Investors and traders tend to focus a lot of their investments and portfolios on stocks, however, it seems that trading commodities are a lot simpler. When you consider trading stocks, the amount of information you need to learn and analyze is far greater than to trade commodities. So, is trading commodities easier than stocks? Why?
The reason is that stocks are far more complex and require a deep analysis of several factors that might influence the price.
Especially when it comes to speculation, it is a lot simpler to speculate on commodity prices that tend to be directly influenced by supply and demand.
Are commodities better than stocks?
No, commodities are not better than stocks, they are simply two different asset classes, and should be traded differently. While stocks are clearly the best asset class for long-term investors, commodities tend to be easier for traders. Especially beginner traders that are just starting out.
Is it hard to trade commodities?
Any type of trading is hard because whenever you trade you are going against the market consensus. That means that the general market has to attribute the wrong price to a certain asset for you to make money. You will also need to pick the right timing and the prices need to move significantly, otherwise, you run the risk of just breaking even.
Although every type of trading is difficult, there are easier assets to trade, than stocks.
Is commodity trading better than equity trading?
Yes, trading commodities is better than equity trading in the sense that it is easier to be right. In theory commodity prices are dependent solely on supply and demand. This is what determines the price at any given moment for a certain commodity. Equity prices are dependent on a multitude of factors, which makes it difficult to analyze and research. This is the main reason why commodities are easier to trade.
Another factor is that commodities also tend to be more volatile than stocks, and volatility is what allows traders to be profitable. Without prices moving significantly traders are not able to generate sizeable profits on trades.
Why are commodities easier to trade
Commodity traders and investors leverage their knowledge of the commodity markets by studying and analyzing each commodity individually. This requires them to consider a number of factors. Here are some questions that help them understand what could be price equilibrium for a certain commodity:
- What countries are the largest producers of a certain commodity?
- What is the expected demand for such a commodity?
- Is the demand or the supply increasing?
- What is the financial situation of the companies that both demand and supply a specific commodity?
By deeply understanding what is driving supply and demand for a commodity, investors and traders are able to accurately understand the supply and demand dynamics of the market. They are also able to factor seasonality into the price projections they make.
For example, we know that Brazil is one of the largest sugar producers in the world. Monitoring the weather and the sugar crops can then help traders understand how prices can be affected. Factor this with the largest countries with which Brazil trades this sugar, and we can get a clear picture of what the market price could be.
Why trading commodities is better than stocks
Although there is clearly a lot of research and analysis that goes into predicting commodity prices, when it comes to stocks there are a lot more factors to consider.
One of the reasons is the fact there are a lot more stocks, which makes the analysis even more complex.
This means that if you are researching an industry you will need to analyze several businesses. Researchers have also found that there is no advantage to trading stocks or commodities in the short term and the numerous benefits of adding them to a stock portfolio.
There are also factors that might affect a stock, that do not affect commodities. Here are some examples:
- Market sentiment
- Short-term financial results
- Number of different stocks to analyze
Each business has a management team, that directly impacts how the business is run. Therefore, this has a direct impact on the company’s financial performance, its valuation, and the market sentiment towards it. In order to trade stocks, you need to be able to understand how the management intends to grow the business, and if they are making the right decisions.
You should also look at the competitors and try to determine what their management team is doing. As it allows you to understand the different approaches each company is taking, it can influence the business and ultimately their share price.
When you trade commodities you do not have to analyze any management. Although some commodity prices can be influenced by the management of some companies, that is not a decisive factor to consider when you are trying to estimate the future price of a commodity.
This is another important factor for traders to consider. It can directly impact the valuation of a certain company, and it can make a large difference in how the stock price trades. Although in some commodities, like gold, there is a certain market sentiment towards it that can influence the price.
Despite that, it is not as important as it is for individual stocks. The market sentiment towards the outlook for a stock is what usually drives the narrative and the price. Thus, this needs to be evaluated in order to pick the right stocks.
Every industry is extremely specific, and when you are considering investing or trading stocks this should be considered. It can be drastically different, and it can affect both the company’s valuation, market sentiment, and even its short-term results.
It is true that when you consider investing in a commodity the industry from which the supply and the demand are coming has to be researched. However, in stocks, there are many more nuances that will directly affect the stock price.
Short-term financial results
Although the market is forward-looking, short-term results can severely impact stock prices. When it comes to commodities there are no financial results or earnings releases that can make the stock price change overnight.
Therefore this is another factor that explains why trading commodities is easier than stocks.
Short-term events or news should also be considered when investing in a specific stock. Although commodity prices are also driven by events, there are not as impactful as they are to stocks.
Number of different stocks to analyze
Finally one of the single most important reasons why commodities tend to be easier to trade is the fact there are thousands of stocks. This means that to analyze companies efficiently you will need to research hundreds if not thousands of stocks.
Analyzing competitors can also be very time-consuming, and it requires an extensive understanding of the industry, and the different players. Commodity prices are also influenced by the other commodity prices, however, not to the same extent to which stock prices influence each other.
While trading commodities might be intimidating in the beginning, they are easier to understand and trade profitably. There are also plenty of different ways to start trading commodities.
Stock prices depend on a multitude of factors, that can influence their price, and are much more susceptible to investors' and traders' emotions. This is why most traders struggle to understand the reason behind stock price movements, and most of them tend to lose money.