Investing versus trading in gold and commodities

Posted by Mehul Kothari | Published on 10 Apr 2019
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Investing versus trading in gold and commodities

Investing and trading are two sides of the same coin. That’s because both the approaches help in building wealth. The only difference between difference between trading and investing is that while investing money is done for a longer period of time, trading is more dynamic and is conducted over a day or two, or maybe a week tops. The same principles are applied while investing money in commodities too. So, let’s look at different scenarios that can help us understand the difference between investing and trading in detail.

✓ Investors and traders generally prefer to deal in different commodity instruments. While investors, who have a medium- to long-term perspective, like to put their money in commodity stocks and exchange-traded funds (ETFs), traders usually prefer commodity futures. It is not to say that traders don’t dabble in forward trading in commodities stocks or ETFs, but they usually swear by commodity futures. A commodity futures contract is an agreement to buy and sell commodities at a specified price on a specific future date. Crude oil and agricultural commodities futures are short-term contracts that locks in the price of commodity a few weeks or months in advance. Traders take various factors into consideration to keep actively buying and selling on a regular basis. The investor, meanwhile, likes to bide his time, maybe even take over a year, before he plans to cash in on an opportunity.

✓ An investor plays the waiting game in order to evade the daily market volatility. A trader, meanwhile, uses several financial tools to figure out which instrument can make him money over a short period of time. To understand the difference between day trading and investing, we borrow a cricket analogy -- an investor is like Rahul Dravid while a trader is like a Virender Sehwag. Both can fetch you runs but in vastly different fashion. The reason the investor has a long-term perspective is because past data show that commodities like gold have usually fared well in the long run. Let’s take gold’s case as an example. In 2007, the metal was valued at Rs 10,800 per 10 gram. Today, it’s priced at Rs 31,800. This is the reason why investors usually have to be patient. A trader though usually uses experience, nous and technical know-how to make money over a shorter period. The objective here is to predict market volatility to make money. In short, investing is relatively less risky than trading. The commodity trading market, therefore, works for those who have a high risk appetite.

✓ An investor looks at the fundamentals of commodities. That means they consider various economic factors that would impact supply and demand of the commodity. But, traders do a technical analysis to predict the direction of the market. Since traders make predictions based on price movements of commodities, the focus is more on the commodity’s market price rather than the factors that affect the price.

To sum up, both the practices require different ethos. While both may have the same destination, the paths chosen are different. It also depends on your risk appetite and time horizon. If you are new to trading in commodity-producing stocks, you could read more on reserves, rates of production, value of enterprises and net present value. Better still, you could seek the advice of a financial expert or professional to guide you through investing in commodities successfully.




Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.



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Types of commodities you can invest in

Posted by Mehul Kothari | Published on 09 Apr 2019

Investing in gold is commonplace in India. You have seen your parents and grandparents swear by the precious metal. Come hail, come shine, they know gold can bail them out of financially troubled times. You also must have heard in the news of how people invest their money in natural gases and petroleum. But did you know that you could also invest or trade in foodgrains? Rice, wheat, soybean...even items like cotton and cocoa allow you to put your money in them! So, before you start investing, it is important to know about the different types of commodities available at the exchange. Let’s look at them in detail:✓ Bullion: Bullion refers to gold and silver. Basically, bullion commodities are considered as hedge against inflation. This is why people invest in bullion, especially gold. They feel it is the ideal choice for long-term wealth creation and stability. Sure, bouts of global crisis, fluctuating value of currency and rickety economic policies do have a bearing on the bullion price. But, decades-long data indicate that it can outperform other asset classes like stocks, bonds and real estate. As for silver, although it’s not really considered as hedge against inflation, this metal is majorly used for industrial purposes. This means that there is a robust demand for this commodity too. ✓ Base metals: Nickel, copper, lead, zinc, sponge iron, steel and aluminium are some of the base metals traded in the Indian commodities market. These metals are mainly used by manufacturing companies for production. Retail investors also trade in these commodities with a long-term perspective. However, you need to remember that geopolitical turmoil and changing currency exchange rates can have an impact on prices of base metal. Therefore, it’s important to do thorough research to estimate the value of base metals properly. Knowing or gauging long-term demand and supply of a particular metal and its average cost of production can help you profit by investing in them. ✓ Agricultural commodities: Many products grown on agricultural farms are traded in the commodities market. Wheat, jeera, corn, soybean, soy oil and sugar are some of the tradeable agricultural commodities. Investing in these items is almost an art form because you need to assess its future global demand. Not only that, factors like weather and crop production also have a bearing in such investments. This is why people do extensive research before investing in these commodities. ✓ Energy-based commodities: This includes crude oil and natural gas. These are also industrial commodities with high price volatility. Before investing, take a look at its average cost of production. If the price of energy-based commodity is closer to its cost of production, it has the potential to fetch good returns over the long-term. How to invest in commodities?You can put your money through various routes such as commodity futures, e-products, commodity ETFs and commodity stocks. What are the benefits of investing in commodities? ✓ Diversification: The performance of commodities investment has very low or almost negligible correlation with the performance of debt and equity investment. Hence, commodity investments can help reduce risk by diversifying your portfolio.✓ Leverage: You only need to pay a small margin to take position in commodities.✓ Liquidity: Energy-based commodities and agricultural commodities are more liquid in nature. Liquidity can also depend on supply and demand for that particular commodity.✓ A good hedge against inflation: Commodities maintain their price even during inflation.✓ Transparency: Commodity futures are traded on electronic exchange and thus offers a fair degree of transparency.✓ High returns: Since commodity markets are subjected to higher price volatility, it has the potential to fetch you high returns. In a nutshell, it’s important to know the diverse world of commodities. That’s because the more you learn about them, more such money-making options can open up before you. There’s also the matter of diversification. These investments can help reduce the risk levels, especially in times of economic strife.Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

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How to pick stocks

Posted by Mehul Kothari | Published on 11 Apr 2019

Picking the right stocks is the key to success. But there lies the challenge. There isn’t any single theory that can be applied when it comes to understanding how to pick stocks. There isn’t any definitive science that you can stick to. What there is a plethora of factors that need to be taken into account before putting your hard-earned money in a company stock. That’s because analysing the various factors can help you make the right pick. So, let’s go through the various factors you need to take into account before knowing how to pick good stocks in Indian market and optimising your investment:Company fundamentals: To discern how to pick stocks, you would have to do some research and find companies that have strong fundamentals. Analyse the financials of the company based on some key financial ratios. Earnings per Share (EPS): This indicates post-tax profits of the company on per share basis. For instance, increasing EPS indicates that the earning power of the company is on the rise. Dividend Yield: Consider this aspect if the primary objective of your investment is to know how to pick stocks for long term and earn a steady income. It indicates percentage of return that can be expected in the form of dividend on your investment at the current market price. An increasing dividend yield indicates that the investment has potential to provide regular stream of income. Price to Earnings (P/E) ratio: This is calculated by dividing the current market price of the company’s stock by its earnings per share (EPS). It shows how much the market is willing to pay for the earning prospects of the company. If P/E ratio is high, it means the stock is overpriced. If P/E ratio is low, it means that the company has a good growth potential. However, this strategy holds water if you compare the stock with its peer company. Price to Book (P/B) ratio: This ratio is calculated by dividing the current market price of the company’s stock by its book value per share. High P/B ratio indicates that the market value is more than the book value. Lower P/B ratio indicates that the company is undervalued. It’s one of the ways to evaluate banking stocks. Thus, companies with increasing earnings per share, increasing dividend yield, lower price to earnings ratio (P/E) and lower price to book ratio (P/B) are considered healthy. Basically, these records show past performance of company. Based on the fundamentals, you can shortlist companies that are worth investing. However, you can further distil your stock choices by looking at the following factors: ✓ Nature of business: A company’s business model can give you an insight into its future prospects. It’s also better to invest in businesses that you understand. Knowing the nature of business and its model can help you take better decisions. ✓ Company’s management: Details of a company’s promoters and their background are easily available on the internet. Look for a management that is stable and experienced. These traits can be a good indicator of the company’s future potential that can help you understand how to pick stocks for day trading. ✓ Stock valuation: Picking the right stock at the right price is the key. It’s important to analyse whether the price of the particular stock is fair or expensive. So, do due diligence before you buy the stock. Make sure you aren’t paying a premium. In a nutshell, informed decision is the key to knowing how to pick the best stocks for successful investing. Although there is no Bible to guide you, poring over the company’s activities can help you gauge its future prowess.Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

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  • Capital Market – Meaning, Types & Functions of Capital Market
    Posted by Mehul Kothari | Published on 20 Nov 2019

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The capital markets may be sometimes termed risky because they do not give fixed returns annually. But when looked from a long term perspective, their performance has always been good and rewarding for the investors. If you want to learn more about the capital market or put your savings in the capital market, you can contact IndiaNivesh Ltd.Disclaimer: "Investment in securities market and Mutual Funds are subject to market risks, read all the related documents carefully before investing."

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