What is Silver Futures Trading?

What is Silver Futures Trading?

Silver futures are standardised, exchange-traded contracts in which the contract buyer agrees to purchase a particular quantity of silver from the seller at a predetermined price on a future delivery date. Though its usage as the nation's currency ended in 1965, silver gained an even more vital economic purpose around the turn of the century: that of an industrial raw commodity. 

Silver is now seen as a valuable and useful industrial commodity, and silver futures are viewed as an intriguing investment that can be traded nearly 24 hours a day, six days a week. Investing in silver futures in India is sometimes considered a means of generating wealth.

Example of Silver Future Trading

To further understand the idea of margins, let's look at an example. You will have to pay the broker Rs 5 lakh if you wish to trade in futures worth Rs 1 crore, and the margin is 5%. Thus, you may obtain Rs 1 crore for merely Rs 5 lakh. There are more prospects for profit because of the high volume of transactions. Of course, this leverage might result in significant losses if your pricing calculations are incorrect.

Smaller investors can also participate in silver futures trading. You may invest less money because these come in several sizes, such as 30 kg, 5 kg, and 1 kilogram. They are not required to be held until the expiration date. If you think that the price of silver is not going in your favour, you can square off your position at any point before then.

Open Demat Account

Table of Content

  1. Example of Silver Future Trading
  2. How to Trade Silver Futures
  3. Importance of Silver Futures
  4. Demand for Silver
  5. Advantages and Disadvantages of Silver Future Trading
  6. Market Participants in the Silver Futures Market
  7. Factors Affecting Silver Futures Prices 

How to Trade Silver Futures

Here are some points on how to trade silver futures in India:

  • Broker Requirement: A broker who is a member of the commodities exchange is required to work with investors in silver futures.
  • Initial Margin Payment: Investors must provide their broker with an initial margin payment before they can begin trading. A part of each transaction performed on the exchange goes towards this initial margin.
  • Tiny Margin: Silver futures usually have tiny margin requirements, making it possible to trade with comparatively less money.
  • Global Exchange Availability: Futures on silver are traded globally on several commodities exchanges. Several well-known exchanges are the New York Mercantile Exchange (NYMEX), the Tokyo Commodity Exchange (TOCOM), and Indian markets like the Multi Commodity Exchange (MCX).
  • Options Trading: Traders have another choice for investing in the market: silver options trading. Futures are not the only products available to traders.

What is Silver Futures Trading?

 

Importance of Silver Futures

The importance of silver futures are given below:

  • Silver is regarded as a safe-haven asset and often rises in value with gold.
  • If gold is too expensive, silver is a more affordable alternative for people looking to get into the market.
  • Potential hedgers are drawn to futures because they provide purchasers a cap on their potential losses.
  • Producers, portfolio managers, and consumers are examples of hedgers who often utilise futures to lower price risk, guard against inflation, and profit from favorable price movements.
  • Conversely, for a fraction of the price of a contract, speculative investors may get exposure to the white metal through silver futures.
  • Naturally, investors who trade silver in futures markets have the same danger of suffering enormous losses because of the leverage at play.
  • Because of this, a lot of professionals suggest that novice traders avoid the futures market unless they are very clear about their ideal risk profile, time horizon, and cost considerations.

Demand for Silver

Factors influencing silver prices are as follows: 

  • Silver futures are considered a secure investment similar to gold, often sought during economic downturns when people sell equities and turn to precious metals.
  • High inflation periods can drive up demand and prices for silver, given its role as a hedge against inflation.
  • India's monsoon season plays a significant role in impacting silver demand and prices, as a poor season reduces spending on non-essential items like silver by farmers.
  • Economic conditions strongly influence the demand and price of silver.
  • Uncertain times, especially during war or civil unrest, increase the demand for silver due to its recognised value, portability, and ease of verification.
  • The value of the US dollar has a direct impact on silver pricing; a weak dollar often signifies a struggling economy, prompting investors to opt for silver as a safer investment compared to the economy itself.

Advantages and Disadvantages of Silver Future Trading

Here are the advantages and disadvantages of silver futures trading:

Advantages of Silver FuturesDisadvantages of Silver Futures
Excellent hedge against investments.Low margins might lead to overextension and significant losses.
Gain from price movements without physical ownership.Volatility in silver futures can pose challenges in timing profits/losses.
No need to worry about metal security or purity.Difficulty in navigating volatility for optimal trading decisions.
Active trading ensures high liquidity.Risk of overexposure due to easily accessible low margins.

Market Participants in the Silver Futures Market

Here are some market participants in the silver futures market:

  • Mining Industry
  • Refineries
  • Electrical/Electronics Companies
  • Photography & Jewelry Businesses
  • Automobile and Solar Energy Equipment Manufacturers

These individuals mostly trade silver futures for price protection and risk management. 

The finance industry is another source of important players in silver futures markets. These players, who may be interested in speculative and arbitrage opportunities, include:

  • Banks
  • Mutual funds and hedge funds
  • Proprietary trading firms
  • Market players and individual traders

Factors Affecting Silver Futures Prices 

Recent years have seen a great deal of volatility in silver prices, possibly pushing it above safe asset groups. Silver's industrial demand has grown dramatically, accounting for more than half of the entire demand at this point. Silver prices may rise in response to expansions in the electronics and automotive industries, but prices may fall in response to a recession or slowdown in industrial demand. Since silver is used in alternative energy sources like solar power, rising oil costs may also lead to an increase in the market for silver. Investors should take these aspects into account to forecast future silver prices.

  • Examine both estimated and actual mine output from the supply side, particularly in major silver-producing nations like China, Peru, and Mexico.
  • Pay attention to the silver market's investment as well as industrial demand.
  • Consider the national or global economy as a whole when studying macroeconomics. Examine the relative success of several alternative investment avenues, such as the stock market, gold, and oil.

Conclusion

So, is it wise to buy silver futures? That is dependent upon several factors. One is that you can manage indebtedness and avoid problems when prices move negatively. Another consideration is your ability to keep up with global events since shifts in supply and demand may impact silver futures anywhere in the world. To be ahead of the curve, you should continually monitor live updates on silver futures via the Internet or TV. But with that, make sure you are using a reliable stock market app for a smooth experience.

Read more about intraday option trading 

FAQs on Silver Futures Trading

Silver can be purchased directly through silver futures, ETFs, and other means.

When you purchase a silver contract,  you own the silver, but that doesn't conclude with taking delivery of the silver.

Silver futures are typically settled through cash payments rather than physical delivery.

Silver trades almost continuously, but futures markets have specified trading hours.

To start silver trading, open an account with a brokerage firm offering commodities trading.