Precious metals have been used for years and are considered integral components of an investment portfolio today. Silver, while not as popular as gold when it comes to investments, is actually a very practical and smart investment option, thanks to its limited supply and unprecedented demand from various industries across the globe. Silver futures are considered a good way to invest in this versatile metal and a large number of people are slowly opening up to the idea of silver futures.
What are Silver Futures?
Futures, in the trading world refers to a scheme in which a commodity transaction is executed on a particular day but the product is delivered only in the future, on a date which has been agreed upon by both parties involved. It essentially means that an agreement is entered into on a specific date but the buyer can take physical delivery of the product only after a specific period. Silver Futures refers to a trade in silver which follows this format wherein an initial payment is made and an agreement signed, with the final delivery scheduled on the date in the agreement.
Silver Futures are based on speculation and there is an element of risk involved in them. For example, Mr. Ram decides to participate in this trade, choosing to buy 5 kg of silver from the futures market. He enters into an agreement to pay Rs 25,000 per kg, taking delivery in June that year, three months after signing the agreement. In June, he takes delivery of 5 kg silver when the market prices are just under RS 24,000, which means that he has incurred a loss of Rs 1,000 per kg at current prices.
Advantages of trading Silver Futures
Some of the advantages of silver futures are mentioned below.
- A buyer will not have to spend additional on finding an immediate storage facility, as the physical delivery will take place only in the future.
- While the agreement is signed on a particular date, a buyer can get additional time to make final payments to settle the amount.
- An individual has the provision to short sell his/her silver.
- While not completely liquid, there is sufficient liquidity on offer.
Risks associated with Silver Futures
Trading in silver futures is not risk free, with some of the risks mentioned below.
- There is a probability for default risk during such trade.
- Silver futures can be volatile, with market crashes a harsh reality.
- Silver prices can fluctuate during the period of a trade and an investor can risk losing a portion of his/her investment.
Expiry of Silver Futures
Silver futures are dated instruments which have an expiry date and an investor should keep this in mind before spending his/her money.
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