--By Abhishek Gautam 

 

Marketing for CFD (contract for difference) - an agreement between two parties to pay each other the change in the price of an underlying asset - started more than five years ago in Nepal after different commodity exchanges started operation here. But while marketing teams of all commodity exchange are doing their best to acquire new clients, results often seem to disappoint.

 

The biggest challenge for any marketer of CFD is to be able to penetrate the high income group and not have to rely on middle or lower income groups which would not be sustainable for business. The reason why high income groups have not opened themselves to the commodity market in Nepal is because of the higher VAT and taxes while trading which in comparison, amounts to more than that of the stock market. Without the participation of the so called upper class, commodity exchanges have today become more akin to software companies where the process of marketing ends right after a client is given with a demo of the software. The proces seldom extends to orienting the client on how to tackle volatile markets. 

 

The scenario today in marketing in commodity exchange goes something like this: after a marketing representative presents a commodity to a prospective client, the presentation usually only induces clients to analyse the risks involved and either express disinterest or make clear the intention to stop entertaining further calls. 

 

Things were different in 2009-2010 when clients would trade without asking questions as they just believed they were buying 1kg of gold at NPR 60,000. Today, clients ask questions about why they have to trade with commodity exchanges when they are happy buying the product physically without the risk of losing their hard earned money.

 

The marketing theory of ‘give and take’ should be at work which will build a long term relation between the client and the exchanges. If this theory becomes skewed then the whole structure will start to crumble. 

 

To be fair, CFD is not everyone’s cup of tea; it is meant for serious businesspersons who understand currency and commodity risk. Hedgers want their risks to be zero so that they can sell their product at a competitive rate and also remain successful market players. In the context of Nepal, almost every business is suited to hedge in a commodity exchange, however the biggest hurdle is the capital gain tax in profit, VAT, high commission to pay as per Nepal’s conditions, low credibility of exchange and lack of a proper mechanism for the adjustment of expenses on hedging with investments.

 

Despite these hurdles, the exchange’s marketing campaign has successfully increased awareness of the world economy among clients. A daily plan to make a profit of NPR 2000-3000 NPR per day perhaps works for a couple of days which then works up the greed to make more each day. But just like the phrase ‘Every day is not a Sunday’, the winning streak comes to a halt and clients start to lose their hard earned money in a matter of minutes.

 

Disappointed with the loss, clients typically would turn to some marketing mantras dispatched by the team such as “always book your loss and hold in your profit”. But given the impulsive nature of some, they may never follow the mantra properly and instead book their profit when it comes and always hold losses thinking the market, always running in a circle, will eventually level into a favourable price again. 

 

Now again in 2013, people thought gold prices had hit its lowest and took a buying position accordingly. But again, the market never came to their favour. 

 

Nepal’s commodity market is on a very different plane compared to other forms of marketing. In the commodity market here, CFD contracts which do not exist physically are sold. And so clients have minimum options for bail out if on a losing track. For example, if a client is trading a contract worth 15kg of silver and has taken a buying position, she will have to invest hard-earned cash frequently to match with the market price. Now if the market starts to go down, then she will need to pump in more deposits of hard earned money. Today, exchanges are making their clients trade with them without keeping underlying assets. Until and unless there is delivery of the product attached with trade, the marketing team may meet millions of people but will not be able to keep sustainable clients.

 

(The writer is General Manager at Commodity Futures Exchange Limited.)