F&O Trading: High Returns At The Cost Of High Risk
If you are a stock investor, the temptation of trying your hand at F&O trading must have brushed you sometime or other. Future & Options trading also known as derivatives is the big attraction for all the new investors/traders. Unlike equity, to make money in derivatives you don't have to wait for years, you make big bucks in a short time, sometimes as little as hours. But if it is so good then why celebrity investors call it the financial instruments of mass destruction? To understand this you will have to take a closer look at F&O market and in no time you will realise that all is not glossy and shiny underneath. F&O trading is a game designed for professional traders. It's a high-risk proposition where you can bag big profits and also lose it all. Sounds exciting, doesn't it? Let's explore the subject and try to understand why and how to use futures and options.
What Is Futures & Options Trading?
Future Contract
A future contract is where two parties agree to enter a contract to buy or sell something at a decided price at a future date. The futures contract is on the underlying asset (stock or index). As the contract derives its value from the underlying assets a future and options contract is also called derivatives. Let's try to understand the concept of F&O with an example.
If you have developed an opinion that Nifty will rally in the next few week as most of the companies in Nifty 50 are doing well. This means you are bullish about Nifty, you buy a future contract of Nifty (long position). Now that you have taken a long position and if your directional view turns out to be true, you will gain from Nifty's upward movement. In case it goes against you, you will lose money. Also, the contract has a certain time frame, so it is important that your directional view realises during the contract period.
In Indian stock market, the duration of a future contract is one month, it expires on the last Thursday of the month.
Short Selling Of The Future Contract
When you buy a futures contract, you are basically anticipating the market to go up. The contract where you are expecting the market (the price of the underlying asset) and you are seeking to gain from the upward movement, this type of future trading is called going long. However, if you the think the index or the particular stock is going to fall in future, you can still make money out of that movement. It's called short selling. Opposite of going long, in short selling, you can sell the future contract and take a short position and buy it when your target is reached. Naturally, you must be wondering - how can you sell something that you don’t own? In futures, it is possible. Just like in the long position you have to sell the contract to square off your position, in short selling, you have to buy the same contact to square off the position.
Option Contract
Just like futures, there is long and short, in options, you have two types - Call and Put. In the call option, the trader is anticipating the price of the underlying asset to go up while in the put option the trader expects it to drop. An option contract is essentially price probabilities of any future event. For example, you buy call option of ABC company at the strike price of Rs.500 with the expiry of 3 months. Now if the price of the stock moves towards the strike price (In this case Rs.500) and you start to gain profit and when it moves against you, you lose money. The time plays a crucial factor in options. If you buy a 1-month contract it will be cheaper as the probabilities of ABC reaching 500 are greater in 3 months than in 1 month.
Should Retail Investor Try Their Hand At Derivative Trading?
If you ask this above question to any experienced investor they would advise you against it. There is a reason why experienced investors spell a cautionary note for traders because they know the quantum of harm derivatives can cause. However, there are some smart ways you can use the F&O. Using it for hedging is one of the best ways. Hedging simply means safeguarding your equity holding. In a way, it works as an insurance. For example, if you are holding 500 shares of Tata Motors and there is a possibility that the share value is going to drop in the coming days, then you can short the future contract of Tata Motors. By doing this, if the stock goes down, as you had expected, you will gain from the futures contract. This process of securing equity holdings is called hedging.
Final Word
As we learned that hedging is the best use of derivatives, and if used wisely, one can gain a lot from it. But we have also learned that derivative trading can turn out to be a beast which has the potential to wipe off all your capital. Over the year, traders have reduced F&O trading to gambling. Hence, the retail investors are better off not using derivative. It's better to focus on your long-term investment goals and stay invested in equity.
Can Pension Plans Play Big Role In Retirement Planning?
Have you ever wondered how much money do you need for retirement? If you are a well-aware investor you would have already worked to find an answer to this haunting question. But there are many who are blissfully ignorant about retirement planning and are marching ahead in life without any financial, investment or a retirement plan. Planning for retirement is important, it's not something that you can afford to put on a hold. It has to be dealt with on a priority basis.
If you are in your 30s and you haven't yet started planning and investing for your retirement, it's high time you should start. The key to being successful in your financial planning is to start early. The sooner you start more time you get to invest and time translates into high returns thanks to compounding.
What Are The Ideal Investment Instruments For Retirement Planning?
To accomplish all your financial goals you need a lot of time and a plenty of help from investment instruments like Mutual Fund, PPF, Pensions Schemes, etc. All the investment mediums play a crucial role in different aspects. Mutual funds give good returns in the long run while also help in saving tax. Direct equity investment is rewarding and tax-free if held for a long time. But then what role do Pension Plans play in your planning? That's an interesting question.
Let's Understand The Relevance Of Pension Plans
There are different pension plans. Some plans are designed to be maintained by employers in which the part of the employee's salary goes to a pension account. On the other hand, there are individual plans in which individuals save in the government-sponsored schemes or private banks to secure their financial future and protect them from any uncertainties that may arise post-retirement.
National Pension Scheme
National Pension Scheme was launched by Pension Fund Regulatory and Development Authority (PFRDA) in 2004. It is the most cost-effective Government supported pension scheme for Indian citizens in the age group of 18-60. For this scheme, the minimum annual contribution is Rs.6,000, which can be paid in one go or in small parts of at least Rs.500.
There are 2 types of NPS accounts: Tier-I and Tier-II account. Tier-I it is an obligatory account while Tier-II is voluntary. The difference between the two is mainly related to the withdrawal of money invested in the scheme. In Tier-I account, you not allowed to withdraw the entire amount until retirement. Even after you reach the retirement age, there are certain conditions on withdrawal. In case of Tier-II account, the subscriber is free to withdraw the entire money.
Are The Returns Good In NPS?
In terms of returns, NPS has several issues that pull it down. Now that it has been proven that equity gives the best inflation-adjusted return as compared to any other assets class i.e debt, gold, and real estate, NPSs looks a little less impressive. In NPS 100% equity investment option is not available, it's only up to 50%. Moreover, unlike other investment schemes, at the end of your investment term, you don't get to withdraw your entire corpus in NPS. Here it is mandatory to invest minimum 40% of the corpus in an Immediate Annuity scheme which in return gives you a lifelong pension. On top of that, though the income in NPS is not taxable the amount you receive in an annuity is taxable.
Is Mutual Fund Better Than National Pension Scheme?
As mutual fund offers more flexibility and tax benefits it is easy to say that mutual fund fares far better than NPS. But let's take a look at all the aspects which make the mutual fund a better investment option.
In mutual funds, you are free to withdraw your corpus anytime you wish. There is no condition of purchasing the annuity however, you can always get an annuity if you wish to. You get to withdraw your investment whenever you wish to in lumpsum or via Systematic Withdrawals Plans (SWP) which can also work like an annuity. On the tax front, in the mutual fund, you get long-term capital gains on equity and balanced funds which give you tax exemption.
Final Word
All the above-mentioned points suggest that in a mutual fund you get better control over your investments. From the selection of your asset allocation to the variety of funds to choose from i.e. equity funds, debt funds and liquid funds you enjoy a lot of freedom and flexibility. This kind of freedom is completely missing from pension plans. Thus in terms of control over investments and returns, mutual funds fare way better than pension schemes.
Wealth Management: The Essential Nurturing Your Assets Need
Have you ever noticed how we perceive rich people? Our natural assumption about them is they get everything in life so easy as they have a lot of money. It is true, money can make your life easier. It has the power to bring all the luxuries and comfort in your life. But while this big money dazzles your eyes, those who have it have a host of issues to worry about. Having a lot of wealth is not a care-free status at all. One has to work to ensure that one's wealth stays safe and at the same time keeps appreciating, all this while walking the tightrope of the tax planning.
Your Wealth Needs Managing
Wealth management is the solution for the aforementioned issues. It is a service which comes as a bundle for all your financial needs like investment advice, tax planning, asset allocation, etc. There is a good reason people usually confuse wealth management with investment planning, but these two are distinctly different from each other. Your investment planner will just help you with picking up right stocks market tips or finding good mutual funds while a wealth manager does this and a lot more.
Let's try to understand the concept of wealth management through an examp
Imagine you are a 40-year-old man with the assets worth 25 crores. Now the question staring at your is how to keep this wealth intact and at the same time how to get a decent appreciation on it. Here a wealth manager comes into the picture. A wealth manager will take stock of all your financial requirements of present and future, current cash flow, assets' assessment and will also review the investment portfolio of clients. Here the challenge before the wealth manager is not just directing the client to the right investment instruments, but he/she has to ensure that all the asset allocation is in the perfect sync with the market. Unlike investment planner, a wealth manager can't just think of high returns, preservation of assets is of equal importance in this domain. Another facet of wealth management is tax planning and setting up an orderly estate.
Role Of Your Wealth Manager
There is a trend in the financial world these days - everyone calls himself or herself a wealth manager. Some also resort to the terms like 'financial advisor' or 'money manager', even if their roles are totally different. People often confuse wealth management with investment management. However, there is a sea difference between these both streams. A role of investment planner is to advise his/her clients about stocks, bonds, exchange-traded funds (ETF), mutual funds, etc. On the other hand, the role of a wealth managers is far more evolved and layered. To understand a wealth manager's scope of works, here is a list of responsibilities he/she has to focus on.
They have to Interview clients to understand their income and expenditures, insurance cover (life, health, etc.), tax return status, present and future financial goals and also their risk appetite. They also have to answer their clients' questions about the plans and minor details of financial plans and investment strategies, etc. A wealth manager has to recommend effective strategies for cash management, has to strike a perfect balance in asset allocation and investment planning and assist his/her clients to achieve their financial goals.
Who Provides Wealth Management Services
In India, there are three main types of wealth management service providers i.e. banks, brokerage firms and advisory firms. All the major banks in India i.e. HDFC, ICICI provide wealth management services to their clients. Apart from them, full-service brokerage firms and independent advisory firms also provide these services. As banks and brokerage firms have a huge client base, it is not always possible for them to provide a personalized service. However, advisory firms can give extremely personalized and customized service to their clients.
Stock Investment Is Not Rocket Science
Investment is one of the most important aspects of your life. Unfortunately, many people realise this quite late in their lives. By the time they realise it, the best friend of the investor - time, is no longer with them. On the other hand, those who make the right investment choices, lead a happy and a satisfying life. So what are the right investment choices? By investing in which instruments will you get the best results? Going by the historical data there is only one investment instrument which has created enormous wealth for the investors - stock investment (equity). Ironically, people have the maximum misconceptions about stock investment i.e stock investment is a gamble and it's a game of rich people and so on and so forth.
However, contrary to all these misconceptions, stock investment is a potent tool for wealth creation and as a smart investor, by all means, it should feature in your investment plan.
To be fair, we have to admit one thing, stock investment is an extremely complex matter. You need to have a thorough understanding of the market and its operations. It's complex nature is one of the biggest reasons why general investors shy away from stock investment.
But there are ways to overcome these complexities. Let's list out things which investors need to remember before entering Stock Market. Things which will ease the way for new investors into the stock market.
Get Your Basics Right
First things first, before you start anything new, it's imperative to understand everything about it. But when it comes to stock market, there is nobody who can claim that he knows everything about the stock market. So, at least you should know the basics of the stock market. If you start with a solid foundation you can build on it gradually as you go ahead with your investment plan. Taking the buying and selling calls as per your broker is counter-productive for your long-term investment plans.
Focus On Long-term Stocks
In the initial stage, you will understand that the stock market is an ocean of stocks. The experts categorise them in small-cap, mid-cap and large-cap stocks. But general investors should only see them as good stocks and bad stocks. You have to avoid bad stocks and invest in good stocks. Having said that, good stocks can be sub-categorised in terms of their growth potential. Some have long-term growth potential while other have long-term growth prospects.
Though there is nothing wrong in banking on the short-term growth potential but the principal focus should always be on building a long-term corpus.
Brokers Aren't Your Best Friends
The biggest roadblock of your long-term goal is your stock broker. Brokers don't like long-term investment perspective. It doesn't agree with their business. It's simple, the more you trade the more brokerage brokers get. Naturally, brokers will try to persuade you to do maximum trading and less investing as to ensure maximum brokerage for their firms. But as a smart investor, it's your responsibility to not fall prey to the brokers' glib talk and pursue your long-term objective.
Don't Trust Your Friends & Neighbours' Stock Tips
In the stock market, "Stocks Market Tips", "multibagger stock tips", "guaranteed return
tips" keep floating around. Mostly you will hear it from your friends, relatives or neighbours. All they assure is a failure, if not in the first go, it will come sooner than later. Just imagine, you work so hard to earn money and some guy comes around and asks you hand over your money for some stock which you haven't even heard of. Is it a wise thing to believe such baseless share market tips? A lot of time and efforts have to be put in to find good stocks which are worth holding on a long-term investment basis.
Spend For Good Investment Advice
Have you ever asked this question to yourself that why there is such a less participation of investors in direct stock investment? The answer is simple, many people find stock investment too complicated to comprehend while some get a bad experience and drift away from it. Stock advisory firms can be a perfect solution for such disgruntled investors.
Stock advisory firms provide all the support for the investors who don't understand the market and are not willing to devote time for research and analysis. An advisory firm helps you to identify undervalued stock, tells you when to enter and when to exit and much more. Some advisory firms also offer portfolio management services. So, if you don't mind spending a little on a quality advice, the sky is a limit for you in the stock market.
Master The Art Of Money Management
Money is funny. Yes, it's very funny. You keep it in your locker for ten years and it will remain the same. I mean, if you put Rs. 100 in a locker, after ten years it will still be Rs. 100. But would its value be the same as it was ten years ago? Certainly not. The buying ability of Rs. 100 would reduce considerably in 10 years. But if you had bought 10 shares of some company at Rs. 10 apiece, and the same stock would have grown ten times in ten years, your Rs. 100 would have become Rs. 1000 in ten years. Now, it's that funny?
This is a simple example of what money management and well-informed investment can do to your money. It not only keeps the value of your money at par with the inflation rate but sometimes goes a step or two ahead too. Whether you are a salaried person or a business person you should always have a robust investment plan. Money management is a key tool for wealth creation.
What Is Money Management?
Money management is the process where budgeting, spending, investing, saving are monitored with certain financial objectives.
Though the term - money management - suggests that an investment professional making investment decisions on your behalf by allocating your funds to investment instruments. That is true, there are professional money managers and financial planners, but it can also be perceived as a theory which anyone can inculcate in his day-to-day life.
In general terms, it simply means that you can account for every penny that you have earned. From paying the utility bills to making provisions for retirement and saving for holidays everything comes under money management. The conscious efforts to spend money wisely and invest intelligently is called money management.
Why Is Money Management Important
People often complain that money just comes in and goes out, and all their plans stay firmly at the bay. People from all the pay grade face the same issue. The root cause is - lack of money management. Money management tightens the screws of your budget and prevents unnecessary spending. It also helps you to allocate funds to right investment instruments and reduce liabilities sooner than later.
- Setting Your Financial Goals - One of the key features of money management is that it provides absolute clarity about your financial goals. Right from setting up short-term goals like buying a car, family vacation to long-term goals like kid's education and retirement planning all your financial goals can get adequate funds and time via money management.
- Reducing Liabilities - Your total assets - total liabilities = your net worth. If your total assets are barely more than liabilities, it means you are just managing to keep your head above the water. Liabilities is the biggest roadblock on the road to wealth creation. With the aid of money management, you can chalk out a payment plan to speedily reduce your debts.
Investment - A Critical Facet Of Money Management
One of the critical facets of money management is the investment. A certain portion of your income has to be invested in growth-oriented investment instruments. There are various investment mediums available i.e. mutual funds, public provident funds, equity, etc.
- Mutual Funds - Is one of the smartest investment tools and it should figure in your investment plan. A mutual fund can be a potent tool to meet your short-term as well as long-term goals. At moderate risk, investors get decent returns and also get to experience the power of compounding.
- Public Provident Fund (PPF) - Is the most reliable and trustworthy investment scheme as it is operated by the government. PPF investment comes with certain stern conditions like 7 years lock in period plus certain limitations on the quantum of investment. But due to tax benefits and compound interest, it has become very popular amongst investors.
- Equity investment - Many people try to avoid direct exposure to stock investment due to fear and ignorance. But there are means like stock advisory firms to help you reduce risk in stock investment. Over the years, stock investment has given uncapped growth to the investors. Every smart investor should have a stake in equity. As we discussed above, equity not only keeps the value of your money on the equal footing with inflation but a step or two ahead.
Source : Niveza India Pvt Ltd.
How Rich People Become Rich
How often have heard people say - "money attracts money"? Quite often, right? But is it true? Well, it's true and it's not true, at the same time. I am afraid there can't be a simple yes or no answer to this question. It is true that to make money you need to have some money on hand, on the other hand, saving and intelligent investment can also make you rich. But to put things in perspective, let's analyse how people become rich. Their methods of earning money may defer, but there is a great possibility, that their methods of investment may have a lot in common.
The Key To Success
The ideal investor is the one who not only saves regularly but also invests regularly. It is imperative to have discipline in your investment. Brick by brick you can build a castle. When you see the glaring success of rich people you should always spare a thought for all the hard work which must have gone into becoming rich.
Investment has a unique ability to make you rich. The only thing which matters is - what you are investing in. So, let's explore the alternatives of good investment and the possibilities and prospects it has to offer.
First Things First
Many people don't understand the basic idea of investment. Some people confuse it with post savings and fixed deposits. Then there's a group of people who live under the impression that insurance is a form of investment.
The general idea of investment is to put your money in instruments which will keep its value either ahead or at par with the inflation rate. Investment is for the future, hence, whatever investment instrument you opt for, it has to be growth-oriented.
So what are the investment instruments which can give good appreciation to your capital?
Investment In Equity (Stock Market)
There are two ways to invest in equity: First, through a mutual fund. Second, through direct equity investment. Naturally, both the mediums come with their set of pros and cons. According to their needs, investors can opt any of the mediums.
a) Mutual Funds - the mutual fund is the best investment option for those who want to stay away from the day-to-day hassle of the stock market. The idea of mutual funds is to create a huge capital from several investors and invest it in multiple stocks. Over the years, it has given good results to the investors. To suit the risk appetite of the investors, there are options available like debt and hybrid funds. The USP of the mutual fund is that it's extremely simple and easy.
But it has a down side too. If you analyse the historic data of any of the best mutual funds, you will get to see that even the best funds and fund managers haven't given more than 16% annual growth. As there are big funds involved, fund managers have the limitation as they have to deliver good results year over year. But for those who seek safety and growth at the same time, the mutual fund can be their best bet.
b) Equity Investment - It's the big daddy of all the investments. Yes, equity investment sits on the top of the food chain. Here you get wide options, better prospects and most importantly - uncapped growth. As we had discussed above, the one common thing amongst all the rich people has to be that most of them invest in stocks. For years, long-term investment in stocks has been a key tool of wealth creation. Investors like Warren Buffett and Rakesh Jhunjhunwala are the shining examples of the potential of the stock market.
However, stock investment comes with its set of challenges. The only reason stock investment gets such low participation is that it is little complex compared to other forms of investment. Basically, to get the best results you have to invest in good stocks. You can't rely on stock market tips as they mostly focus on short-term gains.
To find good stocks with good growth potential you have to run the potential stocks on stern checks like - management of the company, its sustainability, historic data, etc. As stock analysis takes plenty of time and requires certain skill sets, it is not popular with the general investors. But this hurdle can be easily overcome by subscribing to the stock advisory firm. Not only do they ease your work but also provided timely entry and exit calls to ensure best returns.
Conclusion
Rich people, barring those who have become rich by inheritance, become rich because they make right investment choices. They take calculated risks and never rely on free advice. The stock market is an open field for all to invest and prosper, they are the one who reaps maximum benefits of it.
Source : http://www.niveza.in/
A Quick Guide To Reduce Risk In Stock Investment
In the family of investment instruments Stock investment is often looked at with certain amount of suspicion. It doesn't get the love as the traditional investment mediums like fixed deposits, real estates and gold get. In India, only 2% of our enormous population invests in stock market. It is a clear evidence of resistance in the minds of people for stock investment.
But the real picture is quite contrary to the people's perception. Over the years, stock market has produced handsome returns for the investors. So in case you wish to join this prosperous minority; here are few point which will ease you way in the stock market.
- Understand The Market And The Types Of Investments.
If you are a rookie investor, then first thing you need to do is to learn about the market, as much as possible. There is a lot literature available online or in print. Do some research on trusted investment forums. Take baby steps in the market by learning about fundamental stuff like what is a stock, what is dividend, what is investment allocation, etc. One can also start browsing through the books of famous investors like Warren Buffett and Rakesh Jhunjhunwala.
Read More : Stock Market Tips
- Learn The Value Of Diversification
In your initial phase as investor, it is important to understand the importance of diversification. It is your best and the most reliable tool to fight the volatility and uncertainty of equity market. Your portfolio should have a perfect mix of blue-chip stocks as well as mid and small-cap stocks. The reason one has to allocate funds into various stocks is that market keeps going through its upward and downward swings, and it is next to impossible that all your stocks picks are going to work according to your expectation. So, if some of your stocks don't perform, others will make up for the losses. Risk management is the key advantage of diversification.
- Don’t Try To Beat The Market
Not just new investors, but seasoned investors usually face losses because they try to go a step ahead of the market. It is not advisable to do everything that others are doing. For smart investment one has to do a lot of research and analysis. Hence it pays to flow with the current instead of against it. As the initial phase of investing is filled with excitement and confusion, the new investors are better off playing under the guidance of veteran investors who can watch out for them. Another critical reason to play safe is the risk management.
- Stay Away From Derivatives (FNO)
Derivative, known as futures and options, is a form of trading. Some considered it the fastest way to lose your money. Derivative trading is such a risky business that not only new investors but even seasoned traders get hoodwinked by it sometimes. For rookie investors to invest in FNO is an act of self destruction. On several occasions, ace investor Warren Buffett has said that the derivatives are the instruments of mass destruction. Thus, in order to make your investment risk free, or at least, less risky, it's imperative to stay away from derivative trading.
- Pay For Good Advice
One of the most important steps to reduces risk in your investment is to get assistance from the experts. Stock investment is a complex matter. To add to it, the jargon-ridden language, its confusing tables and graphs are quite difficult to understand. To turn this situation on its head subscribe to a good stock advisory firm. Stock advisory firms provide multibagger stock calls and assistance on fund allocation. It helps a great deal to minimise risk at the same time it puts you a step ahead in your investment as the supervision of stock analysts save you from making rookie mistakes.
