trade stock or nifty?

dear Shankarji,
u have asked

"Majority of people are trading different stocks at one time and losing complete focus and concentration. Will you please give your views and the importance on concentrating Nifty or any stock exclusively"

--

well, i feel in stock market world, there are several totally different mini-worlds.
- stock investing
- day trading in index futures
- day trading in stock futures
- swing/positional trading in index options
- swing/positional trading in stock options
- scalping
- hedging
- arbitrage etc etc

all of these, i reapeat, all of these look similar but are a universe apart...

all of these require different training, different temperament and carry different risk/reward scenario.

different funds / entities specialize and focus on different categories from the above.

i am often utterly surprised to recall how i used to hop between day trading to swing trading to investing to scalping etc etc, just like fugitive who, when wanted by one state's police runs across the border to another trading territory.....only to be decimated wherever he goes.....

grass and trade on the other side always looks greener!

--

coming specifically to what u have asked shankarji,

stock trading is very very different from index trading.

since index is the average of top stocks (floating weighted mean of market cap) it's behaviour is totally different from the behaviour of individual stocks. it is less volatile and more predictable. it's response to technicals is more "true". in other words, index futures responds more accurately to technicals than individual stocks. also, stocks need different indicators to tame than indices.

contrary to a myth, to trade a stock u do need to have a tab on the fundamentals of that stock too besides understanding the macro exconomical factors which can effect them. otherwise, one misstep will take away much more than u have gained in many small favourable moves.

also, since the liquidity of nifty futures is much more than that of stocks, the premiums and market rates of nifty futures are much more "genuine" and much less "inflated" or "distorted". slippages are also quite less.

even among bank nifty and cnxit and nifty, there is heel of difference in scenario!

--

stocks are wild horses while nifty is a disciplined trained well bred stallion.
u decide which one to ride depending upon whether u r a tarzan or a professional jockey!

why i prefer trading in bank nifty

earlier i was fan of trading in nifty.
i still am.
but recently
i have developed an affinity of trading in bank nifty.
below i share some of the reasons for the same.
movement
8 out of 12 months it gives a swing of 1000 points per month.
12 out of 12 months it gives a swing of 500+ points (intra-month)
(this is much more than in nifty)
options
options are available and have reasonably good liquidity.
(trading in futures has severe limitations)
"true" movement
since this is an index and not one stock, it has "true" movement as indicated by indicators unlike stocks where technicals are often bulldozed by various factors.
-
all you need to do is, try and time the highest or lowest point with indicator combination and with combination of charts of different time periods.
-
i strongly suggest trading in bank nifty (instead of stocks or nifty) with call options (instead of futures) for new comers who have achieved reasonable proficiency in atleast two technical indicators.

Why nifty may never cross 15000?

Before I discuss why nifty may not be able to cross 15000

let me assure you that even if nifty doesn't cross 15000 it won't matter much and it won't be such a bad thing!

But first, let us see how nifty is calculated.

Nifty comprises of 50 stocks.

Top 50 by way of 'highest free float market capitalisation' are selected.

Let us understand this.

Suppose a company A has 1 lac shares, and the current market price of each is Rs.500/-

So, the total market capitalisation of this company is 500/- x 1 lac = 500 lacs

But this is not the free float market capitalisation. This is total market capitalisation.

This is so because all 1 lac shares are not available for trade in the market.

Some of these are with the promoters besides soome locked with government etc.

Lets assume that there are 30,000 such "holy" shares.

This reduces the number of shares freely available for trade in the open market as 1 lac minus 30,000 = 70,000

So, now the free float market capitalisation of company A is 500/- x 70,000 = 350 lacs (not 500 lacs as earlier)

-------------

Now, calculate the free float market capitalisation of all companies

and shortlist the top 50.

Add the free-float market capitalisation figures of all of these 50 companies.

Let's assume this figure comes as F.

We are just one step of calculating.

Let's see how....

-------------

Nifty was launched in 1995 with base value 1000.

Does this mean that the market capitalisation of nifty 50 shares in 1995 was 1000.

Not really.

It might have been 10000 crore or so.

But how would it have sounded if someone were to say that nifty today is 1213 crore!!!???

It would sound ridiculous.

Certainly not an indicator.

So, someone must have given the idea of taking 1200 crore as 1000.

This is known as the base value.

So, what will be the nifty value if market capitalisation was 2400 crore?

Simple, 2000! (Because 1200 crore was taken as 1000).

Similarly, what will be the nifty value if market capitalisation was 3600 crore?

Simple, 3000!

--------------

So, now can you convert the sum total of freefloat marketcap of 50 companies into today's nifty value?

--------------

Now, we come to our main question

why nifty may not cross 1500 ever?

--------------

Would you be surprised if I told you that the list of 50 companies in the nifty fifty list keeps on changing?

Yes, it is true as most of us know that!

If the share price of a company in the index keeps falling, its market capitalisation also keeps slipping.

Finally it is no more in the top 50.

is given a silent good-bye from the nifty fifty

and is replaced by a new upcoming midcap-turned-large-cap blue eyed company!

--------------

Now, you will not be surprised that majority of the nifty fifty companies of 1995 are out of the present list!!!

Why?

They stopped growing (that fast)

and hence their share price and market capitalisation stagnated or dropped!

Others overtook them!

--------------

Every company in the nifty fifty has a limit of growth!

Every company grows old and must die (or atleast fade away respectfully), sooner or later.

Nifty value will keep rising only till India is a developed country

Even inflation will die down thereafter!

Thereafter, it will keep oscillating in a range.

But it will never be the same.

Old companies will keep making way for new companies in the top 50!

-----------

Want proof?

Look at Nasdaq.

It was near 2500 in 1999.

It is near 2100 in 2010 !!!

But the size of economy has increased manyfold!!!

It is the middle or the bottom of the corporate pyramid that is fattening!

-----------

So, 15000 or 20000 or whatever!

Nifty's growth hormones will subside even as the economy will keep growing

But investing opportunities in stocks

and trading opportunities in both nifty as well as stocks will always be there!

Why I prefer trading Nifty instead of stocks!

* High liquidity
= When there is no shortage of buyers or sellers for an in-demand thing, it is easy to get in or get out of its trade even in most volatile situations.

* No wild fluctuations
= When you are highly leveraged the last thing you want is a wild adverse movement! Since, nifty is the weighted average of more than one stock from more than one sectors, it ensures that there are no shocks! (However, you should always be prepared with a plan for such an eventuality)

* Luxury of mini-Nifty (not available in stock futures)
= When you don't want to take big-ticket position or when you want to enter or exit in steps, this advantage is priceless.

* Nifty is always moving
= Unlike some stocks, nifty is almost always moving. It is because it is a mix of the movements of several sectors. So, if one sector is not moving, some other sector is. In nifty you don't get stuck like you do in a sick or moody sector.

* Less margin, high leverage
= If lack of money is stopping you from financial freedom then leverage is a blessing for you! And since fluctuations in nifty are not that wild as compared to stocks, the leverage allowed is also much large (often as large as 10 times). A word of caution : Leverage is a double-edged sword. If it can crown a beggar, it can also bankrupt a king! Leverage sensibly!

* Technical indicators work best on nifty!
= Fundamental sneezes can cause pneumonia to technical charts of stocks. But in case of nifty, it is just results in mild fever. Since effect of fundamental distortions is least on Nifty, technical indicators can predict nifty movements more accurately and reliably.

* Nifty movements can be better estimated from global cues.
= All global indices are relatives of each other. Stocks are not. They are mob. So, it is easier and more accurate to predict nifty movement from the charts of FTSE or Nasdaq or Nikkei etc than predicting a stock's movement.

* Diversification is in-built
= when Satyam collapsed, those who were having all their money it, collapsed too. Similarly, those who had all their money in Aban also got badly bruised when Aban Pearl sank. That is why, wise men ask you to diversify. But since nifty is already an average of fifty stocks, it is already "pre-diversified".

* Easy to study, easy to master
= If you opt for stocks, you always have to constantly brush-up your information and analyses for dozens and hundreds of them. But if you trade in nifty, you save a hell lot of energy and time and effort! All you have to read and study everyday is Mr.Nifty. I almost remember every contour on the nifty graph by heart by now!

* Option of options
= What an option! Not so lucrative and abundant in stocks!