Stock Market vs. Commodity Market
The commodity market, like the stock market is a financial institution that enables investors to trade, meaning buy or sell goods. In case of commodity market, traders deal with the shares of raw materials to be used for manufacturing other goods. Commodities can be exchanged, meaning the buyers may buy the same product from various sources and likewise the traders may sell the commodity to many buyers. In case of stock markets, shares and stocks of companies are traded.
Markets for trading stocks and commodities are similar. Traders trade contracts at commodity exchanges. Contacts are made for paying money against commodities at specific time. Some of largest exchanges are New York Mercantile Exchange, the Tokyo Commodity Exchange, Dalian Commodity Exchange and Multi Commodity Exchange. All exchanges have regulatory boards that set the rules and standards, ensuring that buyers take delivery of what is written in the contract without carrying an inspection of goods.
Apart from the spot contracts, commodity markets have future contacts too, wherein a buyer pays the seller a price decided on date for delivering at a date in future. The idea of futures contracts is to lock in a low price, while ensuring delivery of essential materials, hedge against crop failure or operational problems.
One major difference in trading of stocks and shares and commodities futures is the duration of time that the two assets remain on the exchange. Numerous stocks remain on exchanges for a number of years while their issuing companies continue with their business, whereas a futures contract is a contract wherein the producer of a commodity promises to deliver a specific commodity to a buyer by a specified date. Soon before the scheduled date of delivery, the exchange removes the contract.
The comparative risks associated with trading of shares of stocks and commodities depend on the assets purchased. For instance, in case of stock market, a number of companies have consistently demonstrated a steady growth over so many years. Such companies, often termed as blue chip companies are considered conservative companies. A lot of companies, being relatively new to their particular business, may lack proven track record but they have the potential of growing big. Likewise, certain commodities like wheat have been able to hold a steady price but others like oil may face unstable periods.
Both the markets present their respective benefits to investors. For example, many stocks distribute quarterly dividends, reelecting their quarterly earnings. The benefit of commodities is that their value is supported on physical possessions. Investors are inclined to buy commodities under uncertain economic conditions.
Many new investors of commodity market believe that this market is not so liquid, meaning that compared to stocks, these can’t be cashed so easily. Likewise, other believe that when an exchange delists any commodity, it is because the owner is not sure if he should take delivery of the commodity. These are wrong apprehensions as most futures contain a clause, enabling them to settle for cash, which means that the producer of the commodity will pay in cash the present value of the contract to the contractor holder and retain the commodity with him.