Saturday, February 24, 2007
What are commodities?
Commodities have slightly different meanings in different contexts.
In everyday parlance, commodities are goods that are sold solely on the basis of price (and not based on brand name, for instance). Examples of commodities in this sense are food & grains, metals such as gold, silver etc.
In the world of investing, commodities are those items that can be traded on the basis of price. In this context, commodities could mean more than just physical commodities - they can also include whatever can be traded on the basis of price.
In everyday parlance, commodities are goods that are sold solely on the basis of price (and not based on brand name, for instance). Examples of commodities in this sense are food & grains, metals such as gold, silver etc.
In the world of investing, commodities are those items that can be traded on the basis of price. In this context, commodities could mean more than just physical commodities - they can also include whatever can be traded on the basis of price.
What is Shorting a Stock or Going Short?
The stock markets are funny!
You would have thought that you can sell only what you have, but in the case of stock markets you can sell something you do not have. Three questions arise: Why will someone want to sell stocks they do not own, how is this possible, and what is the catch?
Why will someone want to sell stocks they do not own? - Well, let's say you are convinced that the price of a stock (that you do not own) is going to decrease significantly over the next few months. You cannot make money with this information if you buy stocks, right? But you can make money with this information if you sell some of those stocks now at a higher price and buy them later at a lower price.
How can I sell stocks that I do not own? - This is possible because you can borrow stocks from some one else (usually a stock brokerage house) and sell them. Makes sense?
But what is the catch? Ah, this is an important point. The catch is, you need to return the stocks you borrowed to the lender (say a stock brokerage house) at some point in time. In order to return these stocks, you will need to buy them from the market. If during the period between your selling and purchase, the price had decreased considerably, then you make a profit. If on the other hand, your information was wrong and the price of the stock increases during this period, you make a loss.
You would have thought that you can sell only what you have, but in the case of stock markets you can sell something you do not have. Three questions arise: Why will someone want to sell stocks they do not own, how is this possible, and what is the catch?
Why will someone want to sell stocks they do not own? - Well, let's say you are convinced that the price of a stock (that you do not own) is going to decrease significantly over the next few months. You cannot make money with this information if you buy stocks, right? But you can make money with this information if you sell some of those stocks now at a higher price and buy them later at a lower price.
How can I sell stocks that I do not own? - This is possible because you can borrow stocks from some one else (usually a stock brokerage house) and sell them. Makes sense?
But what is the catch? Ah, this is an important point. The catch is, you need to return the stocks you borrowed to the lender (say a stock brokerage house) at some point in time. In order to return these stocks, you will need to buy them from the market. If during the period between your selling and purchase, the price had decreased considerably, then you make a profit. If on the other hand, your information was wrong and the price of the stock increases during this period, you make a loss.
What is a hedge fund?
Hedge funds are funds that are usually private funds - meaning these funds are usually run for a relatively few individuals / entities unlike mutual funds which typically have hundreds of thousands of investors. Because these are private funds run for a few select people (usually very rich people), these funds are relatively less-regulated - in other words, not too many people know or can control what these funds do.
Hedge funds tend to make riskier investments than their more stable counterparts such as mutual funds. They can hence provide greater returns, but the chances of losing a lot of money are also higher than usual.
Hedge funds tend to make riskier investments than their more stable counterparts such as mutual funds. They can hence provide greater returns, but the chances of losing a lot of money are also higher than usual.
What are mutual funds?
Mutual funds are companies that take your money along with many other peoples' money, and invest the pooled money together in areas such as stocks and bonds.
Dumb people like us can benefit from investing in mutual funds because these companies have more knowledge about the stocks and bonds and hence can provide more stable returns than if we invest on our own.
Dumb people like us can benefit from investing in mutual funds because these companies have more knowledge about the stocks and bonds and hence can provide more stable returns than if we invest on our own.
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