Difference between Commodity and Equity
While both commodity and equity are investment avenues for an individual, the fundamental difference between the two is in the product itself. In a commodity market, you are dealing with undifferentiated products, most of which have a physical presence. These will include wheat, copper, oil, coffee, gold, silver, corn etc. Equity is basically a form of capital, which is invested by an individual in a business, certifying his or her stake in the company. For instance, you may buy stocks of a company and in return will be entitled to get income in the form of dividends, along with having the power to vote.
Commodities however, cannot be physically traded on an exchange but instead people interested in investing their money in commodities will enter in future or forward contracts. This implies that the value of a particular commodity will be dependent on the agreement between the buyer and seller, allowing for a certain hedge against losses. In case of equity, investors will earn money through dividends, which will further hinge on the profitability of the business. These earnings may be paid out on a quarterly basis.
For both, the level of risk and benefits will vary depending on the market situation. For an equity investor, they will need to look at the company’s overall position for a certain period of time to gauge whether his investment is worth the risk. For a commodity trader, he will need to take economic factors into account and check historic trends. For instance, wheat and silver have been safe investing options, when compared to oil.
For this reason, the time frame of both investments can vary dramatically. An investor may hold onto a stock as long as the company is doing business, which could be for decades. However, people dealing in commodities usually enter into contracts, which are usually short in duration.
Instructions
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Equity
It is basically the money invested by an individual in a company, further representing his or her ownership in the business. Equity trading usually takes place at various stock markets such as New York Stock Exchange and Nasdaq.
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Commodity
It is a marketable item, with physical presence used in commerce and as inputs in the production of other goods. Commodities are traded in a commodities market, where buyers and sellers enter in future or forward contracts.
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