Sharekhan Blog

What is Silver Futures?

  • Apr 15, 2024

A limited supply and unparalleled demand from many businesses worldwide make silver, although not as popular as gold when it comes to investment, a very sensible and wise choice.

A growing number of people are gradually becoming open to the notion of investing in silver futures, which are regarded as a decent method to own this useful metal. So, let’s discuss all about silver futures trading in India.

What is Silver Futures Trading in India?

Exchange-traded contracts, known as silver futures, are standardised agreements wherein the contract buyer commits to buying a particular amount of silver at a fixed price from the seller on a future delivery date. Silver lost its status as the country's currency in 1965. Still, after the turn of the century, it began to serve an even more important economic function as an industrial raw material.

Nowadays, people consider silver as a valuable and practical industrial commodity. Silver futures are thought to be an interesting investment that can be traded almost twenty-four hours a day, six days a week. It is sometimes thought of as a way to make money in India while investing in silver futures.

Importance of Silver Futures Investing

Silver is regarded as a safe-haven asset and typically rises in value alongside gold. When markets are unstable, investors flock to precious metals, driving up demand. If gold is too expensive, silver is a more affordable alternative for people looking to get into the market.

Potential hedgers are drawn to futures because they give buyers a cap on their potential losses. Producers, portfolio managers, and consumers are examples of hedgers who frequently use futures to lower price risk, guard against inflation, and profit from favourable price fluctuations.

Conversely, for a fraction of the silver futures price of a silver futures contract, speculative investors can get exposure to the white metal through silver futures.

Naturally, investors who trade silver in futures markets have the same danger of suffering enormous losses because of the leverage at play. Because of this, a lot of professionals suggest that novice traders avoid the futures market unless they are very clear about their ideal risk profile, time horizon, and cost considerations.

How to Trade Silver Futures?

The following information can help you trade silver futures in India:

1. Broker Requirement: In order to engage with investors in silver futures, a broker must be a member of the commodities exchange.

2. Initial Margin Payment: Before they can start trading, investors must give their broker an initial margin payment. Every transaction made on the exchange contributes a portion of this initial margin.

3. Small Margin: Trading silver futures typically requires very little margin, allowing for the use of far less capital.

4. Global Exchange Availability: A number of commodities exchanges facilitate the global trading of silver futures. The Tokyo Commodity Exchange (TOCOM), the New York Mercantile Exchange (NYMEX), and Indian marketplaces such as the Multi Commodity Exchange (MCX) are a few prominent exchanges.

5. Options Trading: Silver options trading is an additional option available to traders for market investment. There are other products accessible to traders besides futures.

Pros and Cons of Silver Futures Trading in India

Advantages

Disadvantages

1. Hedging against risk: Investors can protect themselves from the risk of variations in the price of silver through futures trading. Futures traders can hedge against unfavourable market changes by locking in futures prices.


1. High risk: Trading futures involves a significant amount of risk due to the unpredictable and volatile nature of prices. If investors are unable to predict changes in the market correctly, they could suffer significant losses.


2. Liquidity: Silver futures markets tend to be highly liquid, meaning there are usually ample buyers and sellers available. This liquidity allows traders or investors to enter and exit positions easily and at minimal cost.

2. Margin requirements: Futures trading often requires investors to deposit a margin, which serves as collateral for their positions. If the market moves against them, traders may be needed to deposit additional funds to maintain their positions, leading to increased capital requirements.

3. Price transparency: Due to the clear pricing information provided by futures markets, traders are able to make well-informed judgments based on price fluctuations and market patterns. This openness contributes to efficient and equitable trading.

3. Counterparty risk: Investors that trade futures are subject to counterparty risk because they are making agreements with other market participants. A counterparty's failure to perform may cause the investor to suffer financial losses.


4. Diversification: By getting exposure to silver prices through futures trading, investors can diversify their holdings without actually owning any silver. By spreading out the risk, this diversification can improve the performance of the portfolio as a whole.

4. Market manipulation: Futures markets are susceptible to manipulation by large traders or institutions, which can distort prices and undermine market integrity. Investors may suffer losses as a result of such manipulation.

5. Leverage: By using leverage, futures trading gives investors the opportunity to control enormous holdings with comparatively little cash, and it also has the potential to yield significant rewards. It's important to remember, though, that leverage increases both gains and losses.


5. Regulatory risks: Changes in government policies or regulations may have an effect on investor behaviour and market dynamics. Futures trading is governed by regulatory scrutiny. It is essential for traders to follow regulatory regulations in order to prevent negative legal and financial outcomes.

The Bottom Line

An appealing choice for investors wishing to expand their portfolio and get exposure to the silver market is silver futures trading in India. Investors may be able to reduce risks and profit from price swings if they conduct thorough research and have a solid understanding of the market. But it's important to remember that trading futures carries risks and should be done so carefully.

Team Sharekhan
by Team Sharekhan

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