Investing versus trading in gold and commodities

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.


Types of commodities you can invest in

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.

read more


How to pick stocks

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.

read more

Are you Investment ready?

*All fields are mandatory

related stories view all

  • What is a Unit Linked Insurance Plan, Types & Benefits

    What is ULIP? Insurance plans are meant to provide financial security to you so that in case of premature demise, your family does not face any financial trouble. Though insurance plans provide unmatched financial security, many individuals also seek good investment returns on their premiums. Keeping this sentiment in mind, ULIPs were launched in the year 2000 when private life insurers were also allowed to operate in the insurance domain. Today, ULIPs have become quite popular, and insurance companies are offering different types of ULIPs to their customers. Let’s understand ULIP meaning in detail and its benefits – What is a ULIP plan? ULIP’s full form is Unit Linked Insurance Plan. A ULIP is an investment-oriented life insurance plan. The plan gives you the dual benefits of investment returns and insurance coverage. The premiums that you pay for the plan are invested in market-linked investment funds, which offer attractive growth. Returns under ULIPs are, therefore, not guaranteed but can be attractive if given time. How do ULIPs work? ULIPs are considered to be a transparent insurance plan as the premiums you pay, and the growth can be easily monitored. When you buy a ULIP, you can decide the amount of premium you wish to pay (provided it is at least the minimum required premium under the plan). The sum assured is then calculated based on the amount of premium paid. ULIPs have different kinds of investment funds which include the following – Equity fund wherein at least 65% of the portfolio is invested in equity-oriented securities Debt fund wherein at least 65% of the portfolio is invested in debt-oriented securities Balanced fund which combines both equity and debt investments for moderate risks and moderate returns You can choose one or more of these investment funds as per your risk appetite. After that, relevant charges are deducted from the premium, and the premium is directed towards the selected fund. As the value of the underlying assets grows, the value of the fund grows. Your investment in the fund also grows, and you get market-linked returns. ULIPs also provide you with various flexible benefits which are as follows – Switching – under switching, you can change the investment funds if your investment preference has changed Partial withdrawal – you are allowed the flexibility of withdrawing from your fund value partially after the first five years of the policy have expired Top-ups – additional investments can be done towards the plan through top-up premiums Premium redirection – you can choose to redirect your subsequent premiums to another fund from the next policy year under this facility Surrender of the plan – if the first five years of the policy have been completed, you can surrender your policy to terminate the coverage before the chosen term. When the policy is surrendered, the available fund value is paid as surrender value, and the plan is terminated. Benefits payable under ULIPs Under most unit-linked plans, you get either a death benefit or a maturity benefit. These benefits are as follows – Death benefit – the death benefit is higher of the available fund value as on the date of death or the sum assured. If the fund value is higher than the sum assured, the fund value is paid otherwise, the sum assured is paid. Maturity benefit – when the term of the plan comes to an end, the fund value is paid as maturity benefit. The maturity benefit can be taken in a lump sum, or you can also avail the benefit in instalments over the next five years through the settlement option feature, which is available under most unit-linked plans. Types of ULIPs Though ULIPs are aimed at creating wealth, there are different types of ULIPs based on the financial goal that they fulfil. These types include the following – Investment ULIPs Investment ULIPs are the most common unit-linked plans which aim to create wealth over the term of the policy. Child ULIPs Child ULIPs are especially designed unit-linked plans for the financial security of the child if the parent is not around. Under these plans, the parent is insured while the child is the beneficiary. These plans have an inbuilt premium waiver rider. If the parent dies during the policy tenure, the death benefit is paid. However, the plan does not terminate. The policy continues, and future premiums are paid by the company on behalf of the insured parent. On maturity of the policy, the fund value is again paid as the maturity benefit which provides the child with the financial corpus needed to pursue his/her dreams. Pension ULIPs These are other specific unit-linked plans which help in creating a retirement fund. Pension ULIPs are deferred annuity plans wherein you pay premiums during the policy tenure to build up a retirement corpus. In case of death, the death benefit is paid. However, if the policy matures, pension ULIPs allow you to receive annuity pay-outs from the corpus created or defer the vesting age from which you would receive an annuity, or withdraw 1/3rd of the corpus in cash and use the remaining fund value to receive annuity payments. Thus, pension ULIPs create a source of income after retirement and are suitable for individuals looking to fulfil their retirement planning needs. Benefits of ULIP A ULIP is popular because of the following benefits it provides – It allows you to avail insurance coverage as well as investment returns in a single product The premiums paid and the benefits received under ULIPs are completely tax-free in nature helping you save tax The flexible benefits of ULIPs allow you to manage your investments as per your investment strategy The different types of ULIPs help you fulfil the various financial goals that you might have Switching and partial withdrawals do not attract any tax making ULIPs tax efficient Since the returns are market-linked, you get inflation-adjusted returns from ULIP ULIPs are attractive insurance policies that give you coverage as well as returns. Now that you understand ULIP meaning, its types and advantages, use our IndiaNivesh platform to invest in a plan as per your insurance and investment needs and enjoy all the benefits that the plan has to offer.   Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

    read more
  • What is CAGR & How to Calculate it?

    There are different types of investment avenues in the market and each of these avenues promises you a compounded rate of growth if you remain invested. Compounding of return means earning a return on the return earlier generated. So, if you invest INR 100 and earn a return of 10% in the first year, the amount would become INR 110. Thereafter, in the second year, you would earn 10% on INR 110 giving you a return of INR 11. This compounding helps grow and multiply your wealth considerably over a period of time. In the case of market-linked investments, the rate of return is not guaranteed. It varies over the investment period. To know the average rate of return on your investments, the concept of CAGR is used. Let’s understand what CAGR is and how it helps you find the growth of your market-linked investments. What is CAGR? CAGR’s full-form is Compound Annual Growth Rate. The Compound Annual Growth Rate, in simple terms, is the average rate of return of an investment over a one year period. CAGR takes into account two important factors - the time period of the investment and the fluctuations in the return. Since the returns vary depending on the market fluctuation, finding the return over a specific time period becomes difficult. CAGR gives you the average growth rate offered by the investment over the said time period. CAGR shows the approximate growth rate considering that there is no market fluctuation and that the returns earned are reinvested into the investment. How to calculate CAGR? It is very easy to calculate CAGR. There is a CAGR formula which you can use to find the Compound Annual Growth Rate of your investment. The CAGR formula needs three important details which are as follows – Value of the investment made initially (VI) Term of investment (T) Value of the investment at the end of the term (VE) Using these three inputs, the CAGR formula becomes – CAGR = (VE / VI) ^ (1/T) – 1 Let’s understand with an example – Mr. A invested INR 10,000 in a market-linked investment avenue. After 3 years, the value of his investments stands at INR 13,500. The CAGR for Mr.A’s investment could be calculated as below – VI – INR 10,000 T = 3 years VE = INR 13,500 CAGR = (13500/10000) ^ (1/3) – 1 = 10.52% How CAGR helps understand the mutual fund growth rate? Mutual funds are market-linked investment avenues which do not offer a guaranteed rate of return. Since the returns are subject to market fluctuations, CAGR becomes an accurate tool to measure the performance of the fund over a specified period. Investors can check the annual CAGR of mutual fund schemes and use the rate to find out which scheme offers better returns than others. The fact sheet offered by the mutual fund house contains returns generated by the fund over different time frames. These returns can prove to be confusing and so CAGR is an easier alternative to understand the performance of the fund. CAGR acts as a ready reckoner for investors to assess returns from a mutual fund scheme and also highlights the compounding of returns on mutual fund investments. Important points to know about CAGR The investment risk inherent in the scheme is not highlighted by CAGR. CAGR is merely a yardstick to measure the growth rate CAGR proves to be a good measure of growth for a short-term period, i.e. up to 6 or 7 years. If you are considering long-term investments, the growth trends over a short-term period would be averaged out. In such cases, CAGR would give an average rate even if the fund performed excessively well in a two or three year period and then the returns fell in later years. CAGR changes every year since the investment period changes CAGR for two investment funds can match one another even if the funds are different. This might happen if one fund performed well initially and the other one performed well in the last few years. As a result, the performance is averaged out and the CAGR Other modes of calculating returns from investments Besides CAGR, there are other ways to calculate the returns generated by market-linked investments. These ways are as follows – Returns since launch Under this model, the return earned by the fund ever since it was launched and till the present date is calculated. Trailing returns Under the trailing returns approach, you measure the performance of your fund daily, weekly, bi-weekly, monthly or annually. Annualised returns Annualised returns are calculated as the geometric average of the return yielded by the fund over a given period of time. CAGR v/s Absolute returns Absolute returns measure the total return yielded by an investment. The time period is not considered. CAGR, on the other hand, measures the return over a specific time period. For instance, in the previous example, INR 10,000 grew to INR 13,500 over a 3-year period. The absolute return would be 35% since it measures the total return earned on the investment. However, when CAGR is considered, the time period of investments is also taken into consideration thereby considering the time value of money. As such, CAGR comes to 10.52% which is a more realistic figure. While absolute returns show the returns generated, the time period is missing. You cannot figure out how many years it took the investment to generate this return. But CAGR shows you the annual return making it easier to make a judgement on the performance of the fund. The next time you invest in mutual funds, stocks or other market-linked investment avenues, consider their CAGR to choose the fund or investment which has better returns over its peers. So, visit IndiaNivesh and find out a mutual fund scheme of your choice and then compare the scheme’s CAGR with its peers to choose the best performing fund.   Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing. 

    read more
  • Capital Market – Meaning, Types & Functions of Capital Market

    We all know how various companies and industries raise funds for their short term requirement through the money market. However, when they need funds for long term, capital market is their source. The capital market is just like the money market but with a difference that funds raised in the capital market can be used only for long term. In this article, you will learn about the concept of capital market in detail. Let us first understand what is the capital market? Understanding Capital Market Capital market in simple words means the market for long term investments. These investments have a lock-in period of more than one year. Here, the buyers and sellers transact in capital market instruments like bonds, debt instruments, debentures, shares, derivative market instruments like swaps, ETFs, futures, options, etc. Let us now understand the types of capital market. Types of Capital Market The capital market is of two types i.e. Primary Market and Secondary Market. Primary Market The primary market is also called “New Issue Market” where a company brings Initial Public Offer (IPO) to get itself listed on the stock exchange for the first time. In the primary market, the mobilisation of funds is done through right issue, private placement and prospectus. The funds collected by the company in the IPO is used for its future expansion and growth. Primary markets help the investors to put their savings into companies that are looking to expand their enterprises.  Secondary Market The secondary market is a type of capital market where the securities that are already listed on the exchange are traded. The trading done on the stock exchange and over the counter falls under the secondary market. Examples of secondary markets in India are National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). After learning about the types of capital market, let us now learn about the capital market instruments through which money is raised. Ways of Raising Funds Offer through Prospectus In the primary market, the prospectus is used to raise funds. The company invites the investors and the general public through an advertisement known as the prospectus to subscribe to the shares of the company. The shares or debentures are allotted to the public on the basis of subscription. If the company receives a high subscription then allotment is done to them on pro-rata basis. The company hires merchant bankers, brokers or underwriters to sell the shares to the public.  Private Placement Some companies try to avoid the IPO route to raise funds as it is very costly. Instead, they give investment opportunity to few individuals via private placement. Here the companies can offer their shares for sale to select individuals, financial institutions, insurance companies and banks. This way they can raise funds quickly and economically. Rights Issue The structure of capital market allows the companies in need of additional funds to first approach their current investors before looking at the other sources for finance. The right issue gives the current investors the first opportunity to make additional investments in the company. The allotment of right shares is done on pro-rata basis. However, if the current shareholders of the company do not want to exercise their rights, the shares can be offered to the public. e-IPO e-IPO means Electronic Initial Public Offer. e-IPO is an agreement between the stock exchange and the company to offer its shares to the public through online mode. It is a fast and speedy process. The company here needs to appoint registrar to the issue and brokers to accept the application received from the public. The above mentioned are the ways of raising funds through the capital market. Let us now learn about the various functions of the capital market. Functions of the Capital Market Helps in the movement of capital from the people who save money to the people who are in need of it. Assists in the financing of long term projects of the companies. Encourages investors to own the range of productive assets. Minimises the transaction cost. Helps in the faster valuation of financial securities like debentures and shares. Creates liquidity in the market by facilitating the trading of securities in the secondary market. Offers cover against price or market risks through the trading of derivative instruments. Helps in efficient capital allocation by way of competitive price mechanism. Helps in liquidity creation and regulation of funds. The above mentioned are the functions of the capital market. The capital market performs its functions with the help of buyers and sellers who interact and transact. The structure of the Indian capital market is well regulated and highly organised. 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."

    read more