Part 1 : The beginning
This is a continuation of the story I wrote here.
After realising that the stocks given to me by my employer has doubled. I decided that I should also start investing some money on stocks. I wanted to invest in the stock exchanges of USA. Since I already saw the success of the companies being traded there. I didn’t really think about investing in Indian companies. So it was an option I never really thought about(just saying I am not against investing in Indian companies).
Very few people know that Indians can invest in US based company stocks legally. I am pretty sure most people want to invest in various bluechip stocks like Google, Facebook, Apple. But due to lack of knowledge or reading outdated articles they are not aware of this.
I was holding around 2L rupees in my bank account (my poor financial management). Immediately I made an account on HDFC securities Global investing. It was easy to transfer money there and start investing through their portal. They charge a 5 dollar fee (at the time of writing this article) for each order placed. Later I realised that vested.co.in is much better.
An order is a transaction that has Quantity and price. Quantity specifies the number of shares/contracts you want to buy/sell. And the price needs no explanation (you are not savages). There are many types of orders, which I won’t discuss but you can read them here.
Which Stock to invest in?
This is a very big question. And there is no right answer to this.
I remember watching a movie called The Age of Adaline. It was about a women who did not age. So in the movie they show her investing her money in a company that made photographs. The scene was set in an age where phtographs had not yet been discovered. Fast forward many years. We all know what would have happened to her investment.
This gave me the idea to put money in something I believe to be the future. Near term future (I do age, hence).
What came to mind was electric cars. The second you read that, you must have thought I put my money in Tesla. Infact I did not. Tesla has progressed majorily forward probably can double or tripple in next 10 years. And I don’t stand to gain much. So I looked for other companies that make electric cars and where I could have a realistic return(there are many automobile manufacturers, people like to choose right). And I found a company called NIO.
Why NIO? thats a huge topic in itself. But if you are interested do let me know in the comments.
So my view was, with us tackling global warming and shifting to renewable sources of energy. Electric cars is obviously going to be the future. My first ever investment happens to be in NIO. And I hold 30 units.
Futures and Options
Now I find myself wating. I have to wait years to see any fruit on my investment. But that patience will be paid of due to the compounding effect.
What do I do with all that time ?
I get into derivatives. What are derivatives you may ask? Derivatives are things that derive value from something else. Since we are talking stocks. That something else is the STOCK(we call it spot instrument)
There are two types of derivatives. Like the heading says.
Stock/Index -Futures & Options.
What is an index is beyond the scope of this article. You can read about it here.
What are Stock Futures ?
Stock Futures are financial contracts where the underlying asset is an individual stock. Stock Future contract is an agreement to buy or sell a specified quantity of underlying equity share for a future date at a price agreed upon between the buyer and seller. The contracts have standardized specifications like market lot, expiry day, unit of price quotation, tick size and method of settlement.
What are Options?
This cannot be answered very easily like above, but we will get there in the further parts of this story. Which is the goal since I only trade in Options. But it’s important you understand these bits so you can digest option contracts very easily.
So if you are holding a contract, you do not have any asset. You do not have any chunk of the company in other words. Holding a contract of NIO doesn’t mean you own a certain amount of NIO like I do. A contrat is simply a promise. And that promise has some value. Which is what you have paid for to get the contract. These contracts are similar to contracts that exist in the real world in some sense.
Each contract has an expiry date written on it. This simply means that the promise has no value after the expiry. This forces you to settle the contract. Settle simply means to do what you promised. In NSE(national stock exchange) all contract settlements are done in cash. Meaning if you bought a contract. Your contract will be sold at expiry and you will be settled by cash.
You can even sell a contract and then the exchange then buys the contract after expiry for you. This doesn’t mean that you can sell/ buy contracts only after expiry. You can do it before also. And you will be given whatever the contract is worth at that time. Some of you may wonder how can one sell first without owning anything. You can read about that here.
Started trading in Futures intraday
By intraday, I mean that I enter the contract and exit on the same day. Positional means you hold the contract for more than a day.
Why Futures and Not stock?
Because you get more buying power. Let me explain.
Every Future contract for a stock has set quantity for each contract. So if you buy 1 contract of a stock A. Then it has a set quantity of X. Now the exchange doesn’t ask you to pay (X*Stock_price_of_A). Insted it asks you to pay K amount of money as collateral. This is called margin money. And this K is always lesser than what you would have to pay for X units at the spot price(stock price). The exchange will then return your K when you have closed the contract plus you make the differnce in contract price.
Example, let’s say Stock A future has 100 quantity. And the spot of Stock A is at Rs.700. The margin for each contract set by exchange is 1Lakh. Let’s say the value of contract is around (710*100). You have a balance of 2Lakh. So 1Lakh is blocked. Now the stock price increases Naturally the future contract price also increases. Lets say stock increased by 10 then the future contract would be around (720*100). You might have noticed that I am valuing the contract at a slightly higher price. And this is usually the case. When you exit you get ((720–710)*100) and your blocked margin back.
You can see now why futures is better. You get more buying power and the increase in futures prices is bit higher compared to the spot. Hence you make more money with less capital.
So I started trading futures on intraday for around 2 months. I had extreme success. I was making over 2 lakhs over a few weeks from very small capital(2Lakhs, during this period brokers were giving intraday leverage in huge percentages). Of course this was just beginners luck. And I did end up losing those profits I made through futures.
How? I got into Options. Option buying to be specific. I remember one day I bought options and I lost over 1.4Lakh in 5 minutes. But thanks to my beginners luck I had a cushion to fall on. If it wasn’t for that cushion I wouldn’t have continued my journey.
I had a streak of losing phase and finally found option selling. And at the time of writing this article I have just reached the high of my beginners luck phase.
In my next part I will discuss how I lost so much money over such short period. And how I discovered option selling. I will also tell you why option buying can ruin you. And why it’s hard to lose money through option selling. If you liked this article, do leave a clap letting me know you are interested in the next part of this series. And I will be motivated to bring it to you much quicker and with greater quality.