Dissecting Investment Vehicles Part 3: Derivatives, FOREX and Gold



The third part of the Dissecting Investment Vehicles miniseries is more exciting, with an introduction of Derivatives and Forex/Gold Trading.


Commonly referred to as Futures in Malaysia.  Derivatives is a security which derives its price from an underlying asset class such as the FBMKLCI and CPO, which are tradable as FKLI and FCPO, respectively.

Gains or losses are thus dependent on the price fluctuation of the underlying asset class.  Traded on Margin Facility, and are measured as “Points” or “Ticks”.  The only securities in Malaysia that Traders can “Long” or “Short”.

The FKLI trade Futures Contracts for the KLCI, and generally moves in line with the KLCI itself, which is a market performance indication measured by the 30 largest market capital stocks in Bursa Malaysia.  Initial Capital Requirement is RM4,000.  Each “Tick” or “Point” in either direction (up or down) is valued at RM50.  Has “Half Ticks” / “Half Points”.  Relative to Stocks, FKLI has High Liquidity, with High Risks and High Returns.

The FCPO trades Futures Contracts for CPO, and fluctuates according to the supply and demand of CPO (check Futures in the Dictionary for more information).  Initial Capital Requirement is RM6,000.  Each “Tick”/”Point” in either direction (up or down) is valued at RM25.  Relative to Stocks, FCPO has Very High Liquidity, with Very High Risks and Very High Returns.

Derivatives are usually used as an instrument to hedge risk.    For example, shorts in futures will help investors gain earnings when the market is down, thus offsetting their Stocks/Shares portfolio losses during the market downturn.


Foreign Exchange (Forex) and Gold

Forex and Gold trading are prohibited in Malaysia.  Bank Negara Malaysia (BNM) reserves the right to close down any company that trades Forex and/or Gold against the regulations set by BNM.  Individuals can still trade on their own accounts, but BNM will not be responsible for any issues and losses when a company providing Forex and/or Gold trading platforms go into liquidity/insolvency/bankruptcy or any other form of problem.

Forex is a type of derivative, where you need an initial deposit, and is traded on a Margin basis up to 200 times!  Gains and losses from Forex arise from the fluctuation of the exchange rate between 2 currencies.  It is the most Liquid and Risky financial product in the world.