Barriers must be overcome to aid derivatives market

What is the outlook of the commodity derivatives market in 2023?

The Vietnamese commodity market has been licensed since 2018, which is the legal basis for operation in Vietnam. New opportunities often appear during tough periods. Thus, plenty of retail investors flocked into the stock market during the last few years. When the traditional investment market encountered some difficulties in 2022, the derivatives market received more attention.

There are barriers to traditional investment channels in Vietnam, such as one-way trading. The derivatives market has solved the problems. However, there is a lack of knowledge about the market.

Many people see the main purpose of the derivatives market as insurance, hedging against risks in traditional investment sectors. Therefore, the derivatives market was developed to protect farmers and import-export businesses. Individual investors who are new to the market are often speculative. They do not think in terms of 5-10 years. They only think about a few days.

The derivatives market is very diverse. However, the lack of documents and books in Vietnam remains a barrier for investors. Although investors in Vietnam have been investing in derivatives for a relatively long time, such as gold and oil. However, the trading volume at Vietnam’s stock exchanges is not much. It is partly because the trading departments and companies have yet to promote the benefits of the market.

The commodity derivatives market helps investors diversify portfolios and better manage risk. For example, with large international liquidity of large import and export commodities, investors can reduce losses and better manage risks. The derivatives market is a two-way transaction.

Investors don’t necessarily have to wait for the market to rise to make money. Therefore, there are ample opportunities for investors. However, each opportunity comes with certain risks. For individual investors, it is significant to identify trends and manage risks.

What are the benefits for investors when participating in the commodity derivatives market?

Compared with other investment channels, the commodity derivatives market brings some advantages for investors. It allows for two-way buying and selling, allowing investors to stay on top of market trends whether the market is bullish or bearish.

Another advantage is the large liquidity as the derivatives market connects to the world, helping investors enter and exit the market very smoothly.

Last but not least, with a low deposit requirement of 7-15 per cent of the actual value, investors can allocate and utilise capital much better.

What makes the difference between individual investors and institutional ones when participating in the commodity derivatives market?

In the past, institutional investors needed numerous documents, such as contracts to buy and sell goods, warehouses, and transport, to participate in the commodity derivatives market. There were limitations in volume, type of goods, and time. Nowadays, individual investors can easily join the commodity derivatives market through the Commodity Exchange of Vietnam. There are 42 commodities being traded across four industries: agriculture products, industrial raw materials, metals, and energy.

Investors have a relatively small capital base and a more flexible investment method than institutional investors. Thus, they can easily trade in the commodity derivatives market during the day with many commodities and flexible capital turnover. They are not much affected by liquidity or other regulations.

What factors are the most concerning to individual investors?

There has been an increasing number of individual investors in Vietnam participating in the commodity derivatives market in recent years. With more than 4,000 new accounts opening last year, it brings the total number of active accounts in the market to 22,000.

Investors are concerned about the trading of WTI crude oil on the New York Mercantile Exchange. The main reason is that this commodity has a significant impact on the cost of petrol, oil, and transportation. Additionally, investors also welcome the introduction of micro-contracts into trading, in line with the global trend.

Thus, investors can now trade micro-commodity contracts for VND10 million ($430), which is considerably less than previously. Thus, it increases the market’s accessibility for investors with different financial capabilities.

The derivatives market proved its attractiveness when the value of its transactions rose threefold in April as the stock market posted a downward trend, reported Saigon Securities Inc (SSI).

The liquidity on the derivatives market has shown signs of improvement and stabilising in the past two weeks, beating previous projection that the new trading fees may discourage them from derivative trading.