A BEGINNER’S GUIDE TO SYSTEMATIC TRADING

A common question we see being asked by both beginner and amateur traders alike is what are the differences between stock trading and commodity trading. 

This question is actually incredibly important – the distinctions between stocks and commodities are actually quite vast in nature, and in reality, the trading experience with them both can be entirely different.

This is why knowing the difference between the two is essential for every trader, and this is exactly what we are going to be talking about in this article. Let’s jump straight into it and talk about the differences between stock trading and commodity trading.

Before taking a look at why the experience of trading stocks and commodities differ, we first need to take a look at the differences between stocks and commodities as a whole. 

If you are already somewhat familiar with investing and are well-accustomed to both of these terms, then feel free to skip this section. However, even if this is the case, having a good understanding of what stocks and commodities are can give you a much better idea as to what the trading experience entails with each of them, and there are a few differences that become glaringly obvious. 

A stock is a share of capital raised by a company or corporation. This means that when you buy a stock, you are quite literally buying a small portion of said company, and it is actually possible to take over a company if you own a large enough stake in a business. 

Commodities have very little to do with stocks, in that they represent a tangible material that can be bought or sold such as oil or gold. Unlike a stock, when you invest in a commodity, you do not actually own said asset. This is a key point about commodities that sets that apart from most other investments, and it is something we are going to talk about later in this article. 

However, the fact that commodities represent a tangible material makes them much more likely to experience large price fluctuations when compared to stocks. This changes the entire trading experience substantially, and it inherently means you cannot treat both assets the same. 

Sure, both are assets that can go up or down in price, and both can be purchased through brokerages and investment sites. Although, this is as far as their similarities go, and in reality, they are quite far removed from one another.

One of the most notable differences between trading stocks and commodities is the length of time you are going to hold each asset. Whilst both assets retain the ability to rise or fall in price at any time, due to the fact that with stocks you are investing in an actual company instead of a material, stocks tend to be much more stable. 

This is simply because it is somewhat rare to see a company go down in value substantially in a short period of time, and while it is possible, it only usually occurs in situations where said business is involved in some sort of scandal. 

Commodities, on the other hand, do not share this same fate. Because of how supply and demand works, commodities regularly see huge jumps/drops in price, and they often experience incredibly volatile markets.

This makes commodities have much higher returns potential in the short term when compared to stocks, and it makes them much better suited for people who are looking to make a sizable return quickly. 

Of course, this also comes with added risk, and the chances of you losing a large chunk of your investment in a matter of days are much higher with commodities than it is with stocks. 

However, commodities often make a better choice for professional investors that have a ton of spare time to speculate on upcoming trends and predictions, and as a result, this also makes them much less beginner-friendly. 

As we mentioned earlier, one of the prime differences between commodities and stocks is ownership. With a stock, you actually own a small portion of a business, and this is just not the case when it comes to commodities. 

This makes the two have a few key distinctions. With stocks, if a company is losing value rapidly, you are essentially going down with the ship. If a business collapses and you don’t get out in time, you can potentially lose your entire investment. 

However, with commodities, even if you experience a huge drop in price and lose a ton of your investment, the chances of said asset returning to its original price are much higher if it is a material in high demand, and this can provide a level of safety that some stocks are not able to provide. Examples include copper, oil, palm oil, orange juice etc.

 

We hope we have been able to give you a much better idea as to what the differences are between trading stocks and commodities. Learning the differences between the two is essential if you want to take that next step in your trading journey, and being able to utilise them both is going to be astronomically beneficial. 

Neither stocks or commodities are better than the other – they are both entirely separate investments, and either one may be better suited to you based on your overall knowledge and tolerance for risk. Good luck.