is done on physical goods (gold, oil, etc.), while stock trading is on equity ownership in companies.
Market Volatility
Commodity trading is a highly volatile market due to external factors, while the market volatility of stock trading is moderate, and driven by corporate performance.
Leverage
Commodity trading has high leverage opportunities while stock trading has lower leverage compared to commodities.
Investment Horizon
For commodity trading, the investment horizon is short-term (due to futures contracts), while it can be short-term or long-term for stock trading.
Regulations
Commodity trading is regulated by commodity exchanges, while stock trading is regulated by stock exchanges and SEC.
How to Choose The Right Career For You
The decision to pursue a career in commodity trading versus stock trading comes down to a number of factors, such as an individual’s abilities, preferences, and willingness to take risks. Here are a few important aspects:
Risk Tolerance
People who enjoy working in fast-paced, high-risk settings might find commodity trading best suited to them. On the hand, if a person prefers an equal blend of risk and stability, they will suit stock trading better.
Market Interest
People captivated by current international economic movements and political activities as well as natural resources will prefer commodity trading. On the other hand, people focusing on the performance of corporations along with the exit financial statements will lean towards stock trading.
Educational Background
Both disciplines will require a good command of finance and economics or market analysis, but commodities trading will call for a solid understanding of supply and demand from around the world.