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Nifty futures Why Trading Nifty Makes Sense

  1. Trading in Futures/ Derivatives
    1. Forward Market Introduction
    2. Futures Contract A Comprehensive Guide to futures trading
    3. Futures Trading Mastering Strategies for Success in the Stock Market
    4. Futures Market Understand trading with 3 possible scenarios
    5. leverage in futures trading and Maximising Returns
    6. Leverage Futures in Market Trading An Analysis with examples
    7. Leverage ratio calculation and Payoff Structure in Futures Trading
    8. f&o margin The Importance of Margins in Futures Trading
    9. MTM Mark to Market  in Futures Trading
    10. Importance of Margins in Futures Trading: Explained with Examples
    11. Short Selling understanding what is shorting with examples
    12. Shorting in spot and futures market
    13. Nifty Futures Benefits and Advantages
    14. Nifty futures Why Trading Nifty Makes Sense
    15. Futures Pricing Formula How to calculate and Things to Consider
    16. Nifty Futures Trading advantages
    17. hedging with futures trading
    18. what is beta in finance and single stock futures
    19. Hedging a stock Portfolio how to calculate
    20. Open Interest: What is, how to calculate
    21. Physical Settlement in F&O Futures & Options Contracts
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Marketopedia / Trading in Futures/ Derivatives / Nifty futures Why Trading Nifty Makes Sense

The Nifty Index comprises of 50 stocks representing a variety of the country’s economic sectors. This allows it to effectively mirror overall economic activity in India, meaning that when the economy is doing well Nifty will rise and when it is performing poorly its value will drop. This makes trading Nifty Futures far more sensible than single stock futures, due to various factors:

  1. Making a directional call on a single stock can be risky. To illustrate, if I were to purchase Infosys Limited in anticipation of positive quarterly results, and the outcome was disappointing then my P&L would take a hit. 

On the other hand, trading Nifty futures offers an advantage due to its diversified portfolio of 50 stocks. This reduces “unsystematic risk” since movement of the Index does not depend completely on one stock, even though heavyweights may influence it occasionally. We will get into the details of hedging later which explains these terms more thoroughly.

  1.           The movement in Nifty is a response to the collective action of the top 50 companies in India (by market capitalization). This means that it is virtually impossible to manipulate the index. On the other hand, individual stocks are a different matter – we can think of cases like Satyam, DHCL, and Bhushan Steel, for example.
  2.           Earlier, we delved into the topic of liquidity. The Nifty is so highly liquid that you can transact any quantity without worrying about losing money on impact costs. Furthermore, there is an ample amount of liquidity to facilitate trading any number of contracts.
  3.           Nifty futures are much more attractive due to their lower margin requirements. In comparison, margins for Nifty range between 12-15%, whereas those of individual stock futures can be as high as 45-60%.
  4.           When trading the Nifty futures, it’s much simpler to take a broad-based economic call rather than focus on individual firm trends. This has been my experience.
  5.           Technical Analysis is most effective when applied to instruments that are liquid. It’s difficult to manipulate liquid stocks, so their movement usually depends on the market’s supply and demand dynamics, something that Technical Analysis predominantly relies on.

7.            Nifty futures are far more stable compared to individual stock futures. To provide an example, the Nifty futures has an average annual volatility of about 16-17%, whereas an individual stock such as Infosys can usually have a volatility of 30% or above.

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