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How I lost money in commodity trading
Satish Vijaykumar |
January 20, 2006
In reaction to our earlier pieces on futures trading and commodities trading, Get Ahead reader Satish Vijaykumar tells us how he lost money when he dabbled in Commodity Futures.
The day the Sensex crossed 9000, I sold all my shares and decided to park my money elsewhere. I was faced with the perennial question that plagues investors: Where must I invest?
Equity mutual funds? They too would be dependent on the stock market performance.
Public Provident Fund? And block my money for 15 years? No way!
LIC policies? Not too happening.
Real estate? Way above my budget.
Commodities trading? Ah ha, that sounded good.
With 80% of the Indian economy being agro-based, commodities trading has a lot of scope (at least, that's what I figured). In commodities trading, you actually trade in commodities (like gold, wheat, crude oil, etc, not stocks).
The success of companies like Financial Technologies (known for its trading software), and the amount of trading done on MCX (the Multi Commodity Exchange of India) and NCDEX (the National Commodity and Derivatives Exchange Ltd), left no doubt in my mind that this was a booming industry.
I wanted to be part of it.
I set the ball rolling
I decided to invest Rs 2,00,000 with a leading commodity trading firm in the hope of achieving returns in the 20% to 30% range by the end of the year.
A friend who works there gave me a tutorial and PDF files so I could learn and understand the business (read How to trade in Futures and How commodity trading works to grasp the basics).
There are two things you must know.
First of all, when you buy a Futures contract, you don't pay the entire value of the contract, just a margin.
Let's say someone is selling a Gold Futures contract of 100 grams of gold that is worth Rs 72,000. If I buy it, I will not have to pay the entire amount. The exchange will set a margin at, say, 3.5%. This means I pay just Rs 2,520 to buy it (3.5% of Rs 72,000).
Secondly, you make and lose money on a daily basis. Here's an example that assumes I have bought that Gold Futures contract:
Let's say the price of gold rises to Rs 73,000 per 100 grams the next day. I make Rs 1,000 (Rs 73,000 – Rs 72,000) and the amount is credited to my account.
The day after, the price of gold dips to Rs 72,500 per 100 gms. I lose Rs 500 (Rs 73,000 – Rs 72,500) and the amount is debited from my account.
I guess you must have got the hang of it by now.
After a week of poring over all the literature, I opened an account with the commodity broking firm. They would invest my money based on the decisions taken by their research team.
My adventure begins
The first few days, life was great. I was making money. I would make a minimum of Rs 500 to a maximum of Rs 2,000 every day. After that, Lady Luck's smile turned into a frown and the firm's research calls no longer hit the target.
My losses began to mount daily: Rs 2,000, Rs 3,000 and even Rs 5,000 in one day!
In 10 days, I had lost Rs 17,000. Can you blame me for getting jittery?
Reality hit me: I was in unchartered territory, clueless about the products I was trading in. I did not understand a thing the dealer said in her daily briefings. She gave me her usual spiel and egged me on, saying there would be losses initially but, in the end, everyone made money.
Momentarily relieved, I breathed a sigh of relief.
I was going by the logic: Be fearful when others are greedy and greedy when the rest are fearful.
That's when the bombshell fell. The very next day I had lost another Rs 17,000 by trading in gold.
That did it for me. It was time to get out. Fast!
After adding the brokerage and the taxes, I realised I had managed to lose Rs 47,000 in 15 days flat.
But, since I tend to look at the bright side, I have to admit the last few days were a great learning experience.
Am I feeling cheated or sad that I lost such a huge amount? Not really.
I guess I've reached the stage where feelings or emotions don't last too long. They just vaporise after a while (like the money I made and lost in day trading).
But hey, I am wiser. So let me share some pearls of wisdom with you.
Lessons learnt the hard way
~ Don't run after anything out of sheer greed.
~ Investing without sufficient knowledge or adequate research will hit you hard.
~ Never rely solely on the judgment or research of others. If it is your money, you take the call and do your own research.
~ Don't shy from asking questions and demanding more information. Remember, it is your money at stake.
~ Stick to investments you have some amount of knowledge like shares or real estate.
~ When in doubt, get out!
~ Tough times don't last (and neither do great profits), tough people do.
~ Day Trading (buying and selling in one single day) is a flawed method of trading.
~ Look at technical charts that track commodities over a three to six month period to get a more reliable indication as to where the market is headed.
~ Most important: learn from your mistakes.
So, what did I do with the money I have left? I invested in shares; the Sensex hovering around 9600... Good judgment or sheer foolishness? Only time will tell.
Satish Vijaykumar blogs on Mumbai, which he refers to as the City of dreams & City of Sensex.