Every investor wants to make an investment in such a way that it provides him with highly rewarding returns and choosing the right financial market is the first and foremost step for achieving this. Thanks to the technological advancements, trading in any market across any sector has become very easy today. The key factor for being a successful investor is to choose the right market and right investment instrument for investing.
To help you out with your investment, we will be comparing the differences which can occur if you invest in one of the two most popular financial markets in India, namely the stock market and the commodity market. It is very important to understand the basics of both of the markets and the involved instruments to finalize the one which will be most appropriate for your investment needs.
Before comparing the investment in stock market and investment in commodity market, let us have an overview of the basics of both of these markets.
Let us begin by discussing about each of these in detail to find out the best financial market for your investment needs.
1. High Volume
Stock market is the financial market which involves trading and investing in stocks or shares. A stock is a type of security which is an indication that the holder has an ownership stake in that company which is usually incorporated as a publically held entity. A person can hold multiple stocks of the same company which increases the per cent of ownership or stake holding in that particular company. A potential investor or trader can buy the stocks either from other stock holders or directly from the company at the time of an IPO (Initial Public Offering).
Trading or investing in the stock market is done through a stock broker. Anyone can invest in the stock market provided that he holds an active demat account. For trading on NSE a person must have an account with the National Securities Depository Limited (NSDL) and for trading on BSE, the demant account should be with Central Depository Service Limited (CDSL).
2. Selecting Popular Commodities
Any goods or asset which is an essential part of our daily life and can be transferred or traded in exchange of currency or other goods is known as a commodity. Commodities can be of two types, hard commodity and soft commodity. The commodities like gold, crude oil, silver etc fall under the category of hard commodities while all the agricultural commodities like soybean, maize etc along with livestock fall under the category of soft commodities.
The place where such commodities are traded or exchanged is known as a commodity market. Trading in commodities is done through a commodity exchange. Multi Commodity Exchange (MCX) and National Commodity and Derivative Exchange (NCDEX) are two of the most prominent commodity exchanges of India. Trading in commodities require a commodity broker, who functions in a similar way as the stock broker. Trading in commodities is done via direct commodity investment or with the help of commodity futures contract as investment.
3. Investing in Stock Market VS Investing in Commodity Market
Now that we have discussed about the basics about the stock market and commodity market, let us discuss about investing in each one of them, which will help you in selecting the appropriate financial market for your investment needs.
- Ownership of the Asset: As we have discussed, when an investor buys the stocks of a particular company, he actually gets a stack in the ownership of that company. The most common investment strategy in the stock market is to buy a stock and wait for a favorable turn of that particular stock. The stock can be sold then, generating profits for you.
However, in case of commodity markets, investment is mostly done using the commodity future contracts. It does not involve getting a stake or exchange of ownership. Future contracts basically deal in future deliveries of a particular commodity which is traded usually but owned very rarely.
- Volatility of the Market: Stock markets are less volatile as compared to commodity markets. The reason for this is that stock market is a high liquidity market. Volatility in the stock market is usually a result of trade orders in one direction.
Commodity market is more volatile when compared with stock market. The main reason for this is the liquidity. Commodity market tends to hold a lower liquidity rate. The volatility of commodity market is often a result of alterations in demand and supply patterns. Geopolitics also play a significant role in affecting the volatility of the commodity markets.
- Duration of the Investment: Trading in stocks can be done with various time horizons. An intraday trader holds the stocks for a day, whereas a positional trader may hold them for weeks or months or even an year. However, you can hold stocks for up to decades, which make them an ideal instrument for long term investing.
On the other hand, the investment horizon in case of commodities is entirely different. Trading and investing in commodity market is done through contracts which are usually for short term. Moreover, these contracts come with an expiry date or time limit unlike stocks. This means that you can only hold a commodity contract for the applicable time limit. This makes the commodity market ideal for short term investment goals.
Conclusion
So, now you must have understood that which financial market you should choose for your investment needs. However, it must be noted that there are various other factors which may impact your investment. It is better to take the services of a SEBI registered investment advisor who can help you in selecting the most appropriate financial market for you investment needs and also provide research based recommendations which can help you in your investment journey.
