Cotton is a type of a commodity.
Stocks and commodities belong to two separate asset classes, although both are investment assets. Stocks are included in the equities asset class, while commodities comprise their own asset class. There are various types of commodities that trade in the financial markets.
Types
Stocks are categorized by the industry in which they trade, such as energy, pharmaceutical or finance. Commodities determine the underlying value in a futures contract, which is an agreement to buy or sell a product at a future date at a fixed price. These assets might be agricultural or energy products, in addition to financial instruments.
Exchanges
Stocks and commodities both trade on exchanges, but not on the same ones. Stocks trade on major stock exchanges, including the New York Stock Exchange in the U.S. and the London Stock Exchange in the United Kingdom. Commodities trade on an exchange dedicated to commodities trading, such as the Chicago Mercantile Exchange Group in the U.S, where commodities trade as part of futures contracts.
Considerations
Stocks and commodities tend to trade in opposite directions, according to MarketWatch. There are exceptions, however, according to Ed Yardeni, chief investment strategist at Yardeni Research. In times of extreme market cycles, such as times of global market expansion or during a recession, both groups are likely to trade in the same direction.
Diversification
By including both stocks and commodities in an investment portfolio, an investor is diversifying risk. Since stocks and commodities tend to trade in opposite directions under non-extreme market conditions, there is a better chance that if one asset class under-performs, the other will add stability or even growth to an investment portfolio.
Risks
Both stocks and commodities can be volatile investments, that is both asset classes can experience dramatic price swings in either an upward or downward direction. For instance, energy resources including oil and gas are commodities, and they trade based on global factors such as supply and demand, which can be unpredictable.
