Sunday, April 27, 2014

Derivative - Speculative or Investment

Derivative products are PROXIES to the "underlyings". If we do not want to invest in a big capital outlay, the best exposure will be to invest in derivative. Derivatives are wrongly abused to speculate for capital gains. The negative publicity of derivatives are accounting classification has contributed bad image.

Derivative products when used correctly and properly will yield much better returns than owning and operating a physical brick and mortar business. The risks when owning a brick and mortar business is due to exposure to the following  to produce the final products:

1. Large capital requirements  2. Manpower management 3. Raw material sourcing, pricing and shipment logistics. 4. Currency volatility 5. Operational issues and maintenance 6. Tax 7. Competition 8. Market demands 9. Regulatory changes 10. Insurance 11 Financing and operational cost 12. Sales and Purchase will take months to complete if one decides to acquire or divest

Investing in the derivative circumvent all the above and reduce all the above risks.

If one is able to change the mindset and perception of derivative products, this is the right avenue to invest.

It depends on how one approach and strategize to maximize the tools available


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