Stocks vs Futures and Options: Know the basics!
“People with money gain experience and people with experience gain money”
In a casino, there are generally two types of people - the first group comprises the ‘real players’, who play based on their skills and presence of mind while the other group is generally categorised as ‘gamblers’, who play based on pure luck without any logic. There are a lot of games in a casino - Blackjack, Poker, Roulette, Rummy, to name a few. A ‘real player’ knows his game and plays the one he is most skilled at, apart from trying out other games with minimum exposure. Thus, he learns from newer rounds and decides his style of play. In the end, he comes out of the casino with a good amount of cash. While on the other hand, a gambler tries out a variety of games with no money management whatsoever, and eventually, loses sooner or later.
The above example can be taken in context to those people, who unknowingly trade in the Futures & Options segment without realising the risks associated with it. Futures & Options are the leverage trades that are done to multiply profits. They are generally done by the big institutions and HNIs to hedge their portfolios from market fluctuations. However, it is also used for day-to-day trading and thus, adds more liquidity to the market.
While the stocks are classified as risky assets, the derivatives are believed to be highly risky asset classes. Many times, traders get attracted to lucrative profits made in F&O and they try to replicate it in their account. However, one mistake and they tend to change the status of F&O from ‘highly profitable’ to ‘never again’. It is important to understand that the F&O requires a high skilled play and wise-risk management to sustain in such a highly volatile market.
Stocks, on the other hand, are an important tool to try out our skills. It requires less capital and thus, possesses less-associated risk. If consistent profits are achieved periodically, one might think of trying in the F&O segment, which is associated with higher risk. However, one must understand that F&O are highly-leveraged trades, and one must have a good amount of capital to trade in this segment. F&O can be very profitable if the trader has good skills along with proper control over their emotions.
As the popular statement in the stock market goes, “People with money gain experience and people with experience gain money”; it is important to understand that losses are bound to occur but it is the experience that counts. It is even more important to understand what went wrong and to know the correct analysis that makes you skilled in the game. Traders must know such advantages and disadvantages of stocks and F&O before choosing which segment they want to trade in. Understanding these points will definitely make you a ‘real player’.