Stock Market Vs. Commodity Market

by Eric Strauss, Demand Media Google
    An investor can buy pork belly futures contracts on the commodities market.

    An investor can buy pork belly futures contracts on the commodities market.

    Investors do not have to limit themselves to stock, small ownership shares of companies. They can purchase everything from mutual funds to bonds to commodities contracts. That way, they can diversify their portfolio and reduce the risk of losing big should a particular sector crash. The sheer number of available investment vehicles can cause confusion, particularly when they share a term such as "market," as in the stock market and the commodities market.

    What Is the Stock Market?

    There is not a single stock market, per se, but a number of stock exchanges in different countries. In the United States, for example, two of the most prominent are the New York Stock Exchange and the Nasdaq Stock Market. On these exchanges, traders representing customers buy and sell ownership shares of publicly traded companies. In these trades, a seller seeking a certain price for a certain number of shares is matched up with a buyer who is willing to pay that price for either the entire number of shares or a portion of them.

    What Is the Commodities Market?

    The commodities market is also made up of more than one entity. There is the cash market and the futures market. On these markets, too, traders representing clients buy and sell, but what they buy and sell depends on the market in which they are working. The cash market deals in actual commodities, which are tangible items such as bushels of grain or head of cattle. The futures market deals in contracts to provide or receive a certain amount of commodities at a set point in the future. Traders are not dealing in the commodities, but the contracts for them.

    Similarities

    Both stock exchanges and commodities exchanges involve traders buying and selling something -- a share of stock in one case, a commodity or commodities contract in the other. Likewise, these markets are made up of multiple entities that handle certain types of trading. For example, the NYSE and Nasdaq deal in stocks, and companies that sell shares must decide with which one to list their shares. The Chicago Board of Trade and Chicago Mercantile Exchange deal in futures, in one case grain and the other animals and their products.

    Differences

    The fundamental differences between the stock market and the commodities market are the products they deal with, and thus the manner in which they work. The stock market deals in ownership shares of a company, while the futures market deals in contracts to provide or receive a shipment and the cash market deals in the actual items in the shipment. In addition, while a share of stock represents an actual -- albeit minute -- percentage of ownership in the company, it is essentially paper (although few companies issue actual stock certificates in the 21st century). Cash market commodities are actual pigs, cows or portions thereof. Futures market contracts are paper like stocks, but they do not provide ownership in any way: You do not own a commodity; you have a contract to own it.

    About the Author

    Eric Strauss spent 12 years as a newspaper copy editor, eventually serving as a deputy business editor at "The Star-Ledger" in New Jersey before transitioning into academic communications. His byline has appeared in several newspapers and websites. Strauss holds a B.A. in creative writing/professional writing and recently earned an M.A. in English literature.

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