The practice of commodity trading is executed by investors in India to gain profits. Stock markets are also quite popular for receiving gains. A solid link exists between stocks and commodities. But before understanding the correlation and its value, you will need a clear idea of what stocks and commodities are.
Understanding Commodities and Stocks
A commodity is any product that can be traded for products of the same type. The price of a commodity depends on the demand and supply. Some typical examples of commodities include gold, natural gas, and oil. Due to the huge interest of institutional investors, the commodity market has experienced extensive expansion.
Stocks or equity refers to the security that signifies the ownership of a segment of the issuing corporation. Every unit of a stock is known as a share. You become a shareholder by purchasing stock from any public company. Stocks are traded in stock exchanges, while commodities are traded on commodity exchanges.
Understanding the Inverse Relation
Stocks and commodities might be affected by different variables, but there is a correlation. When the values of stocks rise, the value of commodities falls. Since gold is one of the most popular commodities, let’s consider it to understand more about the correlation.
Gold is considered one of the stable avenues for investment. Gold is often relied on as a hedge during volatile times in the stock market. Due to the impact of a market downturn on the stock market, investors often choose gold as a way to protect their investments and reduce loss.
It leads to an increase in the value as well as demand for gold increases. When the market goes upward, stocks start performing better. In such a scenario, the demand for commodities also reduces.
In India, SEBI looks after the share market, and FMC regulates the commodity market. But the government has implemented a merger between SEBI and FMC. It has resulted in the growth of a single platform for trading stocks and commodities. As traders can invest in stocks and commodities, they have immense opportunities in front of them.
Significance of the Link Between Commodities and Stocks
In the financial and investment portfolios of Indian investors, both stocks and commodities have a huge role to play. Investors often accumulate and store commodities and stocks to utilize them as a hedge and protect investments during a market downturn. Both stocks and commodities are safety instruments in case of an emergency.
If you are a serious investor, you need to diversify your portfolio and choose both stocks and commodities as your assets. A clear understanding of the negative correlation between stocks and commodities will enable investors to make informed decisions down the line.