Did you know that you could invest in some of the most common everyday items we use in our daily life? Be it food items, gold, silver, oil or gas, we can trade in such items. This is all possible thanks to commodity investing.
What is commodity investing?
Raw materials that are consumed directly or used to make other products are known as commodities.
Commodity investing is the process in which different investors (individual people, banks, and corporations) buy and sell these commodities in order to earn high returns.
How to invest in gold and other commodities:
1) Physical ownership
The simplest way to invest in a commodity is to buy the physical good directly. For example, you can invest in gold by buying 10 gold coins. When the price increases, you can sell the commodity and convert your investment into cash.
This method of investing comes with its own set of challenges. For instance, you have to figure out where to store the commodity. You want to ensure that your gold is in a safe place. And when it comes to soft commodities such as corn, wheat or coffee beans, issues such as spoilage and insurance come into the picture.
2) Exchange traded funds (ETFs)
ETFs are funds that trade like stocks. You can purchase ETFs of commodities and trade them in the market in order to earn profits based on change in price movements. Investment in commodity ETFs is a good way to diversify your portfolio. The best part is that unlike physical commodities, it is very easy to buy and sell ETFs. You can also hold these investments in your regular investment accounts. However, make sure that you thoroughly review the commodity ETF before investing in order to get the best returns.
3) Stocks of companies
Another way to invest in gold or other commodities is to buy shares of companies that manufacture these commodities. For example, you can buy shares in a gold mining company to gain indirect exposure to gold. Similarly, there are many companies in the mining, energy and agriculture sector. Investing in these companies is a good way to gain exposure to these commodities.
4) Future contracts
You can buy or sell a commodity in the futures market. This means you can buy a fixed quantity of the item at a fixed later date. For instance, you can take a futures contract for coffee in order to protect yourself against rising prices of coffee. In case the price of coffee does rise after the specific period, the value of your investment would increase too. But if the price of coffee decreases, your future contract value decreases. Another way to invest is to enter into an agreement with a buyer to sell the commodity at a fixed price at a fixed later date. Futures contract is an easy way to invest in specific commodities without actually having to own the commodity directly.
Investment in commodity ETFs is a good way to diversify your portfolio. Understand how the different avenues work before investing. This is to ensure that your investment is protected and you can earn good returns.
Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
How to Invest in Derivatives
Futures, options and derivatives: Watch any movie about the financial markets and you are bound to hear these words. Traders in good looking suits rush around the trading floor spouting these terms at the top of their voices. It all sounds rather important and complicated. But what are these words exactly? And how do you invest in derivatives? Let’s find out.What are derivatives?Derivatives are financial contracts between investors. They derive their value from another asset such as stocks, bonds or other commodities. That’s why they are known as ‘derivatives’. Based on the change in price of the underlying asset, the price of the derivative is determined.How to trade in derivatives?Future contracts and options are two of the most common types of derivatives. Here is how you can invest or trade in these avenues.Futures contractsAs the name suggests, a futures contract is a contract between two investors to conduct the sale of an asset for a specific price and a pre-determined point of time in the future.Here is how a futures contract takes place. Imagine there are two investors: Santosh and Meera.Santosh has 100 shares of company X. The value of each share at the moment is Rs 50.Santosh wants to sell the shares after six months. However, he fears that the market could take a downturn by then. He wants to ensure that he gets a good return on the sale of his stocks.He tells his broker to find a buyer for his shares.Meera is an investor who wishes to buy the shares of company X. She is confident that the market is poised for a boom in six months. She decides to enter a futures contract with Santosh.As per the contract, she is willing to buy 100 shares of company X at Rs 80 per share after six months.In reality, two things could happen: the market could go up as Meera expects or go down as Santosh expects.Scenario #1 Imagine the market goes up. The stock price of company X rises to Rs 120 per share.This means that Meera earns a profit of Rs 50/share. As for Santosh, it doesn’t really matter whether the market goes up or down because he has already booked his profits at Rs 30 per share.Scenario #2Imagine the market goes down. Let’s assume the prices of company X falls to Rs 20 per share.This means Meera makes a loss of Rs 30 per share.Stop lossIn order to avoid such losses, Meera could instruct her broker to create a stop loss. For example, if she creates a stop loss at Rs 40, the broker immediately sells her shares when the stock hits the specified price.In this way, Meera can ensure that her losses are minimized.OptionsAn option is like a futures contract. Here too, two investors enter into an agreement to trade a security at a particular price on a pre-determined date in the future. But in the case of options, the buyer or seller is not obligated to go through with the transaction. He has the ‘option’ to conduct the transaction. This allows the investor to gain a leveraged position on the stock while at the same time he can avoid the risk of a total purchase. Options are commonly used by traders to hedge their positions in the market.ConclusionDerivatives offer investors the opportunity to hedge their bets in the market and maximize their returns. If you have the appetite for some risk and if you possess an understanding of the Indian markets, investing through derivatives can be largely beneficial. And the next time you hear someone talking about derivatives on the TV, you know exactly what they are talking about. Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
How to invest in mutual funds
A lot of investors around the globe prefer mutual fund investments for wealth creation. This is because of the immense scope and ability of these funds. These funds range over a wide spectrum of variety. Based on your requirements, you can select funds for capital preservation, steady income or high returns in the future. And if you are a novice in investments, this is perhaps the best way to get introduced to financial markets.Here is how you can invest in mutual funds:1) Be KYC compliantIt is very easy to buy mutual funds. In fact, you can purchase funds online. But in order to do it properly, you need to have all the necessary documents in order. Ensure you are KYC compliant. If not, you can fill out the KYC individual form to become compliant. Here is a list of other documents you need to provide:a) The duly-filled application formb) Identity proof (PAN card, passport, voter’s ID or Aadhaar Card are applicable)c) Proof of address (passport, driving licence, ration card, insurance copy)d) Cheque for the investment amount (SIP or lump sum)e) Third-party declaration form (in case of minors) 2) Identify your investment goalsIt is important to have clear-cut investment goals. There are many different types of mutual funds available in the market and each fund has a specific goal. For example, if you wish to avail tax benefits, it is suitable to invest in Equity Linked Saving Schemes (ELSS). If your goal is to earn steady returns, it is best to invest in debt mutual funds. 3) Assess your risk profileEvery investor has a different risk appetite. For example, equity funds invest predominantly in the stock market. These funds have the potential to offer higher returns. But they also come with higher risk when compared to debt funds. Similarly, sectoral funds invest in a specific sector only. So, if a fund has invested in the IT sector, you could be exposed to high risk if the sector crashes. Investing in these kinds of funds without knowing your risk tolerance level can result in losses. 4) Select the right fundsOnce you know your list of investment goals and your risk tolerance level, investing becomes easier. There are different kinds of mutual funds. This includes: 5) Maintain an age appropriate portfolioAs you grow older, your goals and ambitions change. Similarly, your mutual fund portfolio must change too. At the beginning, it may be better to invest more in equity funds to earn higher returns. But as you near your retirement age, it is better to shift your investments to safer funds like debt funds or balanced funds. This way, you can preserve the capital during the sunset years of your life. You don’t want to lose a major chunk of your investment money at such as stage in life. 6) Invest through SIPsOne of the best features of mutual funds is the Systematic Investment Plan (SIP). As an investor, you don’t need to bother about rising and falling markets as long as you continue to invest regularly through SIPs. All you need to do is invest a specific sum of money on a regular basis. This can be monthly, quarterly or even annually. Based on your investment budget and goals, you can decide how much you want to invest. There are many funds that allow you to start a SIP with Rs 500. Over time, you can increase the amount you invest so that you can earn higher returns. ConclusionWith a strategic investment plan, you can invest steadily in mutual funds and earn an envious warchest to meet your future goals like buying a home or creating a retirement fund. And the best part is you can do it very comfortably. Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
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