Financial literacy has become an important aspect of the millennial retirement planning guide. Having many options to choose from, it becomes difficult to find the perfect match for savings if one is not aware enough. One such common confusion is between equity and commodity among other market-related deposits.
For an amateur investor, equity is like a shareholders’ share that he/she receives after deducting the liabilities from the total asset of that organization. It is listed on the stock market and has an authorization of trade. Commodity, however, is traded by taking a delivery or a cash settlement of raw materials in bulk.
One can differentiate between the two on several grounds, such as:
- Ownership
While an equity shareholder is an owner of the company, an option holder (owner of the commodity) does not have any privileges attached to the commodity.
2. Volatility
The commodity market is highly volatile as compared to a more stable equity market.
3. Risk Profile
While risk means a higher rate of returns in financial terms, commodity trading is riskier than equity trading as commodity rates fluctuate with the changing macroeconomic environment of a country.
4. Supervision
The commodity market is highly supervised under SEBI while the equity market has lesser regulations to attend to. This is because the former is a derivative market while the latter is a free market.
5. Margin requirement
The margin requirement for commodity exchange is lower as compared to equity trading. Hence, commodity markets expose investors to higher risks during sudden and sharp movements in the market.
Final verdict
An investor should always have a mix of securities to be able to make the most of their portfolio. Hence, it is advisable to own a balance between equity and commodity to protect themselves from higher exposure.
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