Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Finance

3 Niche Financial Markets You Haven’t Considered Trading… Yet

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If you think you know the financial markets, you might need to think again because this article will open your eyes to some obscure or niche financial markets that you probably haven’t even considered trading before.

As a risk warning; thinly traded markets bring higher risks than high-volume marketplaces.

Issues include an increase in the bid/offer spread (the gap between buying and selling prices). Other concerns include the market being more sensitive and responsive to your own trading activity. In small, illiquid markets, placing a large buy order could move the market price upwards (increasing the price you will pay).

Trading these financial markets is high-risk, but with high risk comes the possibility of higher returns. Some markets are for trading professionals rather than retail investors.

These are the assets we will cover:

  • Preference shares
  • Silicon (commodity) futures
  • Carbon credits

Silicon (commodity) futures

Silicon is a relatively abundant, naturally occurring element, and its chemical table symbol is ‘Si’. Not to be confused with the synthetic rubbery enhancement material known as ‘silicone’. Silicon has many commercial uses, including:

Computing – silicon insulates components on circuit boards, allowing for intricate patterns of electrical charge to co-exist within a tiny space. Circuits are the building blocks for microprocessors – the brain inside of every laptop, server or mobile device. Thus, it’s fair to guess that we all have some silicon on our person at this very moment.

Automobiles – Small engine parts are made from aluminum & silicon alloy, which improves the weight to strength metrics of a pure aluminum part.

Despite its ubiquitous nature, the market for silicon has been volatile lately. During 2021, the price of silicon increased by 300%, triggered by news of production cuts in China in the same period in which microprocessor production is being ramped up to new heights.

This has created a great opportunity for commodity traders in this unheard-of market. Silicon may not have the volume of the gold, silver or palladium markets, but an investment in silicon would have produced a staggering return during the last year.

The price of silicon is approximately 22,000 RMB (Chinese Yuan) per metric ton for product produced in China. The exact production location affects the price due to the different levels of refinement. There is no single trading standard for Silicon in the same way gold bullion fineness levels work in the gold markets.

Preference shares

Preference shares are an archaic form of equity instrument which is tradeable on the London Stock Exchange. Therefore you could use a retail stockbroker or a professional outfit with a MetaTrader 4 desktop client to purchase these at a low cost.

Preference shares are different to ordinary shares in that they confer additional rights to shareholders. The most valuable of these rights usually takes the form of a fixed dividend, usually expressed as a % of the original par value of the share, e.g. 9%.

The yield of a preference share is usually higher than corporate bonds issued by the same organization because a preference share sits far lower in the order of liquidation. It’s unlikely that a preference shareholder would see any proceeds in a liquidation event.

However, as income-orientated instruments, preference shares become a powerful way to trade interest rate expectations, company prospects and the creditworthiness of the business, as each of these has great influence over the preference share price.

Carbon credits

The European Union uses a ‘cap and trade’ system to manage its industrial carbon emissions. The system works by the regulator giving each business a carbon ‘budget’ which is not an absolute limit on emitting. If the business spends over their budget, they must purchase carbon credits equaling the deficit to increase their allowance.

Carbon credits are awarded by the regulator to organization that perform carbon-negative activities such as carbon capture and renewable energy. These companies can sell their carbon credits to other entities, which provides them with a source of income to subsidize their activities.

It’s an elegant way to enforce the carbon emissions of an economy. In theory, if carbon emissions surge, then carbon credits will become hard-to-buy and their price will rise. A rising carbon price will make more carbon-negative projects viable, and at a macro level will help to offset the extra emissions.

Investors can participate and speculate in this interesting financial market via intermediaries or collective investment schemes. Examples include Exchange Traded Funds such as iPath Series B Carbon ETN (Ticker: GRN) KraneShares Global Carbon Strategy ETF (Ticker: KRBN).

GRN tracks the Barclays Global Carbon II Index and KRBN follows the IHS Markit Global Carbon Index. They have relatively high expense ratios for passive funds (approx 0.7%), but this reflects the increased cost of trading in a more illiquid and specialist market. This is not a recommendation to invest.