Two Way Market? No Way!

Let's dive into the derivatives market.

Hey Hisa fan,

In most markets, investors are always of the thoughts that money is only made when the stock you bought goes up in terms of price. Now, imagine the returns you could have made if there was a possibility to make money from a security who’s value is declining.

Unbelievable right?

Not so fast, let’s introduce to you derivatives, these kids have been here for some time but still a challenge for most investors to figure it out. You might have heard of derivatives in some place or another.

Here’s a brief of what a derivative is; a contract that derives it value from the performance of the underlying.

Derivatives Understanding

An underlying can be a stock, a commodity like oil, coffee or gold e.t.c. Well, I will just say it, “A derivative is like a parasite, depending on the host. If the host is not there, the contract is non-existent.”

Where do we get these derivative contracts?

Oh, thought you’d never ask. Well, it depends on what type of derivative contract you’re interested in.

Look, there are two types of markets for investors on the derivatives market. We have Over-The-Counter (OTC) and Exchange Traded Derivatives (ETD).

OTC are those “unregulated” contracts, unregulated and looks more like a free fall contract. Two people meet, they agree on contract terms, sign it in front of a witness and wait for contract maturity.

ETDs are the “cool kids” of derivatives, they’re regulated, the price is open and fair to everyone, contract terms are already set in terms of period, value, quality and quantity.

So, which one would you go for? I know we all want to be cool kids.

Difference between Over the counter and Exchange Traded Derivatives.

So, Where’s the money at?

Well, the money from the derivatives market can be made from two ways, by getting into a long or short contract.

1. Long Position - A long position is when a trader buys a contract with the aim of selling it within the contract's lifespan at a higher price.

2. Short Position - A short position is when a trader first sells a security with the aim of repurchasing it later at a lower price.

Let’s make this simple, if you go short on a position, the value of the underlying must COME DOWN for you to make money. Likewise, if you open a long position, the value of the underlying must GO UP.

Let’s wrap it up, shall we?

Warning shots though, derivatives can be volatile. As the legendary Warren Buffet once said, “Derivatives are financial weapons of mass destruction.” so you need to be a very active investor to invest in derivatives.

What Cowries are we collecting this week?

1. Nation Media Group - You’re right. Nation Media Group announced a massive share buyback, the official details were released over the weekend, the share price may rally to the Kes 25 per share which is the buyback price.

2. Kenya Reinsurance - All investors are waiting for the company to release their financial results. Let’s hope the results will be good.

3. Global watch - Stonks will be looking at Bitcoin, AMC, Tesla, Amazon after MGM Acquisition.

Have a great week ahead and don’t forget to register on the Hisa App.