Nifty futures Why Trading Nifty Makes Sense

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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