Imagine this: you bought Reliance Petroleum (RPL) shares at Rs 280 thinking it would climb to Rs 300.
Instead it falls to Rs 210. So, you sell the shares thinking it will further fall to Rs 180. But the next day it shoots up to Rs 220.
Now, in such a situation if you had played in 'futures', it would have caused enough damage to your portfolio. Futures are basically contracts, which state that you can buy (or sell) the share at a future date, at an agreed price.
Unfortunately, several retail investors have fallen into the futures trap, due to which they made huge losses so large that they end up quitting the stock market completely.
Even today, I get e-mails from retail investors who share their experience of being caught on the wrong side of the futures game. What would be worse: looking at the Sensex at 30,000, two years later with the share price of RPL at Rs 500!
The downside of futures
I know of many small futures traders who lost a huge amount of money when the markets corrected sharply in May 2006. A few of them even went bankrupt and decided to leave the markets. Had these people not traded and just invested in a few good companies they would be much richer today.
Trading in futures has a downside to it. For example, if you have invested Rs 100 in futures, your loss would be much more than Rs 100 if the markets don't go the way you want them to. Several retail investors play in futures simply on the basis of tips provided by their broker.
This is not the best way to trade and according to me it's a gamble. In the short term, stock prices tend to be very volatile and unpredictable. Several times they move in either direction without any logical explanation.
A single announcement by the government is sufficient enough for the stock market to tumble down by 700 points. This makes trading almost suicidal.
What drives the futures game
One of the main factors why so many people play in futures: greed.
I agree that trading in futures is tempting. I used to trade in futures too, but stopped after making losses. I am glad I made those losses; I learnt from them. Lucky for me, they were not too huge.
The main reason I made losses: I did not spend enough time learning how futures work. I did not invest in knowledge.
Smart advice
Experience has taught me that long-term investment is quite profitable. It may not make you rich overnight. But it also will not make you bankrupt overnight.
Don't try to makle short-term gains by investing in futures. And if you want to invest in futures, do it after you have complete knowledge
It will allow you to sleep peacefully at night rather than worrying what is happening to world markets and how much more losses your futures will incur.
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Regards,
Debayan.
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