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Stock Market, Commidity Market

What every investor needs to know about Stock Market, Currency market and Commodity Market to make profits?

by Holistic Leave a Comment | Filed Under: Stock Market Investment

Few best kept secrets, you may not know about Stock Market, Currency market and Commodity Market

What is the most profitable place to invest? Stock Market or currency market or commodity market…? Confused about which market to invest…?

Understanding the fine distinctions between these markets, often spells the difference between failure and success in investing.

Being a regular reader of personal finance columns, you must be knowing about what stock market is, what currency market is and what commodity market is. I would like to highlight a key difference between stock market and the two other markets.

A Key Difference:

Stock exchange has got both the spot market as well as the derivatives market. Whereas the commodity exchange or currency exchange have only the derivatives market.

Let us quickly recall what is spot market and derivative market.

In a spot market, as an investor you can buy shares and hold it perpetually. You can sell it whenever you decide to. You can hold the shares for long term – say 5 years or 10 years. For Example, you can buy Infosys shares and keep it for 5 years or 10 years.

In the derivatives market, you will do advance booking to buy or sell a particular quantity of shares or commodities or currencies on a pre-determined settlement date for a pre-fixed price. As you are doing only advance booking you need not pay the complete price; you need to pay only the margin money.

You can’t hold these contracts perpetually. You need to either buy or sell the shares or commodities or currencies on the pre-determined settlement date.

Let me illustrate. In the commodities market you would like to trade in crude oil. Minimum size of a crude oil contract is 100 barrels. The price of the contract as of 18th june 2014 is Rs. 632100. This contact will expire on 19th Nov 2014. You need to pay 5% of the contract value as the margin money.

If you expect the crude prices to go up, then you can buy this contract. If you expect the share prices to go down, you can sell this contract.

Say you expect the prices to go up. So you buy this contract by paying the margin money of Rs.31605. On 19th Nov, if the crude moves up to Rs. 6,39,900, then you will gain Rs. 7800.

On 19th Nov, if the crude moves down to Rs. 6,24,300, then you will loose Rs.7300.

Let me reiterate the key difference. Currency and commodity exchange have only the derivatives market. Stock exchange has got both the spot market and the derivatives market.

Derivatives as a tool for hedging:

The original purpose behind derivatives is hedging. You can hedge yourself against the future fall or rise in the price of a particular asset.

Why do you need to hedge? Let me explain you with an example.

Say you are an importer. You have placed an order with the exporter. You need to pay the exporter at the end of 3 months in dollars. You are not sure how the exchange rates will move. If the rupee value falls at the end of 3 months, then you may end up paying more in rupee terms to settle the exporter. This will cut your bottom line badly.

So you do advance booking for dollars which you will take delivery at the end of 3 months by paying a small margin. By doing this you have removed the downside. You have hedged yourself against the rupee fall.

Similarly an agriculturalist that is producing wheat can book the sale price for his produce now-itself, however he can do the delivery after 3 months. He has hedged himself against the fall in the prices of wheat.

Somehow, the fall or rise in the price of a particular asset is going to affect you. So you protect your position by hedging with derivatives.

Derivatives as a tool for Speculation:

Though the original purpose of derivatives is hedging, it is often used as a tool for speculation. Though, the fall or rise in the price of a particular asset is not going to affect you, you trade in derivatives to profit from the price movements of an underlying asset.

Say you are not an importer. However you expect that the rupee value will fall and want to gain out of that. Therefore you do advance booking for dollars. This is pure speculation.

Stop Speculating and Start Investing:

Stop speculating in the derivatives market and Start investing in the spot market. Speculating in derivatives market is a zero sum game. Either buyer or seller of the contract can make money. Both can’t make money. Whatever the loss of one person will be the gain of another person. Money is not generating more money. Money is not put into productive use. Money is rotated. Money moves from one pocket to another pocket.

As you need to pay only the margin money, you may take over exposure which will increase the overall risk. Either you will make huge profit or huge loss. This leads to greed and emotional imbalance. Therefore you will loose control at some point in time.

A person who gains in ALL the speculative transactions is only the broker. That’s why Benjamin Graham says, “The investors make money for themselves and the traders make money for their broker”.

When you are investing in shares through the spot market, both the buyer and seller can make money. For Example, Mr.A can buy a share for 100 Rs and keep it for 5 years. At the end of 5 years, he may sell it to Mr.B for 200 Rs. Mr.B can hold the shares for another 5 years and sell it to Mr.C for 400 Rs.

Both the buyer and seller can make money. Here money is not rotated; money is generated.

As you are investing in shares of a company, the company does its business with your money as capital. The company generates more money by way of profit in its business. Because of the profit the share prices go up.

As our money is put into productive use, it breeds more money. As a result, both the buyer and seller can make money by investing in the shares for long term. If you patiently accept the short term volatility you will have long term gain. As you are patient enough and investing only long term money in the stock market, you will be emotionally balanced.

In the spot market, as you are investing for long term, you need to buy the shares by paying its full value and not paying just the margin money. So you will take risk only to the extent you can afford to. Hence, you will not loose control over your investments.

Tell me why:

I have asked this question frequently with the investors. Tell me why you would like to invest in the stock market or commodity market or currency market. Most of the times, their reply will be very vague. They will say, ‘I would like to make more money’.

When you just say you want t make more money, it is not very clear that, you would like to make more money in the short term or long term…? What is your return expectation…? Is it 15% or 50%…?

As you are not very clear about your purpose of investing, it is easy for the broker to confuse you and give you a sugar-coated sales talk about making quick money by trading in the derivatives market.

Why brokers recommend trading in derivatives market over investing for long term in the spot market? In the derivatives market, though you are asked to pay only the margin money, the broker charges his commission as a percentage of the total contract price.

In addition to that, in derivatives market, you can’t invest for long term, so you need to frequently trade. For every trade broker makes money. Also he can feed your greed easily.

In the spot market, if you invest for long term say 5 years or 10 years, broker makes less commission, that too once in a while.

If you are very clear about why you want to invest in the stock market or commodities market or currency market, then the sugar coated sales talks of the broker will not affect you. The very clear answer for the question ‘why you want to invest in the stock market…?’ is ‘I want to meet my long term financial goals with inflation adjusted returns by taking calculated risk’.

If you have any comments or questions, write them in the comment box below.

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20. September, 2023.
Na eppo tha financial goal la enna therunju kitta..enaku full support panna thuku thank you..🥰 friendly nalla pesuninga...
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Holistic Investment is really nice and trust worthy financial planner. They plan things in realistic manner and also consider future dimensions of items also. They are always available for small or big queries, and also share knowledge and help you become more financial literate, and take right decisions in all financial matters.
Dr. Padmakar Wagh
Dr. Padmakar Wagh
27. June, 2023.
Mr Ramalingam who is the Director of Holistic investments has a excellent financial planning knowledge, the entire Holistic team has been very helpful in my financial planning journey and execution. This is my third year of financial planning with Holistic investments and so far I am satisfied with the progress I have made.
Binamra Dash
Binamra Dash
13. June, 2023.
Very knowledgeable team. Guided me properly with my concerns.
Murugan Bala
Murugan Bala
16. May, 2023.
I have been investing through Holistic for the past 4 years and my experience with them have been really good. The team of Rajan and Ramalingam doing excellent services in meeting my needs through proper guidance on investment options customized. Theya re always available on any specific needs time to time.I would recommend their services to my friends and colleagues too.
Neeraja R K
Neeraja R K
15. May, 2023.
Working with holistic investment planners was a really wonderful experience for me. For me the entire team had been very supportive in all ways. Their working strategy is well planned and methodical. They always keep me informed and updated about my investments, so that i can take informed decisions. The team first helps us understand the basics of investments, then they collect data, work with the data and then provide investments solutions according to our goals which i find it the best. Good luck to the entire team.
deepika kulkarni
deepika kulkarni
21. April, 2023.
We have availed holistic service from last couple of years and are very happy with our decision. Their systematic approach has helped us plan our finances and meet our goals. They provide very comprehensive and detail plan and resource management every 6 months which ensures we are on right track to achieve our goals. Rajan and Ramalingam from holistic are always there to help us with our queries. They have also accommodated any changes to our goals or resources mid year in a professional manner.
Ashook Panneerselvam
Ashook Panneerselvam
21. March, 2023.
For the past year, I have been interacting with Holistic Investment. I frequently read Nanayam Vikatan, which is a publication owned by the Vikatan family, and I was impressed by their financial advice. My brother also suggested holistic investing, and he also got excellent financial advice. Holistic Investment follows a methodical approach that I really liked because they first fully understand our financial situation "As Is," which includes "Assets" and "Liabilities," as well as our short-, mid-, and long-term goals, on the basis of which they provide a detailed plan on how to achieve our goals for which they are recommending various investment options. Even in the investment advice, why do they suggest particular mutual funds and what is the justification behind it, which adds transparency to the client. One essential factor is that they are always available. Even if I needed to make some urgent financial decisions, they were very helpful and kind to answer my questions via phone calls, WhatsApp messages, and emails. I was very happy with their service. Periodic reviews are also crucial, even though I have forgotten that they occur once every three months, and I also intend to renew this year.
Mahesh S
Mahesh S
19. February, 2023.
I have availed Holistic investment service for last 1yr against my early retirement decision. they provided me comprehensive detailed report how to move ahead with my existing resources. moreover, they are available to me whenever i have any doubt.. highly recommend others to avail their service
Google rating score: 4.5 of 5,
based on 104 reviews

Google Reviews

Lingesh MMG
Lingesh MMG
20. September, 2023.
Na eppo tha financial goal la enna therunju kitta..enaku full support panna thuku thank you..🥰 friendly nalla pesuninga...
Ravi L
Ravi L
15. August, 2023.
Very knowledgeable and professional team, guided me with the precise financial solutions and timely suggestions.
Hardik Dave
Hardik Dave
5. July, 2023.
Holistic Investment is really nice and trust worthy financial planner. They plan things in realistic manner and also consider future dimensions of items also. They are always available for small or big queries, and also share knowledge and help you become more financial literate, and take right decisions in all financial matters.
Dr. Padmakar Wagh
Dr. Padmakar Wagh
27. June, 2023.
Mr Ramalingam who is the Director of Holistic investments has a excellent financial planning knowledge, the entire Holistic team has been very helpful in my financial planning journey and execution. This is my third year of financial planning with Holistic investments and so far I am satisfied with the progress I have made.
Binamra Dash
Binamra Dash
13. June, 2023.
Very knowledgeable team. Guided me properly with my concerns.
Murugan Bala
Murugan Bala
16. May, 2023.
I have been investing through Holistic for the past 4 years and my experience with them have been really good. The team of Rajan and Ramalingam doing excellent services in meeting my needs through proper guidance on investment options customized. Theya re always available on any specific needs time to time.I would recommend their services to my friends and colleagues too.
Neeraja R K
Neeraja R K
15. May, 2023.
Working with holistic investment planners was a really wonderful experience for me. For me the entire team had been very supportive in all ways. Their working strategy is well planned and methodical. They always keep me informed and updated about my investments, so that i can take informed decisions. The team first helps us understand the basics of investments, then they collect data, work with the data and then provide investments solutions according to our goals which i find it the best. Good luck to the entire team.
deepika kulkarni
deepika kulkarni
21. April, 2023.
We have availed holistic service from last couple of years and are very happy with our decision. Their systematic approach has helped us plan our finances and meet our goals. They provide very comprehensive and detail plan and resource management every 6 months which ensures we are on right track to achieve our goals. Rajan and Ramalingam from holistic are always there to help us with our queries. They have also accommodated any changes to our goals or resources mid year in a professional manner.
Ashook Panneerselvam
Ashook Panneerselvam
21. March, 2023.
For the past year, I have been interacting with Holistic Investment. I frequently read Nanayam Vikatan, which is a publication owned by the Vikatan family, and I was impressed by their financial advice. My brother also suggested holistic investing, and he also got excellent financial advice. Holistic Investment follows a methodical approach that I really liked because they first fully understand our financial situation "As Is," which includes "Assets" and "Liabilities," as well as our short-, mid-, and long-term goals, on the basis of which they provide a detailed plan on how to achieve our goals for which they are recommending various investment options. Even in the investment advice, why do they suggest particular mutual funds and what is the justification behind it, which adds transparency to the client. One essential factor is that they are always available. Even if I needed to make some urgent financial decisions, they were very helpful and kind to answer my questions via phone calls, WhatsApp messages, and emails. I was very happy with their service. Periodic reviews are also crucial, even though I have forgotten that they occur once every three months, and I also intend to renew this year.
Mahesh S
Mahesh S
19. February, 2023.
I have availed Holistic investment service for last 1yr against my early retirement decision. they provided me comprehensive detailed report how to move ahead with my existing resources. moreover, they are available to me whenever i have any doubt.. highly recommend others to avail their service
Google rating score: 4.5 of 5,
based on 104 reviews

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