Commodity Trading-Mutual Funds

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The truth is that commodity trading is as risky as you want to make it.



Commodity Trading
By Alex Weis
Date added: June 1st, 2002 Main article: I should begin this article by disclosing the fact that I have never traded commodity futures and my acquaintance with this topic is through research. Most investors are familiar with stocks, bonds, and mutual funds as forms of investment. Too often commodity trading is ignored even though it has many advantages over other types of investments. The principal attraction of commodity trading is its potential for large profits in a short period of time. In spite of that, because most people lose money, commodity trading has gained the reputation of being too risky for the individual investor. The truth is that commodity trading is as risky as you want to make it. If you act prudently by doing your research and having someone with more experience aide you, then your prospects should be good. Unlike other kinds of investments, such as stocks and bonds, when you trade commodity futures, you do not truly buy or own anything. You are merely speculating on the direction of the price of a certain commodity. If you believed that the price of wheat was going to rise, you would buy future contracts. Conversely, if you thought the price of wheat was going to drop then you would sell future contracts. In addition to buying futures on products like wheat and corn, one can buy futures in currency and market indices. An advantage of trading futures on market indices is that you have to invest a lot less money than you would if you were buying stocks. For instance, a $10,000 futures contract on the S&P 500 is equivalent to about $350,000 dollars in stock. Let's say you are expecting the stock market will go up in the short term, you could buy many of the stocks that compose the S&P 500 stock index (the route most people take) or you could buy an S&P futures contract . If you invested $350,000 in stocks in the S&P 500 on the first trading day of September 1996 and held the investment for two weeks you would have made a profit of $20,000. If you, instead, bought a $10,000 futures contract on the same time period you would have made the same $20,000, a two hundred percent gain. The downside is that commodity trading is usually done on margin to leverage your investment so a small downward swing in the price could cost you your entire investment. For this reason one must be discreet and make informed decisions. Commodity futures trading is not a replacement for other forms of investment, it simply offers another way of obtaining diversification in one's portfolio.

How commodity trading works
Sulagna Chakravarty | January 19, 2006

Answer these questions.
Do you think gold prices will go up further? Are you sure that crude oil prices are going to fall? Have you heard that the soya crop this year is bad and will result in soya prices going up? If you believe that these predictions have a good chance of coming true and are willing to bet some money on them, you could try your hand at playing the commodity futures market. In How to trade in Futures, we spoke about stock futures. Here we talk about commodity futures.

The commodity markets have changed a lot from the poky, little hole-in-the-wall trading offices in narrow streets next to crowded markets where traditional dhoti-clad merchants used to trade. Brand new commodities exchanges---the main ones are NCDEX and MCX---have been set up and these are fully computerised. More and more stock brokers are setting up commodity brokerages as well, and trading volumes in commodity futures is widely predicted to rival the volume of derivative transactions (futures and options) on the stock exchanges. What's more, you can also trade online. Why commodities trading?

Well, let's suppose you want to buy gold because you believe that the price of gold will rise.

You could then buy gold ingots, store them, wait for them to go up in price, and then sell them at a profit.

But, you have to be sure that the gold you buy is pure, you have to find a place to store it, you have to provide the security, transport it to vault and other such hassles.

A far better way to invest in gold would be to buy gold futures from the commodities exchange.

How do you do that?

When you buy a Gold Futures contract, you undertake to do three things. 1. Buy the amount of gold specified in the contract. 2. Buy it at the price specified in the contract. 3. Buy it on the expiry of the contract. This could be after one month, two months, three months and so on. Of course, if you sell the Gold Futures contract before it expires, then you don't have to worry about actually buying the gold. Let's say you buy the Gold Future contract at say Rs 7,200 per 10 gm. Your hunch comes true and the gold prices rally to Rs 8,000 per 10 gm. You can sell the Gold Futures any time before expiry of the contract.

Gold and other commodity futures prices are quoted on the commodity exchanges in exactly the same way in which stock prices or stock futures prices are quoted on a daily basis in the stock markets.

How it works

Just like stock futures (Read How to trade in Futures to understand how futures work).

When you buy a Futures, you don't have to pay the entire amount, just a fixed percentage of the cost. This is known as the margin. Let's say you are buying a Gold Futures contract. The minimum contract size for a gold future is 100 gms. 100 gms of gold may be worth Rs 72,000. The margin for gold set by MCX is 3.5%. So you only end up paying Rs 2,520.

The low margin means that you can buy futures representing a large amount of gold by paying only a fraction of the price.

So you bought the Gold Futures contract when it was Rs 72,000 per 100 gms. The next day, the price of gold rose to Rs 73,000 per 100 gms. Rs 1,000 (Rs 73,000 – Rs 72,000) will be credited to your account. The following day, the price dips to Rs 72,500. Rs 500 will get debited from your account (Rs 73,000 - Rs 72,500). What you need to know Compared to stocks, trading in commodities is much cheaper, because margins are much lower than in stock futures.

Brokerage is low for commodity futures. It ranges from 0.05% to 0.12%.

Because of this, commodity futures are a speculator's paradise.

If you are a hard-core trader who follows the technical charts and do not really care what you trade, and if you are nimble and savvy, then commodity futures could be another asset class that you would be interested in.

The advantages in this line is that there are no balance sheets, no complicated financial statements----all you have to do is follow the supply and demand position of the commodities you trade in very closely.

Go onto the commodities trading exchange - NCDEX and MCX - to see which commodities are offered for trading, their contract size and other criteria. You will have to get hold of a commodities broker but that should not be a problem. There are lots of brokers that offer commodity trading these days. But, it would be wise to avoid commodity trading if you are a rookie. A better move would be to initially trade in stock futures before opting for commodity futures.

A Look into Mutual Funds
By Chris Stallman Bio | E-mail
Date added: August, 1999 Main article: Ok, so maybe you want to buy stock but you don't know which one. Or maybe you are afraid to put your money into a stock because you might lose it. Instead of giving up on investing (big mistake), you might want to look into mutual funds. A mutual fund is a large pool of money that investors create which is used to buy many different stocks. Rather than just buying an individual stock, investors pool their money by giving it to a mutual fund. Because all these investors have combined their money, they can afford to buy many different stocks. A mutual fund is managed by a portfolio manager. This person's job is to control all of the investors' money and invest it into a group of stocks or bonds. He or she also decides how much to invest in each stock. This person has quite a bit of responsibility so they're usually assisted by a team of analysts. A mutual fund has a price, like a stock. This price is called a Net Asset Value, or NAV. It tells you how much one share of that mutual fund costs. What Makes Mutual Funds So Great? Mutual funds are great for people who don't want to take as much risk with their money. Mutual funds are less risky because they buy a bunch of stocks. If one stock does poorly, you won't lose as much money as you would if that was the only stock you owned. Mutual funds are also good for people who don't want to spend too much time investing. Portfolio managers handle their money and invest it for them. When you buy stock, you have to pay a commission. However, the fees involved with investing in a mutual fund are often much less in comparison. Many people who want to invest are somewhat afraid to actually do it. Investing is an important step to becoming rich in the long-term, so mutual funds offer a safer way to reach your goals.

Closed-end Mutual Funds
By Chris Stallman Bio | E-mail
Date added: June, 2002 Main article:

If you've been researching the stock market for a while, then you have probably heard talk about mutual funds by now. Mutual funds are extremely popular among investors. After all, there are about 10,000 of them in total. Despite their popularity, there is still one kind of mutual fund that you might not be aware of: the closed-end mutual fund. Mutual funds come in two different forms, they are either open-end or closed-end mutual funds. The most common form of mutual fund is the open-end fund, but there are still quite a few closed-end mutual funds out there. Although they both are based on people pooling their money to buy a group of stocks or bonds, there are still quite a few differences among the two. Closed-end mutual funds closely resemble stocks. This is because they are a combination of a stock and a mutual fund. They are stocks traded on stock exchanges, just like companies such as Disney or Pepsi. Rather than filling out forms and sending them in to the mutual fund family, you can buy the shares just like you would for any other stock. When someone wants to create an open-end mutual fund, they have to find a lot of investors before they open the fund. This gives them enough money to start with. They then begin issuing shares to regular investors. Over time, the amount of assets that the fund has will vary as investors buy and sell shares. The size of the fund will fluctuate because if an investor wants to sell their shares, the mutual fund has to pay them in cash right away. If the fund starts to do really well, more investors will invest in it and it will grow faster. However, if the fund does poorly, the investors might sell their shares quickly, thus shrinking the size of the mutual fund. Closed-end mutual funds work a little differently than this. Like open-end mutual funds, they must first start by gathering investments from the public. Once this is done, they issue a certain amount of shares. Because only a certain amount of shares are issued, if a person wants to sell their shares they have to find someone who wants to buy them and likewise with buying shares. This keeps the mutual fund's size from fluctuating. For example, if John Doe creates a $500 million closed-end mutual fund, it will remain that size forever unless its portfolio increases or decreases. Many portfolio managers like closed-end mutual funds because if they do poorly one year, they don't have to worry about losing all of their investors. Another point where closed-end mutual funds differ is in their Net Asset Value (NAV). To figure the NAV of a regular mutual fund, you divide the total value of all of the holdings and the number of shares. With a closed-end mutual fund, the price you see when you look up a quote may not actually be the NAV. Occasionally, closed-end mutual funds trade at a discount or premium to the actual Net Asset Value. Closed-end mutual funds are another way that investors can invest in a group of stocks and may be a good investment for you. Just be prepared to research them thoroughly, like you would for any stock or mutual fund.

Fund Classifications
By Chris Stallman Bio | E-mail
Date added: October, 2001 Main article:

When I first got started in investing, I heard somewhere that there were about 10,000 mutual funds but I didn't really believe it until I started researching them. That's when I realized that whoever told me that was correct. Mutual funds are a lot like humans: there's a lot of them and no two are alike. Each has its own unique size, shape, color, and preferences. To any new investor, it can prove to be a daunting task to find the one fund that is best for them. It's this very reason that we've decided to demystify some of the different fund classifications. Stock Funds Stock funds are probably the most common funds out there. These mutual funds invest a majority of their assets into common stocks. The fund might have a specific group of stocks that they look for (i.e. small-cap, mid-cap, or large-cap). These funds are typically best for moderate investors with a mid to long-term outlook. Bond Funds These are another popular type of mutual fund that invests in bonds. Rather than owning parts of many different companies, they invest in the debts of companies or the government and earn an interest that is paid out to the investors. These types of funds are good for conservative investors with a shorter time horizon. Balanced Funds A balanced fund is a combination of a stock fund and a bond fund. In order to reduce risk, the fund diversifies itself by buying a number of different stocks and bonds. This keeps the fund from dropping considerably in a down market. Unfortunately, it also doesn't appreciate as quickly in an up market. These funds are best for conservative or moderate investors with any time horizon. International Funds The US is just one of the many markets in the world. In order to open up the international markets to the average investor, international funds were created. By investing in an international fund, you can invest in stocks or bonds from other countries. Many small countries may be growing quickly and an investment in them could prove profitable but there are a number of added risks such as currency fluctuations and political turmoil. These funds are best for moderately aggressive investors with long time horizons. Sector Funds As their name suggests, sector funds invest in one specific sector of the market. For example, communications funds would invest in telecommunications and information companies. Investing in sector funds allows you to target one specific sector in order to maximize your return. But keep in mind that the risks are greater when you do this.

Hedge Funds
By Chris Stallman Bio | E-mail
Date added: June 1st, 2002 Main article: If you were to sit down with a list of all the mutual funds in the US and count them one-by-one, it'd take forever. That's because there are close to 12,000 mutual funds. However, that doesn't account for the number of hedge funds, which could greatly increase that number. A hedge fund is a privately-managed investment fund that is basically like a mutual fund in the sense that it pools people's money in order to diversify. However, there are quite a few notable differences between the two. One difference can be seen in the minimum initial investments. With a regular mutual fund, you can often get started with $2500 or less. With hedge funds, you're usually required to start with as much as $25k, $50k, $100k, or sometimes even $1 million! Hedge funds are usually restricted to the affluent so they usually aren't even considered by average investors. Mutual funds have as many regulations as a marine in bootcamp." That is a popular saying among investment professionals because funds have to abide by rules that the SEC sets. The SEC regulates mutual funds so they are often restricted in their investments. Hedge funds don't have this problem because they aren't currently regulated by the SEC. They are free to invest in other forms of speculative investments such as options and futures. They are also able to take advantage of short selling and buying on margin to increase the fund's performance. Hedge fund shareholders get hurt in the pocketbook when it comes to calculating the fees. Although the management fee is relatively small, 1-2% on average, the fund usually takes the first 20% in profits to keep for themselves. This means that the fund must earn a much higher return than a mutual fund to make it worth the fees. Despite the high fees and high minimum investments, hedge funds aren't necessarily bad. In fact, I might even say that they are good investments for certain people. For example, if you have a large amount of money saved and your portfolio is pretty conservative, it might not be a bad idea to put a small percentage in a riskier investment such as a hedge fund. Of course, that's considering you've done the proper research with the available information.

Hedge Fund Strategies
By Chris Stallman Bio | E-mail
Date added: July 19th, 2004 Main article:

While we find it highly unlikely that our readers will be investing in hedge funds anytime soon (after all, the minimum investment is usually $250,000), they're still interesting things to learn about. Like mutual funds, there are a variety of different hedge fund classifications. Each fund has its own strategy that it uses to try and earn a high return on investment for its investors. Each of these strategies varies in the types of returns they generate and in their expected volatility, as you are about to see. Aggressive Growth Volatility: High Aggressive growth hedge funds typically take an aggressive approach to investing by buying stocks with high P/E multiples and shorting stocks that are likely to miss their earnings estimates. They're usually biased towards investing in companies in the technology and biotechnology sectors. Distressed Securities Volatility: Moderate These funds buy equity or debt in companies that are facing bankruptcy. These fund managers usually think that the general public doesn't understand troubled companies very well so they seek to profit from deeply discounted securities. Emerging Markets Volatility: Very High Emerging market funds invest in stocks or bonds of emerging markets. These are considered very volatile because emerging markets typically have higher inflation and volatile economic conditions. Not all emerging markets allow short selling so hedging is usually not available. Income Volatility: Low Hedge funds with a focus on income usually focus on high-yield stocks or bonds. They also might purchase fixed income derivatives that enhance their profit from the appreciation and interest income. Macroeconomic Volatility: High Macroeconomic funds aim to profit from changes in global economies. They are typically involved in stocks, bonds, commodities, and currencies. These funds usually use derivatives to increase the impact of market movements. Market Neutral Volatility: Low Market neutral funds attempt to remove the market risk from their portfolios by being both long and short in a given sector. A market neutral fund may pick two similar stocks and purchase the one it feels is better and short the stock that is weaker, hoping that the stock it likes more outperforms the other stock. Opportunistic Volatility: Depends These types of hedge funds often vary their investment strategies to whatever conditions they feel are profitable at the time. For example, if the IPO market is hot, they may attempt to buy in on a large number of IPO's. Or they will be involved in hostile takeovers.

How to Evaluate No-load Mutual Fund Investing
By Ulli Niemann
Date added: February, 2003 Main article:

What are you thinking when it comes to your no load mutual fund selections? Are you saving pennies and sacrificing dollars? Are you spending your time looking at expense ratios, analyzing Morningstar ratings and searching for funds with low fees and no 12b1 charges? If you are like most people, you know these things in and out. You've spent hours evaluating them, and your chosen mutual funds cost little to purchase and maintain. But they still don't perform to your hopes and expectations. So, why is this happening? Because this kind of investing focuses on cost as opposed to value. Investors with this philosophy have usually interviewed numerous advisors. But instead of trying to find someone suitable with a sensible approach, they only want to know who has the lowest fees. That's like going to the cheapest auto repair shop and getting the best price, but your car still doesn't run well. Then there are the investors who call or email me wanting a recommendation on a no load mutual fund. They want one with no 12b1 charge, but they completely ignore the issue of how the fund might perform. Both of these kinds of investors spend their time trying to save pennies and in the process they are losing dollars. Instead of falling into the penny wise, dollar foolish trap, here are some ideas that will assist you in evaluating the end profit rather than just the short term saving. 1. Shift your focus from penny pinching to looking at the big picture: What can a mutual fund or an advisor do for you, not how much does it cost? Why? If you buy a given no load mutual fund at the right time and it gains a tidy 15% for you over a 6 week period, would you really care about the costs? If a mutual fund-or an advisor for that matter-can give you superior performance and an increase of several percentage points over your bargain price pick wouldn't you pay an extra 0.25%? 2. Consider finding a fee-based investment advisor who uses a facts-based methodology and has a track record indicating those kinds of returns. For example, in my own practice I used a trend tracking approach to get my clients into the market on April 29, 2003. Plus, our research and homework led us to recommending funds that gained anywhere from 11.50% to 22.00% over the following 6 week period. How did you do during that time? Do you think any of my clients care whether one of these funds has a small 12b 1 charge? Or whether they have the lowest expense ratios in the industry? I know they don't. The bottom line is to look at costs as balanced by performance and that's where you find value. Then seek true value not simple savings, enjoy healthy dollar-level returns and don't sweat the pennies.

Load vs. No-load
By Chris Stallman Bio | E-mail
Date added: February, 2000 Main article:

Recently, we received an e-mail from a young investor who wanted to invest in a mutual fund but didn't know what the terms "Load" and "No-Load" meant. These terms are very important for investors, especially young investors, so we're going to cover this topic for you. All mutual funds carry fees that you must pay in order to invest in the mutual fund. These fees usually cover the expenses that the mutual fund has. No one likes to pay fees when they invest but it is necessary in order to keep the mutual fund running. Loads One type of fee is called a "load". This is a fee that you have to pay on top of all the other fees. These fees are usually pretty high, about 3-5% on average. There are two types of loads: front-end loads and back-end loads. A front-end load charges you a fee on what you invest. For example, if you wanted to invest $500 into a mutual fund with a 5% load, the mutual fund would take out $25 and you would get to invest the rest. A back-end load is a fee that you pay to take your money out of the mutual fund. For example, if you wanted to take $1000 out of a mutual fund with a 5% back-end load, you would have to pay $50 just to do so. No-Load Mutual Funds In the 1990's, no-load mutual funds started to become very popular. As their name suggests, these are mutual funds that don't charge you large fees in order to invest in them. They still have a couple small fees but not nearly as much as load mutual funds carry. Why You Should Invest In No-Load Funds For young investors, investing in no-load mutual funds is very important. Our time horizon is much longer so investing in no-load mutual funds helps our money compound more. Here is an example of how much of a difference there is: Jimmy invests $500 in fund A which has no loads and earns 13% per year. Johnny invests in fund B which has a 5% front-end load which earns 13% per year. Neither of them touch the money until they retire 50 years later. Jimmy's mutual fund is now worth $225,367 and Johnny's mutual fund is now worth $214,099. So, as you can see, Johnny earned $11,268 less just because his mutual fund had a 5% load. We urge you to invest in no-load mutual funds because young investors are those who have the most to gain from them. One excellent no-load mutual fund that you should take a look into is the Pax World Balanced Fund.

Portfolio Turnover
By Chris Stallman Bio | E-mail
Date added: June 1st, 2002 Main article: I received an e-mail the other day from a 14-year-old young investor who was looking at mutual fund information and came across a section labeled "Turnover Rate" and he was unsure what it meant. Every mutual fund has a portfolio turnover rate. The turnover rate is basically the percentage of the portfolio that is bought and sold to exchange for other stocks. For example, if there are 20 stocks in the mutual fund and 5 of those stocks are sold one year so that the mutual fund will be able to buy 5 more stocks, then the turnover rate would be 25% (5 / 20 = .25). The turnover rate may seem like just another number for you to look at and confuse you but it does have major significance. As a young investor, you may not be too concerned about taxes but your parents might be. This number helps you determine how much you will have to pay in taxes for that mutual fund. For example, if the mutual fund has a low turnover rate, you will probably pay less in taxes. If it has a high turnover rate, you will probably pay more in taxes. For your comparison, the average turnover rate is about 50%. Some types of mutual funds just naturally have low turnover rates. These include retirement funds, growth and income funds, and equity income funds. Likewise, some mutual funds have high turnover rates. These are usually mutual funds that are riskier and require more concentration such as technology funds. We hope this has cleared up a couple questions. We apologize if we lost you anywhere in there but if we didn't, you might be able to put this knowledge to use sometime, because the turnover rate is a very important number to consider.

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