Last Updated: Friday, January 22, 2016

Why INDEX trading is safer than trading in EQUITY/STOCK?

Image:Why-INDEX_trading_safer_than_stock_trading_EQUITY/STOCK_moneynbusiness.comMost of the traders find it difficult to trade in INDEX and always go with trading in specific EQUITY/STOCK as they find it easier but trading in EQUITY/STOCK is more riskier than trading in NIFTY INDEX. In Present post we will discuss "Why NIFTY INDEX trading is safer and easier than EQUITY/STOCK trading?"

1) Stocks are very sensitive: Stock are very sensitive as they are affected by many factors;

  • Stocks are volatile and it fluctuate with every micro component like; post and prior to result day, stock specific news, dividend declaration, change in shareholding pattern, Management announcement etc. and therefore, difficult to keep an eye on them on regular basis.
  • Stocks tend to fluctuate by two ways; by market sentiments and by stock specific new in contrast INDEX is fluctuated only by the first reason.
  • In recent example of Aviation sector witnessed it where Interglobe Aviation (Indigo) results had nothing to do with Spice Jet and Jet Airways but both the stocks was affected because it being same sector. 
  • A contrast movement by banks where all private banks tanked more than 40% from its peak in last three months (All PSUs and Most of the private banks) except HDFC Bank, (I don’t track them daily basis may not be up to mark, but overall is seen). 
  • Look at housing finance/General finance BEING IN SAME SECTOR they behaved differently. 
  • In contrast, NIFTY INDEX is the combination of top 50 Stocks from  almost all core sectors  and  hence the performance of one company cannot affect it drastically. 
2) Lots of Homework requires: for trading in stocks you really need to study its business model, board of directors, share holding pattern etc. and need to keep an eye on it always.

3) Trading is like betting only, While trading in NIFTINDEX you are betting on large cap companies or A Category companies that is why it is safer than to go with stock specific trade.

4) Leveraging with (F&O); when you trade in NIFTINDEX  you can make big deal in few money as it do provide leverage opportunity specially in case of Future and Option Trade (F&O). In simple words you don’t need more amount to trade in INDEX.

Image:INDEX trading is safer than trading in EQUITY/
5) Most of the small cap stocks or penny stocks are influenced by operators and it is tough for a small investor to identify operator based stocks. Even if you succeed to identify it, these small/penny stocks definitely need time. 

6)  In INDEX trading whenever you do a risky trade with a risk of one point there should be four point gain. Example: if SL is at 15 points near entry position, the target should be 60 points beyond. Even in worst case where you lose consecutive four sessions in week and achieve target once in week, you will be at indifference/break even point i.e. No Profit-No Loss . 

7) Most important thing associated with NIFTY INDEX is day's possible levels and movements may be estimated in early morning via SGX NIFTY and ASIAN Market like Sanghai INDEX (China), NIKKEI (Japan), Hang Seng Indexes (Hong Cong)  etc. and there is very rare situation of sudden strike on global market. 

8) NIFTY INDEX future is always trailed by spot, if your calculations go wrong the spot price will indicates you the next possible direction, hence it gives you chances to book early profit or to reduce your loss. 

9) Most problematic situation with trading in stocks is; if you go for short sell it need to be squared off (Buy) on the same day, In contrast you have ample time in NIFTY INDEX to buy it till expiry of that month and further more you may also roll over your position if you wish. 

10) If you follow one EQUITY/STOCK you will probably be master in it but you may lose opportunities happened due to market sentiments.

11) Trading requires movement; Nifty definitely moves 50-70 points on daily basis while this movement may not be seen in all stocks.

12) Moving Direction; Even if stocks in momentum it moves in both sides i.e. upward and downward more rapidly, while INDEX usually moves in one direction for fairly a long time in intraday i.e. if there is an upward trend it tend to be up only and in case of downward trend it tends to maintain lower trend only; hence, it is easy to flow with it. 

Here we conclude that stocks are basically for investment while INDEX is for trading, we suggest not to mix the two words "Investment" and "Trading", remember trading is not investment. While its trading one may go with stock specific or with INDEX trading; as per above analysis it is clear that "NIFTY INDEX is Safer than trading in EQUITY/STOCK"However we do agree that both the trading have its own advantage and disadvantages. 

Any comment/suggestion in regard to present post "Why INDEX trading is safer than trading in EQUITY/STOCK?" will highly be appreciated.

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