Stocks and commodities are two different types of investment items sold via a regulated exchange market. Although both are most commonly purchased by investors and may seem to be variations on a theme, these two things are fundamentally different. Commodities represent real, tangible goods, while stocks represent partial ownership of a business. Either one can be a good investment, but both can also cause the investor to lose his money.
A stock, also referred to as an equity, represents a small piece of a company. When a person buys stock, he is actually buying a portion of the company and its assets. If the company does well, the stock does well, and stockholders make money. It the company performs poorly, the stock’s value goes down, and shareholders lose money. Selling stock is a way for companies to acquire funds for operations and expansion. Shareholders are often paid dividends if the company does well.
Commodities are actual products such as corn, beef and orange juice. They are bought and sold by people who are willing to risk buying them at a certain price because they believe the price will increase enough to make it worth their while. If the price falls for any reason, the person who is the owner of the commodity at that time will lose money, though it is possible for the price to go up again. Commodities are traded on paper and investors do not actually take delivery of the items they are buying and selling. Commodity owners only make money when they sell their commodities.
One major difference between stocks and commodities is that stocks are typically considered a long-term investment. It may take years for a stock to gain enough value to make the owner an appreciable amount of money, and the stock can be held indefinitely. A commodity has a finite lifespan, and there is normally a date associated with the sale and purchase of commodities. This type of trading is referred to as commodity futures, because a price is agreed upon for a future date. In some cases the commodity is traded in real time, which involves the actual commodity itself, but this is not common.
Stocks and commodities both are likely to do best when considered as part of a larger portfolio. Prices rise and fall frequently. Investors are typically advised to diversify their portfolios so that they own a variety of stocks and commodities. Bonds are often included in portfolios as well. That way, if one investment loses some of its value or becomes worthless, there is a good chance that the others won’t, helping to make sure the portfolio does not lose money overall. While it is possible to make money with a single stock or commodity, it is not usually recommended.
- Jupiterimages/Photos.com/Getty Images