narenmt Mr. Narendar’s investment experience spans over 8 years during several Bull and Bear market cycles. He has personally and actively traded in NIFTY futures and options, shares. All through the years, he was in business; he traded the stock market and has built a great deal of those experiences into his current trading philosophy & trading strategy. One important feature of a successful trader is to understand, what in the real world, it takes to earn a rupee. Should you require the services of an experienced trader who is able to provide invaluable and detailed mentoring services to assist you in developing your trading skills, I would suggest you contact him to discuss whether his mentoring service would suit you. Narendar has been certified by “The Options Institute” (Chicago Board Options Exchange). He has also completed NSE’s Certification in Financial Markets (Options Trading Strategies Module).

Trading in cash market? Think again…

3 min read

Mr. Narendar kumar is option strategist at Assuredgain and one of the regular reader and guest author of marketcalls.

All of us have only one objective while entering the stock market, it is to make money. However, we all forget one important thing. In stock market the competition is severe. We are competing with professionals, foreign investors who are equipped with enhanced tools. But we hope to overcome them without knowing anything about the capabilities of our adversaries. You can imagine how futile will be our efforts.

We have two types of markets here.
1. Cash market.
2. Derivative market.

The cost of buying shares in the cash market is very high for retail investors because broker commissions are around 1% on one side. For example buying 100 shares of Reliance involves a cash outlay of Rs. 1, 00,000 (approximately) at the rate of Rs.1000 per share. If we buy 100 Reliance shares on a day and its price does not go up, we will be either forced to close the transaction by booking loss or taking the share for delivery. Daily buying and selling in the cash market is highly risky because nobody can predict the correct movement of a particular share on a daily basis. Short term charts are also of no help because daily movements are dictated by the actual demand and supply and this depends on the money that chases the shares. Hence daily buying and selling shares is the most risky trading strategy and nobody I have known in the last 10 years seems to have made money by this means consistently. I am sure that you know this from your own experience. Hence this activity is not advised for you. Never think of making money by this method.

 
Second method is to buy and hold shares in case we do not get required profit on a particular day. Let us take the case of buying 100 Reliance and making it a delivery. Once you make Reliance delivery, you will be paying a delivery commission of 0.5% and this is equal to Rs. 5 per share. While you sell these shares again you pay another Rs. 5 as brokerage. Thus to break even you need to get more than Rs. 1010 in the cash market. This normally is difficult and you will be forced to hold the shares for a long period of time with out any out put for the money you invested in this share or exit with less profit. Therefore trading in the cash markets in this manner is also of no use for a retail investor with short-term horizon. Thus operation in the cash market is not likely to benefit a short term investor at all. Most probably he will be ending with a number of shares he could not sell profitably for a long time. Therefore we have to think about the next alternative. In the derivative markets the brokerage is very low. It can go down to even 0.05% on side if your volume of trading is high. There are two major problems when you try to trade in the derivative markets

1. Most of the retail investors are totally ignorant of the derivative markets and their products. They are also prejudiced by the stories of huge losses incurred by those who played in these markets. The problem of ignorance can be solved only by study.
2. The second difficulty in dealing with derivative markets is caused by the contract size. For example to buy a lot of Reliance futures you have to purchase 300 numbers of Reliance. However you will not have to pay the full amount there. You will be asked to remit 15-20% of the notional value of the contract to the exchange. In this case the notional value of a reliance futures contract is 300*1000=3,00,000. 20% of this is Rs. 60,000. This is big money for retail investors. More over the profits and losses will be five times. As the chances of losses are 50-50, buying futures contracts or selling futures contracts in single stock is a highly risky affair for retail investor. But the broker commission for the contract for 300 shares will be around 300*1000*0.05/100=150 only. Compare this with the delivery commission of Rs 1500 in the cash market for 300 shares. More over you could hold the contract even for three months. Therefore chances of making profit are more in the derivative marks due to the availability of more time. From the figures given above you must have noticed that your funds will not be sufficient to operate in the single stock futures market.

But I have a solution to you. In the derivative markets, there are many products that will not involve a large sum of money. For example buying options in stocks and NIFTY involve only small amounts of money. Similarly buying and selling one lot of NIFTY futures involves only Rs. 25,000. One lot of NIFTY futures involves 50 NIFTY. There are many advantages in trading NIFTY.

Value of NIFTY depends on 50 shares in the NSE with highest volume of trading including Infosys, Reliance, Bajaj, Maruti, HCL, Satyam, TCS, Wipro, SBI, L&T, HDFC, Bharati, ONGC etc. Therefore it is not easy to manipulate the value of NIFTY. Moreover huge volumes are traded in NIFTY every day. Therefore there is very little spread between buying price and selling price. But in single stock case the difference between buying price and selling price might be having a large spread. More over NIFTY represents the markets as a whole because it includes shares from all sectors. Therefore movement of NIFTY can be easily predicted most of the time. However, trading in the derivative markets needs a lot of expertise in the technical analysis, as the time involved is one to three months.

Therefore I think prudent investors will stick to the methods advised by me and trade in the derivative markets rather than in the cash market. More over short selling in the cash market involves higher risks as the short seller is forced to close the contract before the end of the trading session.
Once again I request you to reconsider trading in the cash market, because it is suicidal and will ultimately result in huge losses in your capital.

narenmt Mr. Narendar’s investment experience spans over 8 years during several Bull and Bear market cycles. He has personally and actively traded in NIFTY futures and options, shares. All through the years, he was in business; he traded the stock market and has built a great deal of those experiences into his current trading philosophy & trading strategy. One important feature of a successful trader is to understand, what in the real world, it takes to earn a rupee. Should you require the services of an experienced trader who is able to provide invaluable and detailed mentoring services to assist you in developing your trading skills, I would suggest you contact him to discuss whether his mentoring service would suit you. Narendar has been certified by “The Options Institute” (Chicago Board Options Exchange). He has also completed NSE’s Certification in Financial Markets (Options Trading Strategies Module).

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8 Replies to “Trading in cash market? Think again…”

  1. Warren Buffet once said derivatives are the weapons of mass destructions. Trading in financial markets means competing against the best mind and resources of the world.
    Derivatives means leveraging and we have seen what leverage can do to the financial decisions. What is important is “Common Sense Investing”.

    here is some insight.

    http://www.indiaswingtrading.com/index.php/personal-finance/trading-education/515-common-sense-investing-the-new-way-of-making-money

  2. Warren Buffet on Derivatives: Good For Me, But Not For Thee in Capitalism Magazine | March 4, 2003 | Don Luskin: Summary:

    Now of course, in the obligatory “to be sure” disclosure, Buffett admits “Indeed, at Berkshire, I sometimes engage in large-scale derivatives transactions in order to facilitate certain investment strategies.” And back in the 1992 annual letter, Buffett smirked about how simple derivatives are, when taking that view helped buttress his argument that executive stock options should be expensed in corporate income statements.

    …options are just not that difficult to value… In fact, since I’m in the mood for offers, I’ll make one to any executive who is granted a restricted option, even though it may be out of the money: On the day of issue, Berkshire will pay him or her a substantial sum for the right to any future gain he or she realizes on the option. So if you find a CEO who says his newly-issued options have little or no value, tell him to try us out. In truth, we have far more confidence in our ability to determine an appropriate price to pay for an option than we have in our ability to determine the proper depreciation rate for our corporate jet.

    Get it? The guy with the corporate jet can “engage in large-scale derivatives transactions in order to facilitate certain investment strategies” — and for him they’re “just not that difficult to value.” But for the rest of you grubby Wall Street strivers who think you can get your own corporate jet someday — no way. Too dangerous!

  3. In general, I agree with Rohit that the word “derivatives” is often invoked (usually by people who are entirely ignorant of derivatives) to frighten people (who are just as ignorant.) Derivatives, when used properly, can reduce downside risk. What some of the large institutions and small retail traders are doing is using them for speculation without knowing the risk.

  4. Options are the worst game to be played , don’t ever think of trading in it else u loose all ..
    Futures/Equity/Commodities are best to be played

    No matter u r intelligent ..Always there is an Price slash and losses
    Unless u play for INTRADAY and not for long

    If u hold Long u r the losser
    If u Buy options u r the loser
    If u touch option u r the loser

    Conclusion : Be away from OPTIONS …Just keep it as an OPTION 🙂

  5. This is actually low to see people who are not convinced with option trading.

    if option trading is bad then why people are seeing around 1.5 (only NSE!!) lack crores of turnover everyday?
    if you are greedy gambler still options are good as we don’t have lottery in many states of India!!
    if you area speculator still options are good for you as per risk reward ratio and profit potential is very high!!
    if you are delivery based trader still options are good towards protecting your gains in down trend markets!!!
    if you are expert trader still options are very good which provide you an opportunity to structure your trade!!

    then what you need to mind dealing with options?
    1. know what you are doing?
    to this just understand how options work & what factors affect its price.

    2.learn to deal with volatility.
    options are highly volatile and try to make most of it in your favor.

    3.learn to make you ready for the worst case.
    money management is word for you. according to buffet permanent loss of capital is called risk.

    4.time and timing
    see up to what time you can keep options based on your studies while its important to learn that when to use options like over bought and over sold situations ect ect

    5.have strategies for tension free trading
    with a very small amount you can play bull and bear at the same time

    6.don’t be fooled
    there are some true but demotivating facts like’
    only options writers make money not buyers ( use your sense how far its true) on month on month basis
    95% of the options are going to be zero at the end while its not cheating or bad thing is just an attribute of the product and that is how it is designed. the movement one call option become out of the money, immediately one put option become in the money and vice versa, so be wise.

    Just Don’t Go On False, Misleading & Discouraging Logic.

    be wise in terms of selecting between two thing before trading options-
    1. Highest profits or
    2. Highest probability of profit.

    Have a great time folks.

    Regards

    “risk is a default thing!!! even simply sitting at a single place for long time put you at risk of heart attack due lack of activity and accumulation of fat!!!
    and not taking a calculated risk it self is big risk today.”

  6. Seems to be good words. But The author says I has not met any Day Trader who have made consistent return over the period. I ask the same Question how many Traders he has met who are consistently earning via derivatives??. Earning in stock market is not limited with only Nifty. Many stocks clearly out performed nifty over the period many of them are trading only in cash segment.

    Moreover Trading in derivatives requires more knowledge and one can not enjoy invest any forget approach

    we have seen many Great successful investor (apart from Waren Buffet) over the period can you point any trader have earned so much wealth using derivatives??

    OK ignore Great Traders/Investors Today any Body can invest via Mutual fund many common investors made good return over the period are you saying a common trader earned better return using derivatives than Average MF Return??

    In My Opinion only Analysts,trading mentor like people can benefit from derivative trading via teaching complex strategies to innocent/amateur traders

    though many trading systems which are available publicly showing great returns many of them are optimized. I have seen many trader burn their fingers following such systems

    in short it is easy to find a good Mutual fund than find a good tradiing system(Holy Grail) 🙂

    to proof my point today it is very easy to find an analyst/Tips Providers/Newsletter providers/Blog writers
    than a full time trader who earns via trading

  7. The author says I has not met any Day Trader who have made consistent return over the period. I ask the same Question how many Traders he has met who are consistently earning via derivatives??. Earning in stock market is not limited with only Nifty. Many stocks clearly out performed nifty over the period many of them are trading only in cash segment.

    Moreover Trading in derivatives requires more knowledge and one can not enjoy invest any forget approach

    we have seen many Great successful investor (apart from Waren Buffet) over the period can you point any trader have earned so much wealth using derivatives??

    OK ignore Great Traders/Investors Today any Body can invest via Mutual fund many common investors made good return over the period are you saying a common trader earned better return using derivatives than Average MF Return??

    In My Opinion only Analysts,trading mentor like people can benefit from derivative trading via teaching complex strategies to innocent/amateur traders

    though many trading systems which are available publicly showing great returns many of them are optimized. I have seen many trader burn their fingers following such systems

    in short it is easy to find a good Mutual fund than find a good tradiing system(Holy Grail) 🙂

    to proof my point today it is very easy to find an analyst/Tips Providers/Newsletter providers/Blog writers
    than a full time trader who earns via trading

    Happy Trading experiance

  8. Participants of this game:
    – Pension funds – largest with funds in multiples of US debt ($17.5 trillion)
    – FIIs & DIIs
    – Governments
    – HNI
    – Retail investors

    Out of the simple say 10% growth, funds try to extract 100 – 200% by manipulating stocks or markets by
    – Buying out or selling (crash)
    – Giving signals through appropriate media as per game theory
    – Sectoral or currency, bond rotation of money movement
    – Spreading theories like diversification is good for portfolio so people feel safe to invest

    In 19th century, returns from equities were primarily from dividends and not capital gains.
    In 20th century, all rules changed and equities had more premia over bonds.
    Greatest boom (1920 to 1929) before depression. Next 1994 to 2000 before 2001 slowdown.

    Fixed income markets had 40 year bear period in 20th century.

    Good read – ’23 things they don’t tell you about capitalism’

    So, retail investors have no control. You cannot make profit wherever you don’t have control as in any business.

    Taking delivery or hedging offer some control but doesn’t help much in short term horizon.

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