The stock market is as consistent a form of investment as a game of roulette. But the more one hit the books of stocks, and the more one apprehends the true nature of stock market investment, the better and smarter one can manage their money.
Before moving ahead some basic information to understand stocks is a need of hour. A share in the ownership of a company is what is called a “share of stock”, and resultantly shareholder (buyer or owner of stocks) is authorized to a trivial portion of assets and earnings of that respective company. Now the question is why the company is interested to sell or share its stocks to its shareholders, and general public? The answer is that company wants money.
And for company there are two means to raise money either through debt financing, or through equity financing. Debt financing is borrowing of money in the form of loan, for which company would be obliged to pay interest. However, on the other hand equity financing is selling of stocks by the company without any fear of paying interest on the attained money. More precisely by selling stocks the company is basically dividing its risk amongst its shareholders, so in case if company defaults, the founder of that company lose a number of thousand chunks of other people’s money.
Though, countless companies pay a dividend (a distribution of profits) on their shares. These dividends can be taken in the form of cash or can be reinvested.
Now coming to stock prices, these aren’t static. From the second a stock is sold to the public, its price will rise and fall based on “free market forces.” These free market forces are not a mystery at all, the aforementioned is the game of demand and supply. It is these ever-fluctuating market forces that turn short-term movements of the stock market so challenging to foresee. And that is accurately the reason why short-term stock market investing is so risky, while traded volume of Pakistan Stock Exchange FY19 was around 2.2 trillion rupees.
Here interesting thing is supply of stocks is generally fixed, so the main movements are on the demand side as what makes concerns to buy or sell stocks. The demand movements of stocks in hence based on three aspects; firstly, technical, secondly fundamentals, and lastly practical aspects.
The reason of telling this whole story is to bring into consideration the commodity market, it is same as stock market but it involves buying, selling, and trading of raw goods like gold, silver, platinum and oil rather than shares. Here commodities are the investment tools for making profit.
Commodities are unpredictable too, implicating their prices to often witness wide swings. For this reason, commodity futures are considered high-risk investments. But still commodity investors sometimes earn huge returns on the basis of the notion “higher the risk, higher the return” as commodities support in hedging against inflation, against wars, and other such crises (Corona is a case as well which will be discussed in a while).
There are a number of ways to invest in commodities, such as Futures, Options, and Exchange traded funds (ETFs). And its price or shares depends on demand and supply mechanism as well. Future contracts are the ones in which an agreement is made to buy or sell a specific quantity of a commodity at a set price at a later time. Futures are available on every category of commodity with two types of investors participation; Commercial or institutional users of the commodities and Speculators. However, ETFs are traded alike stocks, letting investors to participate in commodity price fluctuations without investing directly in futures contracts.
Now as for shares, stock market is the go to place similarly for commodity trading Mercantile Exchanges are the places for trading. Latter refers to the physical and non-physical commodity trading. Non-physical refers to online trade or settlements. A number of markets worldwide facilitate the buying and selling of these materials and commodities including the London Metals Exchange, the Chicago Board of Trade, the Chicago Mercantile Exchange, the New York Mercantile Exchange and the Bolsa de Mercadorias & Futuros in Brazil.
Pakistan has its own registered mercantile market known as Pakistan Mercantile Exchange Limited (PMEX) started its operations in 2007 as being Pakistan’s only licensed Commodities Futures Exchange with internationally renowned trading systems. It is licensed and regulated by the Securities and Exchange Commission of Pakistan (SECP). And its membership is open for all and you can buy/sell commodities over PMEX with designated brokers too, who will assist you in understanding the markets trends and grabbing profitable opportunities in commodities. In FY19, PMEX traded value was 2.912 trillion rupees.
Now moving mark towards three important current practical scenarios for better understanding is a must thing as how market moved. In September 2019, Saudi Aramco drone attack brought great disruption as about half of normal production stopped, it was an active oil war. In a single day Saudi stock market fell by 2.3%. With this attacked it resulted in the shortage of oil supply, that pushed unreached demand and leading to high international oil prices.The attack in Saudi Arabia sent traders scrambling to buy oil contracts. Second important practical example is of Russia- KSA oil war, And lastly the Corona Pandemic. It brought massive demand shock.
In all, this media played an appreciative role, whether it be social media, electronic media or international broadcasting. General public would never be able to understand what was going on, if these hubs weren’t there. For laymen it may not be of much interest but for brokers it was a blessing in disguise. They made their commodity investment movement accordingly and with this people have earned a lot of good returns as well.
Investing is thus all about managing risk, and here are two ways to approach risk management: first approach; according to Warren Buffet, Rule #1 of investing is Never to lose money, and Rule #2 of investing is never to forget rule #1.Second approach; If focus is on protecting the downside, the upside will take care of itself. So basically investing in commodities market is apparently a win-win situation and this whole story is enough to encourage people to take advantage of this, while investing in Commodities.