Why to trade in stock markets ? part 2

As we have discussed in our previous post , as a smart investor, you must trade in stock markets to beat inflation and taxes.

Question is how to trade , what are the tools which can guarantee success ?

We have two segments in equity markets.

a. CASH SEGMENT

b. DERIVATIVES SEGMENT

Traditionally , cash segment was traded wherein you can buy shares and sell as and when you want. If you have paid the whole amount , you can hold the position for whatever period you want. But if you want to hold only for intra-day, you need to pay only margin money and hence you can leverage your investments. 

Here the problem is that even if you have funds available with you, you can take only buying position. This means you will make profits if and only if the stock goes up from the price at which you have purchased it. But if it falls, you have to take losses.So ,there is only one way i.e. the stock should go up only. Also, if you want to hold position for few days or few weeks, you need 100% capital. So no leverage on your funds is possible.

Solution to these issues is derivatives segment.

Here , you get huge leverage of funds , you can hold your position for whatever period you want , you can sell (without buying) and square it off later means you can make money in falling stocks / markets also.

There are two instruments available in Derivatives Segment.

1. Futures 

2. Options

They are traded in fixed lot sizes and their multiples.

A proper understanding ensures you do not loose your capital the way it is possible in cash segment.

We will talk about futures & Options in our next post.

Pradeep Singla

www.theoptionschool.in

(We conduct options trading workshops in Bangalore,Hyderabad , Chennai, Mumbai, Delhi and Kolkata)