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NOTES TO ALL INVESTORS : TO BE NOTICED CAREFULLY

To all investors, before conducting futures contract transactions, the commodity futures trading, which will be mentioned next as futures trading, could be an interesting investment with the presence of leverage factor. Leverage is a condition which, with a relatively small amount of fund could resulted in profit or loss, as the result of changing commodity price which amount was calculated based on the value of fund.

Futures trading often called as a risky, complex and fluctuating activity so only suitable for people with high business skills. Therefore, before involved in this activity, you should be:

Consider your experience at financial field, your purpose, finances, and how prepared you are to suffer loss, which calculated from your first payment without affecting your finances.
Understand and comprehend futures contract, as well as the obligations needs to be fulfilled if you are to involve in futures contract transaction.
Understand and comprehend the possibility of risks and other various aspects of trading, as listed in Risk Disclosure Statement presented by the futures brokerage to you.
Find out whom you could/must contact if you face some problems or need to ask some questions.

Find out your purpose and financial source.

Who are to involve in futures trading and why?

Most investors or participants of futures trading are companies and institutions of the traded commodity. For instance, a company or individual that possesses certain assets like coffee, corn, soybean or stock portfolio, would like to increase the value of their assets or minimize the losses they might experience.

They could use futures market by taking opposite position with the real one. With this method risks and losses as the result of commodity/asset price changes could be minimizing. This is called hedging.

Other participant is speculators whom expect profit from changing of futures contract price. Someone who buy futures contract or call option, or sell put option, expect profit from the rising of price. Otherwise, those who sell future contract or call option, or buy put option expect profit from the falling of price.

A speculator could suffer huge loss, because he/she does not possess the commodity that is the subject of future contract, does not possess index component, or other products. Therefore, losses that he/she might suffer in future trading, could not “be compensated” by profit from real market.

Individual investor could also participate in futures market activity. Someone who possesses a commodity business, or possesses a various and large amount of investment portfolio could use futures contract or option contract. They act as hedgers. Individual investors must possess enough financial sources, to “prepare” to suffer huge loss he/she might experience in trading futures contract or option.

Could futures trading or option fulfill my investment purpose?

Future trading is complex, risky, and may not be suitable for everyone. First, you have to determine or find out the amount of potential losses you could suffer and to judge yourself honestly if you are “ready” to suffer huge amount based on financial source and investment purpose. Communicate this to your brokerage. If you have come to a conclusion that you possess enough financial source and strong consideration to invest in futures trading, you should determine the amount of fund that you plan to invest based on the advice of brokerage rather than your own calculation. Next, you should estimate and compare calculation method before choosing one which result, in your opinion, will fulfill your plan/purpose. You should also determine the limit of time of your investment and the amount of loss you prepared. Like other financial markets, futures trading also cyclical. The important thing is that the nature of futures trading which is leverage, therefore the amount of loss one might experience could exceed early deposit.

Investor should be careful with an offer of excessive profit. One thing that is more important is to understand futures trading. Even though a promise of huge profit could be true, it should be understand that promise of huge “return” with small risk usually a misleading statement. Therefore, beware of someone who did not inform you about “disclosure statement”. Before opening an account, you should receive a disclosure statement first and read it carefully.

Beware of someone who seems to urge you to borrow money to invest. Beware of profit guarantee or “boasting” about past time achievements. Do not easily believe in profit guarantee based on season cycle calculation, market prediction, or various up to date news/information.

There is always some deception in every business, including futures trading industry. You might need to check first about the status of company or individual whom you are involved with, before you open an account.

Futures Trading Definition

The most basic thing that you should understand is the definition of futures trading. Futures trading is an agreement which binds two sides officially, to buy and sell commodities which are the subject of futures trading at certain quantity, quality, variety, and place decided.

Trading is carried out in futures market that received a license from Bappebti. Buyer and seller of futures contract agreed on a certain price for the commodity, which will be delivered later. Although the real delivery could be carried out as the implementation of fulfilling contract, most futures trading usually settled by “off-set” before due time.

Offset is performing a transaction (buy/sell) of the same futures contract, at the same amount and delivery month, which opposite with “open” position of futures contract which owned before (“buy/sell contract).

How to carry out Future Trading

Future trading only traded in futures market, and traded by participants who possess a license from Bappepti, and carry out under official market regulations and rules. As an individual, you could not perform a transaction of futures trading directly at the market, but only through member of stock exchange with futures brokerage license. Apart from futures broker, you could also invest in futures trading at Sentra Dana Berjangka which manage Sentra Dana investment portfolio.

To become a Sentra Dana investor, you should buy Sertifikat Penyertaan which is published by Sentra Dana Management. Futures contract transaction performed by Sentra Dana Management through a chosen broker, made on behalf of Sentra Dana.

For each purchase/sale of futures contract, you must deposit some amount of fund (money) which called margin (initial margin). Compared with the real value of futures contract you buy/sell, the amount of margin is relatively small. This is the attraction of futures contract trading (leverage). With leverage, although the price changing is small, in a short time could produce considerable profit or loss.

Every day your brokerage will calculate your account based on settlement price toward open position of futures contract. If the value of account decrease to some amount which must be maintained (maintenance margin, about 75% of initial margin), the brokerage will ask you to deposit more margin (margin call) until the amount returns to the original margin limit.

In case you fail to fulfill the margin call requirement at certain time, to reduce further loss of open position, brokerage could “close” the open position (liquidate position). If your position liquidated at loss condition, the loss is still your responsibility.

Future trading is a business activity which produce considerable profit but very risky. How big is the risk?

Because futures trading only suitable for certain businesses and individuals brokerage are obliged to deliver documents which contain notification about possible risk of futures trading to prospective investors.

Therefore as a prospective investor, you could consider if futures trading is suitable for you, by considering your experience, investment purpose and financial source, or other factors which relevant with the condition and nature of futures trading itself.

Next, brokerage should receive the notification that you signed and dated, confirmed that you have accepted an understood the contents of Risk Notification, before brokerage accept money or certain securities (which allowed) from you in order to open your account.

To distribute margin to foreign stock market or over trading hours (over-the-counter-market), Risk Notification document also contains warning that margin which is distributed might not receive the same protection as margin used for futures contract transaction at Indonesia stock market because the differences of regulations and possibly, fluctuation of currency.

Your investment could change drastically at any time because sudden change of commodity price. With the existence of leverage, then a slight change of price opposite the open position of futures contract could result in an enormous loss, including “lost” of all initial margin. You are also still responsible for additional loss. The same risk could occur with your investment at Sentra Dana, even though the loss is limited to initial investment.

Risks could be reduced by placing certain order. There are some orders like stop loss order or shop limit order which designed to limit loss at specific amount. This is not effective to limit losses because various market conditions could make your order impossible to carry out at certain price. A strategy that combines several positions for instance spread and staddle position might contain the same risk with the usual buy (long) or sell (short) position. If you invest in Sentra Dana, you should ask about any strategy that would be applied to reduce risk. Always beware of any profit guarantee charges and minimum risks.

When planning to trade option of futures contract, you should first understand some options available (put or call), and their risks. You must calculate how much option should rise to benefit your position, including premium calculation and transaction costs. You should also understand that certain market condition, such as lack of liquidity or market regulations, could increase risks.

You should read Risk Notification document carefully before involving in Sentra Dana, especially information about loss. Although not occurred all the time, loss which Sentra Dana investor might experience usually limited on your investment. The nature of transaction with leverage is that it could produce significant loss and profit, and the loss could be larger than initial deposit. Therefore, you are responsible to “cover” the loss with additional fund.

According to UU No. 32/97, brokerage must deliver confirmation to investors about their financial positions every day, which cover various costs for transaction and service that is the following day at 12.00 pm at the latest. Brokerage also obliged to make confirmation to investors about futures contract and price position, prediction of net profit or net loss, the amount of investment, and various costs that the account must hold, at least once a month.

UU No. 32/97 also obliged brokerage and Sentra Dana Management to treat the margin, including additional funds from transaction, as funds that belong to investor, and place them under segregated account from brokerage/sentra dana management account, at Bappebti chosen bank. The fund could taken only from segregated account, for the payment of commission and other costs of futures contract transaction and/or other necessities, at investor written instruction. If brokerage go bankrupt, investor fund in the brokerage could not be use to fulfill the obligation of brokerage to third parties or creditors.

The clauses indicate the efforts to protect investors’ margin.