Stock Market vs. Commodity Market

The stock market and the commodity market are financial exchanges in which goods are bought and sold by traders. The main difference between the two markets is the goods traded. On commodities markets, futures contracts for tangible commodities are bought and sold. On the stock market, investors trade shares of stock in companies.

Identification

The markets on which stocks and commodities are traded are similar. Most trading occurs on physical exchanges, such as the New York Stock Exchange and the Chicago Mercantile Exchange. However, much trading also occurs off the exchange. Stocks sold off an exchange are said to be sold "over the counter." Commodities sold off a regulated exchange are said to be sold on the "spot market."

Time Frame

One of the main differences between shares of stock and commodities futures is the length of time that these assets spend on an exchange. Many stocks stay on exchanges for decades, as the companies for which they are issued continue to do business. A futures contract, by contrast, is an agreement for a producer to deliver a commodity to a supplier on a certain date. Shortly before that date arrives, the contract is removed from the exchange.

Risks

The relative risk of investing in the stock market or the commodities market differs depending on the assets purchased. On the stock market, many blue chip companies have been able to demonstrate slow, steady growth over a long time period, making them relatively conservative. Many newer companies are unproven, but have the potential for a bigger upside. Similarly, some commodities, such as wheat, have historically kept a stable price. Others, such as oil, can enter periods of volatility.

Benefits

Each market has its own advantages for investors. Many stocks, for example, issue a quarterly dividend, which is a payment that reflects the company's quarterly earnings. Commodities can be beneficial to investors because their value is based on a physical asset. Investors will often purchase commodities in times of economic uncertainty.

Misconceptions

A common misconception among beginning investors is that commodities are less liquid, or less easily turned into cash, than stocks. Some investors believe that when commodities are delisted from an exchange before their delivery date, the current owner is stuck taking delivery of a shipment of the commodity, whether he wants it or not. In fact, most futures have a clause that allows them to be settled for cash, meaning the producer of the commodity will give the contract holder the contract's present value in cash and hold onto the commodity himself.

References

• "Investing Online for Dummies"; Matt Krantz; 2007
• "Investing for Dummies"; Eric Tyson; 2008
• Commodity World: FAQ