Commodities eat into equity pie

Dull stocks push small traders into shifting; but observers warn risks in this trade need to be understood by many.

A number of traders in equities are moving to commodities, thanks to poor volumes and a range-bound equity market restricting trading opportunities. Brokers say there is a clear preference among day traders, especially for gold, silver and crude oil, as volatility and volumes are much better in commodities.

“A lot of small traders are moving to commodities. While stocks are not going anywhere, there is good movement in commodities, especially in gold and silver,” said Kamal Bansal, head (institutions), Bonanza Portfolio. And, he noted, the fact that the Securities Transaction Tax (STT) was not applicable on commodity trades made these more viable. A transaction in equities attracts an STT of Rs 125 per trade.

 

Gagan Randev, CEO, Religare Securities, agreed that the commodities and currency segments were doing better than equities for the brokerages. This shift is reflecting in the overall turnover. In August, the average daily turnover in commodity exchanges shot up to Rs 76,268 crore, a 64 per cent jump over the daily average of Rs 46,328 crore in January. In September, the volumes fell marginally, but remain high at Rs 67,371 crore.

In comparison, daily average turnover in cash equities fell 18 per cent to Rs 13,708 crore in August from Rs 16,846 crore clocked in January. In the first few days of September, volumes have picked up in equities but remained well below the levels seen in the first quarter of 2011.

Volumes in the equity futures and options (F&O) segment have slumped below the Rs 1 trillion mark in September. In the first two weeks, F&O volumes were a little over Rs 95,000 crore, a 32 per cent fall over August volumes of Rs 1.41 trillion

DOWNSIDE
The shift, though, is not uniform and comes with its own set of issues. “Some traders are moving to commodities. But, we must keep in mind, these are different classes of investors. The majority sticks to their own area of comfort,” Randev of Religare said.

People who change are the ones using the traditional broking channels, say brokers. “People who call up their brokers and place trades are making the shift, not the online types. Many of these guys depend on trading for their bread and butter,” according to Bansal of Bonanza.

Brokers are flooded with requests to shift equity accounts to commodities and open new accounts. While the business opportunity is clear, intermediaries are dealing cautiously, as commodities are risky and could potentially lead to huge losses and an avalanche of complaints when things go wrong.

“We have centralised the approval process for entering commodities trading. Commodities’ markets are not understood well and are much more risky than the equities market. We are very cautious about allowing our investors in to this segment,” said the CEO of a retail broking arm of a large business group.

He added that margining systems and trading patterns in commodities are such that an investor can lose his entire wealth in his sleep. “Commodity trading goes on till 11.30 pm. Many people who get into commodities are not even aware of this. If there is some late night development in global markets and silver falls 30 per cent, you could lose all your money while you are fast asleep,” he warned.