How to use derivative market for your advantage?

Different countries have different national currencies which have different values at different period of time. To trade internationally there had to be a system how all these things can be accounted for all these differences.

How to use derivative market for your advantage

A derivative is a contract that is used to safeguard or protect impartially the fluctuating exchange rates of goods that are traded internationally. In other words, it is a “security of the price” that is derived from underlying assets between two or more parties. This contract based upon the assets. Underlying assets can be bonds, stocks, currencies, commodities, interest rates, and market indexes.

There are many kinds of derivatives in existence. Depending upon the type, they are a variety of functions and applications.

Lets us understand this with an example. Let us say a farmer (one party) in July (during sowing season) agrees (contract agreement) to sell 1 metric ton of rice (underlying asset commodity) in October (after harvesting season) to a miller (second party) for Rs.32,000/- (price consideration) per metric ton. Current price being Rs.35,000/- per metric ton. Now if by October per metric ton of rice costs Rs. 33,000/- Still the farmer will have to sell at Rs 32,000/- per metric ton. In this case, the farmer was at loss of Rs 1000/- and miller is at a profit of Rs 1000/-. What if October price were Rs. 31,000/- in that case farmer would have made profit and miller would have made a loss by Rs 1000/-.

From the above example, we can conclude that whatever will be the price in open market farmer will get Rs 32,000/- per metric ton and miller too knew that he will buy rice for Rs 32,000/- irrespective of market condition. Both knew their rates in July itself.

Certain types of derivatives are used for hedging against risk on the asset. They can be also used for speculation on the future price of underlying asset.

How can you use derivatives? Futures and options are standardized contracts and can be freely traded on exchanges.

  1. Stocks

One can earn money on stocks which are kept ideal for too long. The advantage of price fluctuation can be taken in this case. Derivative markets allow you to conduct transactions. No need to sell shares physically.

  1. Arbitrage

Taking advantage of the difference in prices in different exchanges is called arbitrage. Benefitting by purchasing low from one exchange and selling at high in another exchange.

  1. Protecting securities

One can protect his securities against fluctuating prices. That is you can hedge your securities against falling market by the products that are offered in derivative markets. They also protect you from the rise in prices if you are purchasing securities.

  1. Risk transfer

This is one of the most important uses of the derivative market. It transfers market risk from non-risk taking investor to risk taking investor. Non-risk taking investors use derivatives to increase their safety, whereas risk taking investor conducts risky business to improve his profit. There are many strategies and products available that help in transferring risk both ways.

Derivative participants, types of derivative contracts, trading in derivative market in another blog.

Best 5 proven commodity trading tips for beginners

When talking of exchange, stock exchange comes first to everyone’s mind. Place where securities (shares, bonds etc.) are traded.

 

But very few know that commodity exchanges (though in a crude form) existed much before stock markets came into existence. People traded in rare seashells, animals, precious metals, precious stones, pearls, cocoa, soya beans, spices and later on in oil, energy, electronic and electrical equipment, machinery, pharmaceuticals, chemicals, and what not.

commodity trading

Share market deals, more or less with companies producing finished goods, commodity market deals with raw material used to make other products. It can be agricultural like wheat, soya beans, tea, coffee, corn, cotton, sugar etc, can be metals like gold, silver, platinum, palladium, lead, zinc, tin aluminum etc, can be energy like crude oil, natural gas, propane, heating oil, etc. can be livestock and meat like live cattle lean hogs, pork etc, others products are rubber, wool, amber, etc.

 

Every country has its own measurement criterion and different qualities. So things have to be standardized for smooth exchange of business. In a commodity exchange, the unit of trading is a metric ton, bales, bushels, the barrel of oil, troy ounce, kilogram etc and quantity of each commodity is also defined. Currency is mostly US Dollars.

There are many commodities exchanges in the world. Some have merged and some were unable to continue their business. There are few commodities exchanges that deal in few selected commodities, whereas others deal only in one group of a commodity.

Few known commodity exchanges in India are ICEX (Energy, Precious Metals, Base Metals, Agricultural), MCX (Precious Metals, Base Metals, Energy, Agricultural), NCDEX  (Agricultural , Precious Metals, Base Metals, Energy,),  NMCE (Precious Metals, Base Metals, Agricultural), COC (Agricultural), ACE (Agricultural), BOOE (Agricultural), UCX (Agricultural), and  NSEL.

Bases of trading in commodity market.

  1. Investment amount – It should be very clear that commodity trading is a risky business. One can multiply his wealth several times and may also wash out his capital with huge debts. Hence one should be very sure of the amount he is investing (usually 10% of your portfolio)
  2. Brokerage account – You will have to open the brokerage account with any of the brokering firms which deal with the trading of the commodity. You will have to deposit amount in proportion to your trading. Since trading in certain commodities, you have to deposit huge amount because of the minimum trading size of the lot.
  3. Types of commodities you wish to trade – From the above-given commodities you will have to select which types of the commodity you wish to trade in, like agricultural, precious metals, base metals, energy etc.
  4. Portfolio diversification – To reduce the risk it is better to diversify your portfolio holding. Say if agriculture is your portfolio you can diversify into wheat, cotton, sugar etc, as our country’s agriculture and crop pattern are based on monsoon, it is seen that monsoon pattern is very uneven in different parts of the country. So for some commodity, there will be an abundance of stock which in turn will be least profitable and vice versa. One should rebalance his portfolio from time to time especially depending on monsoon conditions during that year.
  5. Other methods – One also can go in for shares of companies which deal in the commodity. But bear in mind that these commodities-related shares will not be in complete relation to rising or fall of the commodity prices over a period of short time. But they will, however, reduce your risk as they will be managed by experts in the commodity field.

What is the Best Way to Invest in Gold in India?

There are many avenues for investment of your hard earned money. Stocks, bonds, deposits (FD), real estate, equity, precious metals like platinum, gold, and silver (jewelry, bars, and coins), precious stones, paintings, etc.

Investments should always be goal based. The goal can be anything like buying a house (or a second one too), education, tour and travel, retirement fund, etc. While investing never use your heart, always use your brains. Analyze things from the practical perspective. Investing is both a science and art. It’s the art of using creativity and judgment to plan financial goals and maximizing returns.

invest in gold

We will talk about gold investment. Though one can evaluate other viable aspects too.

First question is why should one invest in gold?

Usually, people purchase gold for personal use such as jewelry, coins, to gift it during celebration purpose like marriage, as a hedge during bad times etc. One should also know that it can be used as an investment tool for the future. India is one of the largest markets of gold jewelry in the world.

Like any other assets (real estate, stocks etc.) gold too can be used for investment purpose. Investing in gold can also be treated as an asset class. They give a bit more return than the rate of inflation.

When the stock market rises, gold prices fall, and vice versa. There seems to be some type of correlation. When markets are high one should sell stocks and buy gold as it is cheaper. And when stocks are low sell gold which is high. Sell high (stock or gold) buy low (stock or gold) to get the maximum benefit.

Secondly, the question is how much (quantity) and how to invest in gold?

  1. Jewelry: – Gold can be purchased in form of jewelry and is one of the most traditional way. But purchasing jewelry is not a good form of investment. Because many costs like making charges, etc are to be paid while purchasing and when one sells making charges are not taken into consideration. This way investor loses somewhere around 8 to 12 percent in value. Also, jewelers purchase at rates below present market value on premises that it is not of pure quality. This further decreases its value. Finally, the value that we get is 18 to 20 percent less which in others words less return on our investment. It is a double whammy.
  2. Bullion: – It is better to invest gold in form of bullion i.e. in form of bars and coins. They are of more pure form than jewelry. Near around 24 karat gold. When we sell them they have higher of acceptance in the market and have good resale value. Bullion can be purchased from banks (mostly in form of coin), financial institutions, bullion retailer or jeweler. The rates are spot rates and are usually lower than the market rate. They can be kept in bank lockers and can be sold when the market is in our favor.
  3. Periodical investments: – One can pay for gold in form of systematic investment plan. SIP in local parlance. That is small amount every month. In long run, this small investment accumulates into a big amount. Say you can invest Rs. 1000/- per month on first of every month. Say you are able to purchase X grams in the first month, then in next month with Rs.1000/- you purchase Y grams. So on and so forth. All this small “grams” over a period of time will add up to huge weight. And when payment terms are completed one can redeem the gold. This is mostly done through online purchase.
  4. Invested asset: – Many investment analysts believe that gold should be at least 8 to 10 percent of one’s investment portfolio. In turbulent times (war like condition or external aggression) it should be near around 20 percent.
  5. Investment time: – Experts are of the view that gold asset to give good returns should be held for a period of not less than 5 plus years and purchase should be at a certain interval of time so as to average out purchase cost.
  6. Other forms/methods: – One can invest in gold through “paper gold” Gold ETF i.e. investing in mutual funds which invest in gold, they are listed on stock exchange. One can also invest in the equity of those companies which are related to mining, extraction, purification, and selling physical gold and/or ornaments. But their returns are directly related to the managerial efficiencies of management.

Do you know how to invest in commodities for long term?

Portfolio for investments can be of many types. Few of them can include shares, bonds, FD, commodities, real estate, etc. Here we will talk about commodity as an investment portfolio since many use this to diversified (alternate) their portfolio. Hence we should know various types of Commodity Derivatives that are allowed to trade in the Indian market.

commodity tips

Time period (3 months, a year or 10 years) for which one wishes to stay invested and the objective (marriage, education, home purchase, foreign trip etc) should be clear. Every commodity has its range and characteristics which are different from each other.

Commodities can be classified as
1. Bullion
2.Base Metals
3. Energy
And many more…

1. Bullion

Bullion usually consists of precious metals such as gold and silver. Many investors (especially old aged) consider gold as one of the best option (youngsters go in for EFT’s). Be it in terms of ornaments or bars /coins. It acts as long term hedge for one’s portfolio against uncertain volatile condition arising out of government policies or change in personal financial conditions.

Uncertainties can be of any type like change in government rules and regulations, change of power at top, high inflation, free fall of stock market, monsoon conditions (floods, drought or normal), uneasy or war like situation with neighboring countries, global economic slowdown, etc. which has its effect on bullion prices (positive or negative). In turbulent times long term returns from real estate, stocks, equities, bonds etc usually underperform. Usually, these follow certain cycles. Bullion is virtually equal to ready cash, anytime and everywhere.

Hence bullion should be a part of everyone’s investment portfolio. It gives security and protection in bad times. Though appreciation and return on investment vary, still depending upon the conditions, it is advisable to have bullion investment allocation in your portfolio in the range of 15 to 20 %. Investment in bullion can be in a systematic way, purchasing small quantities whenever one has surplus funds. And build upon the portfolio gradually.

2. Base metals

Aluminum, copper, lead, nickel, tin and zinc are the base metals which can be traded on an exchange. These are metals that oxidize, corrode or tarnish relatively easily when exposed to moisture or air. They have their use mostly in industrial units and are commercial traded and usually in huge quantity. These are mostly raw materials for industries. If one has knowledge regarding the surplus and shortages of availability of these commodities one can use for long term fundamentals. As with any other asset, base metal prices can also rise and fall on speculation by investors and traders.

3. Energy

Crude oil and natural gas are traded on Commodity Exchange. There are many companies which provide commodity tips. Companies dealing in energy use this as the hedge to tide over the fluctuating prices. Speculators can use derivatives to profit from the changes in the underlying price and can amplify those profits through the use of leverage.

They have their use mostly in industrial units and are commercial traded and usually in huge quantity. You can “play” in energy if you have deep pocket and the heck to “smell” the favorable/unfavorable conditions from OPEC meetings, Gulf war, Syria crisis, fluctuations in USD, etc. for future demand and requirements. Oil, coal, electricity are considered as most useful energy sources for driving industrial growth.

Best five Commodity Trading Tips For Beginners

Everyone knows that, the commodity market is increasing enormously that’s why traders are starting to enter in the trading market. It is really true that the commodity market has determined economies of different first class countries more than the past few years. Commodity traders require a right strategy of how the best part of traders believe and respond to certain market circumstances. It is important to know about the commodity trading tips for development of the worldwide financial market. It will helpful for you to make more profits. If you make a decision to invest in the currency trading, commodity or stock trading then it is necessary to know that the production can be unsafe. Thus, there are following some tips of commodity trading that is useful for beginners.

commodity tips

  1. Be familiar With The Commodity Trading Technical Language

It is important for beginners to know the language that used in commodity trading. The language level is one of the major that is also difficult areas for traders. When you familiar with language, it provides you lots of knowledge about commodity, commodity tips, increasing number of market concepts and change nature of economic transactions. There are many commodity traders think about this face for their trading achievement.

  1. Select Area Of Specialization

There are many types of commodity trading so you are able to select from your preferred fields according to the commodity trading markets. You need to improve yourself according to trading choices because understanding the inner working of market depends on your ability to focus in a particular area of expertise.

  1. Know About How Other Traders Earn

You should be familiar with how your competitors earn from the equivalent market or other markets. It is necessary to find out what others traders earn, what commodities tips that they follow and some other things that can be cost-effective to you. While it pays to use your knowledge and the familiarity of other traders, it is very important to look for the support of commodity discount brokers.

  1. Choose the popular commodity exchanges

It is significant for a learner in commodity trading to understand some facts about the well-liked national level exchanges that is available for commodity trading in the India. This can decide which exchanges are suitable for you according to their needs.

  1. Set The Initial Investment Amount

It is essential to decide the right investment strategy for trading. When start initial business, you don’t have to put all your assets. It is suggested to recognize the market before providing your whole promise. So, you have to to decide invest amount and put your convenient funds. Therefore, time and money is essential stage for the commodity trading. If you do perfect then you get more back.

However, there are several methods and techniques to boost your possibility of success in trading. They are generally referred as plans that are useful to accomplish specific goals to enhance the possibility of taking income and limiting loss. Therefore, for people who want to expand their selection away from shares, bonds and actual estate than commodities is the best choice.