Saturday, June 26, 2021

BENEFITS OF TRADING IN STOCK FUTURES

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A futures contract is a contract or agreement between two parties to conduct a transaction at a predetermined locked down price at some point in the future. It is essentially a bet on the prospects of a stock, one of the multiple financial trades you can perform. Two parties take opposing stances, with one agreeing to buy shares and the other agreeing to sell them at a certain price sometime later, irrespective of the prevailing market price then.To illustrate, consider two trading entities A and B. A holds the view that the value of a stock would rise from its present value in the future while B believes the opposite. A and B enter into a contract with A agreeing to buy shares of the stock from B at the present price sometime in the future. If A’s bet comes true, that is, if stock value rises, A can get shares of the stock at a discounted price from B. Conversely, if the share value drops, B can sell shares to A at a premium, that is, at a value greater than the market price.

There are 2 primary benefits to future trading - the leverage you receive, and the risk mitigation it offers.

Margins and leverage

Unlike buying equity, one needn't pay in full to buy futures. One need to only pay a percentage of the total contract value to buy or sell in futures. This percentage is called margin and varies between different stock futures. Thus you could buy/sell a lot more shares of futures than equity with a certain amount of money. For example, if the margin is fixed at 20% for futures in a stock, one could buy/sell 5x times more shares in futures than in equity. This ratio is called leverage. Thus, with 20% margin, the leverage is 5. Leverage is a double-edged sword. It multiplies profits manifold but also multiplies losses.
If futures in a stock has a leverage of 5, it means that profits would be five times than that of equity profits. If the equity returns a profit of 20%, the futures offer a return of 100% (Futures profit percentage = Equity profit percentage*Leverage). This is possible because only a fraction of the price is paid to buy futures . But losses would be equally magnified too. A 20% loss in equity would cause 100% loss in futures having a leverage of five.

Hedging against risks

Futures can be used to mitigate or hedge against systemic risks to investment in a single stock or a portfolio of stocks. For single stocks, hedging can be done easily by selling futures at a higher price than the price at which equity was bought. The number of futures sold must be equal to the number of equity shares held by one. Thus, if prices fall, the profit from the selling order in stock futures would offset fall in equity value and vice versa. A fixed return is guaranteed and market fluctuations don't affect the returns. Futures can also be used to hedge against risks to investment in a portfolio of stocks.

POINTS TO REMEMBER

·      With Futures, you do not have to worry about closing your position at the end of the day, while with Cash Trading you need to be mindful of closing intraday positions if you are taking margin.

·         Nifty and certain Equity Futures are usually very liquid; therefore, through liquidity there is a a good chance that the trader will capture the price he seeks.

·         Futures is 0.01%, while intraday Cash Trading charges 0.025% on sell side trading and 0.1% on both buy and sell side trading for delivery transactions.

Friday, June 25, 2021

IS F&O TRADING GOOD ????

FUTURES & OPTIONS are wonderful derivatives that provide enough leverage for trading. Investors can gain larger profits with smaller risk. You just need to adopt some basic option trading strategies for beginners while trading.An option is a contract that gives the buyer the right, but not obligation, to buy or sell an underlying asset at a specific price on or before a certain date.Like stocks, options also involve risks & are not suitable for every trader. Option trading is found to be highly speculative in nature. It carries the risk of losing partial or even entire premium paid by you. You should invest only the partial amount of your total investments in options. However, one of the biggest advantages of option trading is that you can easily hedge your portfolio with them.Hedging with options can limit your potential downside risk. 
In contrast, trading options can be better than trading stocks when appropriately used. However, if the ability to generate relatively reliable analyses and outlook of their underlying assets is not right, both options trading and futures trading may be equally risky.Future trading is capable of producing return on investment and leverage far higher than it can be achieved in trading options.Whether buying call options or put options, the actual risk is limited according to how much money you used to purchase those options. The worst thing that can happen is that the forecast is entirely incorrect, and the choices all go useless.

but our views differ according to the risk profile of the investor. Considering we are talking about trading and not investment,so we suggest -

  • Stock trading only permits day trades. If you want to stay for a longer period, you    need to consider delivery trading.
  • If you hold negative reviews about stocks, consider shorting. Remember, trading       in shares reduces profit-making potential on a good trade.
  •  The losses are minimal as the position size is limited, which is not possible                 under F&O.
  •  But the returns are better with F&O because it offers better opportunities           with  limited   restrictions. The primary constraint is the position size, and traders fear of losing the same.
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