Om Sri Ganeshaya Namaha

Om  Sri  Ganeshaya  Namaha
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Saturday, March 2, 2013

Trading the Nifty

I am  simple and always think simple. I always try to bring down any situation to it's simplest avtaar and then solve it. There are some people who do the opposite and somehow complicate situations for themselves. I agree with Hans Hofmann who gave us this quote " The ability to simplify means to eliminate the unnecessary so that the necessary may speak" By now you may be wondering why I am ranting about simplicity. Yes, I am trying to convince you why I prefer to trade only in Nifty.

When I stepped into trading, everything confused me.It was mind boggling. Those innumerable stocks  to choose from. What should be the criteria to pick stocks?  I started looking for a 'simple' solution. Then I read about Nifty Futures. A product which had a little of the best of companies in India. Bingo ! Here was my solution !

The Nifty as you would know is made up of 50 of the best performing stocks available on the NSE. It  provides a great way to speculate on the performance of the overall stock market, as opposed to selecting individual stocks and shares.When you take a position on an index, you are effectively investing in the performance of these blue chip shares of which the Nifty is made up of. It is also less of a risk than trading individual stocks, as you are spreading your risk across the whole market rather than on a single company.This was definitely a hassle free way to invest in a basket of stocks that instantly diversifies your investment portfolio across a few sectors.

Whoa ! No scanning those innumerable number of stocks ! No keeping tabs on  the quality of  management or company performance.No botheration about churning the protfolio ! -- This  is done regularly for the Nifty by the Exchange. All I had to do was apply technicals to this one chart of Nifty. What is more, being based on  blue chip securities  the Nifty is considered a good measure of the current market sentiment and so is constantly in the news headlines.This makes it quite easy  to familiarise oneself with the Nifty.

Nifty has lower volatility compared to individual stocks.Earnings reports, takeover rumors,  and other market events are what drive volatility in individual stocks. An index tends to smooth out the wild ups and downs of the stocks it is made up of. Good liquidity is another plus point as it is popularly traded. It also has the advantage of leverage which leads to more efficient use of capital.

A trader who is 'afraid ' to trade in Futures - since each contract size is large - can trade in the Nifty Bees which is traded like a stock through the Dmat Account. It is a unit representing 1/10th of the Nifty value and is traded on decent volumes.Those who like diversification could also trade similar products like the popular Bank Nifty Futures, Gold Bees and Bank Bees.

The greatest fear a market participant has is of losing  when the market turns. Trading the Indices also makes hedging at turning points easy as Put and Call options are available and are very liquid too. Hedging is a popular options strategy. Options offer a reasonably priced, low-risk method of protecting against major losses on your equity investments.One more reason why investing / trading only in Nifty scores. This is so because buying a  Put Option in the Nifty may not protect your portfolio as much as an individual Put Option in the stock concerned. But when it comes to stock options, very few are liquid and are more costly as compared to those in the Nifty.

I am sure you must be convinced with my view.I bring out a daily Nifty and Bank Nifty Newsletter which will help you trade the Nifty and Bank Nifty. You may write to for a subscription. We will soon be introducing Derivative strategies for the Nifty. Stay tuned.

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Happy Trading !!

Lakshmi Ramachandran

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