Commodity vs Equity
The terms commodity and equity are quite commonly used when explaining investments and trade that take place in the stock market. The main similarity between the two is that both equity and commodities are investment assets in which investors can invest their funds by purchasing or trading. It is, however, important to understand the difference between what a commodity is and what equity means before applying them to the stock or commodity exchanges. The following article provides a clear description of what is meant by the two terms equity and commodity and explains them in relation to their respective trading platforms while highlighting the differences between the two investment assets.
Commodity
Commodity refers to a generic form of a product that is very basic and undifferentiated. Examples of a commodity include sugar, wheat, copper, bio fuels, coffee, cotton, potatoes, etc. A commodity is a product that cannot be differentiated because every commodity is equal to each other and cannot be separated out. Going deeper into the context of the stock market commodities, there are a number of commodities that are traded on exchanges which include gold, silver, corn, coffee beans, oil, ethanol, copper, cobalt, etc. These commodities are not physically traded on an exchange and instead traded through commodity futures and forward contracts.
The price of the futures or forward contracts will depend on the value of the commodity at the time of trading and a futures or forward contract will act as an agreement to buy or sell a specified quantity of the commodity at an agreed upon price. The trader in this instance actually does not seek to purchase the commodity, rather make a profit from the price fluctuations.
Equity
Equity refers to some form of capital that is invested into a business, or an asset that represents ownership held in a business. In a company balance sheet, the capital contributed by the owner and shares held by a shareholder represent equity as it shows ownership held in the company by others. Equity, on the other hand, refers to shares that are sold by a firm on a stock exchange. Once shares are purchased by an investor, they become a shareholder in the firm and hold an ownership interest. A shareholder’s shareholding can be calculated as a percentage by looking at the number of shares held in relation to the total number of shares.
Commodity vs Equity
In the context of exchanges, the only major similarity between commodities and equities is that they are both investment vehicles. In a more general note, commodities and equity are quite different to each other as commodities are undifferentiated goods, and equity is an investment made in a firm that provides the investor with an ownership stake. Even in the sense of a trading platform, there are a number of differences between the two investment assets. Stocks and commodities trade on different types of exchanges; stocks trade on stock exchanges such as the New York Stock Exchange and commodities trade on commodity exchanges such as the Chicago Mercantile Exchange. The period in which each can be held also differ as stocks can be held by a shareholder for as long as the company is listed on a stock exchange, whereas futures or forward contracts have a shorter ‘expiry’ period referred to as the delivery date. The other difference is that while equity investments are longer term and are focused on taking an ownership interest in a firm, commodities are bought and sold with the aim of making a profit through quick, short term trades.
Summary:
• Commodity refers to a generic form of a product that is very basic and undifferentiated. Equity refers to some form of capital that is invested into a business or an asset that represents ownership held in a business.
• In the context of stock and commodity exchanges, commodities are traded on a commodities exchange through futures and forwards. Equity refers to shares that are traded on a stock exchange and represent an ownership interest when purchased.
• Commodity trades are shorter term and focused on making profits through price changes, and equity investments are usually made for a longer period of time, with a focus on ownership in a successful firm.