Summary:
Explore what are commodities, how commodities work, their types, and how they contrast with stocks in terms of volatility, returns, and market behaviour.
In the dynamic world of investing, two of the most talked-about asset classes are commodities and stocks. While both can play crucial roles in a diversified portfolio, they operate under different principles, are driven by unique market forces, and appeal to distinct types of investors.
Whether you're a beginner trying to understand basic trading concepts or an experienced investor seeking to refine your strategy, knowing the difference between commodities and stocks can help you better manage risk and opportunity in today's volatile markets.
Commodities are raw materials or primary agricultural products that can be bought and sold—often standardised and interchangeable with others of the same type. These are essential inputs in the production of goods and services.
Categories of Commodities
1) Hard Commodities – Natural resources that are mined or extracted.
Examples: Gold, silver, oil, natural gas
2) Soft Commodities – Agricultural or livestock products.
Examples: Corn, wheat, coffee, cocoa, cotton, soybeans, cattle
How Commodities Are Traded
Futures contracts on exchanges like the Chicago Mercantile Exchange (CME) or Intercontinental Exchange (ICE)
Spot markets, where immediate delivery occurs
ETFs and commodity mutual funds
Options and derivatives
Stocks, or equities, represent ownership shares in a company. When you buy a stock, you're essentially investing a small piece of that business.
Types of Stocks
Common stocks – Provide voting rights and potential dividends.
Preferred stocks – Priority in dividends and liquidation but limited/no voting rights.
Where Stocks Are Traded
Major stock exchanges: NYSE, NASDAQ, London Stock Exchange, Tokyo Stock Exchange
Through brokerage accounts, ETFs, or mutual funds
| Feature | Commodities | Stocks |
|---|---|---|
| Nature | Tangible goods | Ownership in a company |
| Volatility | Often more volatile | Moderate volatility (varies by stock) |
| Returns | Short-term trading potential | Long-term capital appreciation |
| Dividends | No dividends | Can earn dividends |
| Influenced by | Supply-demand, geopolitics, weather | Company earnings, economic indicators |
| Market hours | Often 24/5 | Limited to stock exchange hours |
| Hedge against inflation | Strong (especially gold, oil) | Moderate |
| Diversification role | Excellent portfolio diversifier | Core portfolio component |
Risk and Volatility Comparison
Commodities:
Highly sensitive to external factors like weather, wars, geopolitical tensions, and supply shocks.
Energy commodities such as oil can fluctuate 5–10% in a single day.
Risk increases with leveraged instruments such as futures or CFDs.
Stocks:
Subject to company performance, earnings reports, sector performance, and macroeconomic trends.
Large-cap blue-chip stocks tend to be less volatile than small-cap or tech startups.
Commodity Trends in 2025
Gold: Hovering near record highs due to inflation fears and central bank purchases.
Oil: Volatile amid Middle East tensions and OPEC+ production shifts.
Agriculture: Weather patterns and climate concerns influence pricing.
Stock Market Trends in 2025
Tech stocks: Experiencing correction after 2024 highs.
Energy and commodities-related stocks: Performing well due to inflation hedges.
S&P 500: Up ~8% YTD as of mid-2025, showing resilience post-rate hike cycle.
Why Investors Choose Commodities:
Hedge against inflation: Physical commodities like gold or oil tend to retain value when fiat currencies weaken.
Portfolio diversification: They often have a low correlation with equities.
Speculative potential: High volatility offers trading opportunities.
Why Investors Choose Stocks:
Long-term growth potential: Businesses reinvest profits to increase.
Income through dividends
Greater accessibility: Stock trading is more widespread and supported by a large retail investor ecosystem.
Real-World Portfolio Strategy in 2025
Many modern portfolios apply the 60/40 rule (60% stocks, 40% bonds), but in 2025, we're seeing rising interest in a core-satellite approach:
Core: Broad index funds (e.g., S&P 500)
Satellite: Strategic allocation to commodities like oil, gold, copper, or agricultural ETFs
Examples of Popular Commodity ETFs in 2025:
| ETF Name | Focus | YTD Return (2025) |
|---|---|---|
| SPDR Gold Trust (GLD) | Gold | +12.3% |
| Invesco DB Agriculture Fund (DBA) | Agriculture | +8.6% |
| United States Oil Fund (USO) | Crude oil | +10.1% |
In conclusion, commodities and stocks serve very different roles in a portfolio. While stocks are ideal for long-term capital growth, commodities are crucial during economic uncertainty and inflation.
If you're just getting started, consider using ETFs or mutual funds that offer exposure to both markets with built-in diversification. As your knowledge grows, you can explore direct commodity trading or individual stock picking to maximise returns based on your goals.
Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
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