The Edge Search

Breaking News

How to Manage your Demat Account Shares in times of Currency Fluctuations


The business and trading environment is always susceptible to change and is dynamic. A static trading environment does not exist, with today’s international trades and investments, dematerialisation of shares, vast avenues of investments and higher levels of investor education. Investments have been simplified with personal financial assistance and a wealth of literature to expand the awareness and knowledge of investors regarding the wise allocation of funds. What contributes to the dynamism of the trading environment is foreign trading, interest rates, monetary policy and fiscal policy of nations, coupled with instantaneous currency fluctuations.

What is Demat account?
A demat account allows share investors to hold units of shares purchased in an electronic form. Demat accounts have removed the hassles that existed in case of holding share units in a physical form. With dematerialisation, trading has become easier for retail investors. It is a one-stop account for all shares, government securities, mutual fund units, bonds etc. to be held and accessed together by the investors, and brokers. Depositories such as NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited) provide for investors to open and access demat accounts.
Dematerialisation has revolutionised trading on the stock exchanges. However, demat accounts call for extra attention from investors in an era of dynamic business cycles and trading environment. A major factor that influences trading across borders is ‘currency fluctuations’.

Currency fluctuations are caused by differences in the exchange rates of different currencies. Fundamental and technical factors also affect exchange rate fluctuations. Some of these factors are- the demand and supply of the currencies, interest rates, economic status of the countries, inflation rates and so on. Managing your demat account shares in times of currency fluctuations can be a challenging exercise. Here are some steps by which losses on trades can be avoided in times of fluctuations in currencies and exchange rates:
  • Measure foreign share investments: Investors invest in foreign funds and shares in order to diversify their portfolios and minimise risks. However, investors must make a careful measurement of risk in investing in shares abroad, as currency risks can outweigh the future gains on investment. Over-dependence on foreign portfolios may lead to higher losses in the long run. A measured balance between domestic and foreign shares is advisable for investors.
  • Currency Derivatives: To prevent losses from currency fluctuations, investors can invest in currency derivatives. These are essentially derivatives contracts wherein the underlying asset is the value of the currency. Predetermined currency exchange rates can also be considered for exchange in the future as an underlying asset.
  • Consult Technical Advisors: An average retail investor may not have the necessary knowledge and skill set to minimise losses caused by currency fluctuations and a volatile international trading environment. Experienced technical advisors and investment consultants are qualified in the art of making profitable investments. While it is not any guarantee for riskless trades through a technical advisor, however, risks can be minimised through their analysis on when to enter and exit trades.
  • Identify correlation: The Modern Portfolio Theory (MPT) recommends diversification among asset classes to minimise risks. Assets are correlated and the correlation coefficient ranges from -1 to +1. Investors must study correlation coefficients before making investment decisions. Investing in a foreign asset class adds the correlation between currencies, which must be considered by the investors.
  • Hedging Policy: Having a hedging policy in place is essential for an investor dealing in a mix of domestic and foreign investments. Currency futures form an important part of hedging policies. A currency future is a futures contract wherein two currencies are exchanged at a preset price at a future date. Future buy (long) or sell (short) positions can be taken based on the investor’s perception of the performance of the currencies in the future. 
  • Study Macroeconomics: Investing in foreign asset classes such as shares and bonds entails a thorough understanding of macroeconomics and world trading environment. Investors must be abridged with a basic knowledge of how markets function, what could be the factors affecting trade cycles and currency trends, for a better and more profitable investment run.
  • Avoid Speculation: Foreign investments can be tricky as they are susceptible to global risks like interest rates, monetary and fiscal policies, currency exchange rates, the economic condition of the trading countries etc. In this case, investors should opt for term oriented investments, and avoid hasty and speculative trades. Average retail investors may lose on speculation and uncalculated trades in the foreign markets. 

Currency fluctuations can wreak havoc on unplanned trades and shareholdings in foreign equity shares. A carefully planned and tailored approach is essential to minimise risks and maximise portfolio gains. Investors usually invest in foreign shares to diversify risks in domestic assets. However, the international markets, trading environments, macroeconomics and correlations must be studied before making entry or exit decisions for foreign shareholdings.

Enter your email address:

Delivered by FeedBurner