Choose between stocks, indices, and derivatives

4.2.1 · Stock-Market › What to Trade

Teen instrument types ko samajhna

Individual stocks

Stocks kyun?

• Company performance mein direct exposure
• Voting rights (retail investors ke liye usually negligible hote hain)
• Agar winners pick karo to outsized gains ki potential

Ye kaise kaam karte hain: Aap broker ke through khariidte ho → ownership demat account mein record hoti hai → market hours ke dauran aap prevailing market price par kabhi bhi sell kar sakte ho

Capital requirement: Full stock price × quantity. 100 shares ₹2,500 mein kharidne ke liye = ₹2,50,000 (plus brokerage, ST, GST ~0.5% total).

Index funds/ETFs

Indices kyun?

• Diversification: Ek purchase = 50+ companies mein exposure
• Market returns: Aap broad market movement capture karte ho, individual company risk nahi
• Lower volatility: Agar TCS 10% crash kare, NIFTY sirf 0.5% drop ho sakta hai (TCS NIFTY ka ~4% hai)

Ye kaise kaam karte hain (ETF example): NIFTY 50 ETF sabhi 50 NIFTY stocks ko exact proportion mein hold karta hai → ETF price NIFTY level × scaling factor ko track karta hai → aap ETF units ko stock kharidne ki tarah khariidte ho

Capital requirement: Bahut kam. NIFTY 50 ETF ~₹200/unit par trade karta hai. ₹10,000 mein aapko diversified exposure milta hai.

Step 1: Har stock ka adjusted market cap calculate karo ${\text{Adj. Market Cap}}_i={\text{Price}}_i\times {\text{Free-float shares}}_i$ Free-float = shares jo public trading ke liye available hain (promoter holdings exclude hoti hain)

Step 2: Sabhi adjusted market caps ka sum karo $\text{Total Market Cap}={\sum }_{i=1}^{50}{\text{Adj. Market Cap}}_i$

Step 3: Base period normalization apply karo $\text{Index Value}=\frac{\text{Total Market Cap}}{\text{Base Market Cap}}\times \text{Base Value}$

NIFTY 50 ke liye: Base date = Nov 3, 1995; Base value = 1000

Ye formula kyun?

• Badi companies (higher market cap) ka index par zyada impact hota hai → economic reality ko reflect karta hai
• Free-float adjustment illiquid promoter holdings se distortion ko rokti hai
• Base normalization current value ko interpretable banata hai (NIFTY at 22,000 = 1995 se 22× growth)

Total Market Cap = ₹15,000 million

Agar base market cap = ₹10,000 million aur base value = 1000: $\text{Index}=\frac{15,000}{10,000}\times 1000=1500$

Agle din: Stock B ₹550 ho jaata hai (10% gain)

• B ke liye naya Adj. Market Cap = ₹550 × 10M = ₹5,500M
• Naya Total = ₹4,000M + ₹5,500M + ₹6,000M = ₹15,500M
• Naya Index = (15,500/10,000) × 1000 = 1550

Ye step kyun? Ye dikhata hai ki mid-sized stock B mein 10% ki move se sirf 3.3% index move hota hai kyunki B total market cap ka 1/3 hai.

Derivatives

Main types: Futures (buy/sell karne ki obligation) aur Options (right but not obligation)

Derivatives kyun?

• Leverage: Chhote capital se badi positions control karo (margin = contract value ka 10-20%)
• Hedging: Existing holdings ko downside se protect karo
• Speculation: Underlying own kiye bina price movements se profit karo

Ye kaise kaam karte hain: Aap actual stocks nahi, contracts trade karte ho. Expiry par, ya to:

• Cash settlement: Contract price aur market price ke beech ka difference pay/receive karo
• Physical delivery: Rare; actual shares transfer hote hain (mostly stock futures mein)

Stock approach:

• NIFTY ETF kharido: ₹200/unit × 500 units = ₹1,000 invested
• NIFTY 4.5% badhta hai → ETF ₹209 ho jaata hai
• Profit = (₹209 - ₹200) × 500 = ₹4,500
• Return = 4.5%

Futures approach:

• 1 NIFTY futures lot kharido (size = NIFTY ke 25 units)
• Contract value = 22,000 × 25 = ₹5,50,000
• Margin required = ₹60,000 (broker sets this, ~11% of contract value)
• NIFTY 23,000 ho jaata hai → Profit = (23,000 - 22,000) × 25 = ₹25,000
• Return on margin = ₹25,000 / ₹60,000 = 41.7%

Ye step kyun? Leverage effect dikhata hai: Same market move (4.5%) futures mein 9× higher return deta hai kyunki aap ₹60K se ₹5.5L control karte ho.

LEKIN: Agar NIFTY 4.5% girkar 21,000 ho jaaye:

• Futures loss = (21,000 - 22,000) × 25 = ₹-25,000
• Aap apne margin ka 41.7% lose karte ho

Leverage gains AUR losses dono ko magnify karta hai.

Aapke paas ₹1,500 par Infosys ke 100 shares hain (total = ₹1,50,000). Agle hafte earnings report ki chinta hai.

Put Option kharido:

• Strike price = ₹1,500
• Premium = ₹30/share
• Cost = ₹30 × 100 = ₹3,000
• Expiry = 1 hafte

Scenario 1: Stock ₹1,300 crash kare (bad earnings)

• Stock loss = (₹1,300 - ₹1,500) × 100 = ₹-20,000
• Option gain = (₹1,500 - ₹1,300) × 100 = ₹20,000 (aap option ke through ₹1,500 par sell kar sakte ho)
• Net loss = ₹-20,000 + ₹20,000 - ₹3,000 (premium) = ₹-3,000

Ye step kyun? Put option ne aapka maximum loss premium paid tak cap kar diya. Iske bina, aap ₹20,000 lose karte.

Scenario 2: Stock ₹1,600 ho jaaye (good earnings)

• Stock gain = ₹10,000
• Option worthless expire ho jaata hai (₹1,500 par sell karne ki koi wajah nahi jab market price ₹1,600 hai)
• Net gain = ₹10,000 - ₹3,000 (premium) = ₹7,000

Options asymmetric bets hote hain: Limited downside (premium), unlimited upside (call options ke liye).

Comparison framework

| Criterion | Stocks | Indices (ETF) | Derivatives | |--------|---------------|-------------| | Capital needed | High (full price) | Medium (₹5K-₹50K) | Low (margin 10-20%) | | Risk level | High (single company) | Medium (diversified) | Very High (leverage) | | Profit potential | Unlimited | Market returns (~12% CAGR) | Unlimited (but options mein time decay) | | Loss potential | 100% (company bankrupt) | Limited (market zero nahi hoga) | >100% (margin calls) | | Time horizon | Any (days to decades) | Long-term (1+ years) | Short (days to months, expiry-bound) | | Complexity | Simple | Medium | Complex (greeks, strikes, expiry) | | Ideal for | Stock pickers | Passive investors | Hedgers, speculators |

The Steel-man: Derivatives ke legitimate uses zaroor hain:

• Exporters currency risk hedge karte hain: Ek company jo 6 mahine mein $1M expect kar rahi hai, rupee appreciation se bachne ke liye currency futures ke through USD/INR rate lock karti hai
• Portfolio managers downside protect karte hain: Uncertain times mein, index puts kharidna stocks bechne aur wapas kharidne se sasta hota hai (tax implications, transaction costs)

The fix: Derivatives gambling ban jaate hain jab inhe sirf leveraged speculation ke liye use kiya jaaye bina:

1. Position sizing ke (ek trade mein capital ka >5% risk lena)
2. Stop-losses ke (koi exit plan nahi)
3. Instrument mechanics ki understanding ke (naked options sell karna bina unlimited loss potential jaane)

Defined risk ke saath hedging ke liye use karo = tool. 50× leverage gambling ke liye use karo = casino.

The nuance: Indices unsystematic risk (company-specific events jaise fraud, bad management) eliminate karte hain lekin systematic risk (market-wide crashes, recessions) mein fully expose karte hain.

Example: March 2020 COVID crash

• NIFTY 1 mahine mein 38% gira
• Aapka NIFTY ETF portfolio: -38%
• Agar aapne IT stocks hold kiye hote (work-from-home se fayda hua): Kuch sirf 15% gire, kuch flat rahe

The fix: Indices stock-selection risk ke liye safer hain lekin market risk se immune nahi hain. Short-term goals (<5 years) ke liye, index funds bhi risky ho sakte hain. 10+ years ke liye, indices positive returns par converge karte hain (India: historically ~11% CAGR).

Instrument choose karne ke liye decision tree

START: Aapka goal kya hai?

1. Kya aap long-term wealth ke liye invest kar rahe ho (5+ years)?
   YES → Kya aapke paas companies research karne ka time hai?
         YES → Individual stocks (10-15 stocks across sectors)
         NO → Index funds/ETFs (NIFTY, SENSEX, ya sector ETFs)
   NO → 2 par jaao

2. Kya aap short-term price moves par speculate kar rahe ho?
   YES → Kya aap derivatives deeply samajhte ho?
         YES → Futures/Options with strict risk management
         NO → Derivatives mat trade karo; stocks use karo ya ETFs swing trade karo
   NO → 3 par jaao

3. Kya aap koi existing position hedge kar rahe ho?
   YES → Downside protect karne ke liye options ya futures use karo
         (jaise apne owned stocks par Put options)

Stocks kharidna aise hai jaise apni favorite company ka ek hissa kharidna (maan lo, jo company aapka phone banati hai). Agar company acchi perform kare, to aapka hissa zyada valuable ho jaata hai. Lekin agar sirf WO EK company gadbad kar de, to aap paisa lose karte ho. Ye risky hai kyunki aap ek company par bet laga rahe ho.

Index fund kharidna aise hai jaise ek hi baar mein top 50 companies mein se har ek ka thoda sa hissa kharidna! Agar ek company fail ho jaaye, aapke paas abhi bhi 49 doosri hain. Ye aise hai jaise sirf ek player par bet lagane ki jagah cricket team rakhna. Bahut safer, lekin aap jaldi super-rich nahi honge.

Derivatives aise hain jaise ye bet lagana ki price kahan jaayegi, bina actual cheez khariidte. Ye aise hai jaise apne dost se ₹100 ki bet lagana ki aapki team agle hafte jeetegi. Agar aap sahi ho, to aap ₹100 (ya zyada!) jeetto. Agar galat ho, to aap apne ₹100 (ya zyada!) lose karte ho. Ye exciting hai lekin bahut risky kyunki bet ki time limit hoti hai—agar match khatam ho gaya, to bet bhi khatam.

Shuruat karne wale zyaadatar logon ko index funds se jaana chahiye kyunki ye aise hai jaise poori market aapke liye kaam kare, sirf ek company nahi.

Connections

• 4.1.01-Risk-and-reward-relationship - Risk tolerance instrument choice determine karta hai
• 4.2.02-Lot-sizesand-margin-requirements - Derivatives mechanics ki details
• 4.3.01-Market-and-limit-orders - Execution sabhi instruments par apply hoti hai
• 5.1.01-Diversification-strategies - Index funds instant diversification dete hain
• 6.2.01-Hedging-with-options - Risk management ke liye derivative use

#flashcards/stock-market

Trading ke liye available teen main financial instruments kya hain? :: Stocks (individual equities), Indices (ETFs/mutual funds ke through), aur Derivatives (futures aur options)

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