When a client asked me to visit a very successful doctor, I thought he wanted to invest some monies in the equity market. He actually wanted a shoulder to cry about the losses in the F & O market!

A small story might be in place. There is a simple mortal who is praying to Lord Shiva (Hindu God of Destruction of all evil). One of the smaller gods, Lord Indra, felt threatened by this little guy and wants to disturb his penance. So dressed as a simple man, Lord Indra, goes to this little guy and tells him “here is a lovely sword, will you mind looking after it for a while, please?”. The little man says yes.

After some time he touches the sword. Then he ties to see what it does. He cuts some grass, then a plant, then a small animal, then a big animal…then a man! He soon becomes a dacoit….and Indra’s work is done.

This doctor is a very successful guy who specialized in a particular field…and was doing very well, financially speaking.

That is to say till a 17 year old (from a large brokerage company – I am not naming the company) came and said “May I give you a bolt terminal”. When God wants to give you trouble, he takes away your brain. So in such a weak moment, the doctor said “yes”.

Then like a drinking habit…the Futures & Options (FnO) game started, first a small peg, then a large, then a Patiala peg now he is down financially. Every day he is signing cheque for paying a margin call. The doctor is down by a huge amount! His last 4 years income has been wiped out in just a few transactions. The equivalent is like saying, he did not bill any of his clients for the past 4 years.  Now the mood is somber. I told him Indra’s sword story. His father understood it. He may or may not have.

The takeaway is simple. Invest in the stock exchange – by the law of averages, you will get an average return. How much is likely to be the average return? It will be dividend yield + inflation + say 3%. However because your 17 year old ‘agent’ at the other end of the phone tells you, you enter the leveraged market, there is a  greater chance of losing a serious amount of your capital. This is all a clear case of “hope winning over experience”. There is very, very remote chance of a rookie making money with leverage on a regular basis.

Remember lenders love to lend to people – credit cards urge you to buy your shirt, cds, food stuff on their credit cards – and pay 5% p.m! Similar is the case with the broker who wants to fund you – they will fund you to pay the “margin”, give you Loan against shares, do margin trading for you,……the works. What they want is to earn about 8% of the amounts that you supposedly have in your bank account. It is a clear case of you knowing the game in full.

If you do not wish to spend time, effort and money on financial learning…..find out how expensive can financial ignorance is!

  1. Sanjeev Bhatia CFP

    Subra,

    A very relevant post indeed. People just don’t understand how leverage can cut both ways, particualrly F & O segment and commodities Futures. They are not able to comprehend how difficult it is to manage this particular segment. One doesnot have to be sound only in stock selection, be able to see charts, analyse data but also have excellent money management (read loss limiting) and psychological temperament to deal with this. As a regular F & O trader (& wisened by few losses along the way), I know of so many riches to rags stories. Fortunately, I had the head to forget my ego, stop fighting with market and make amends swiftly and made strategies which suited MY profile. But still, if anybody asks me if he should dabble in F&O, I hollar NO at the top of my voice. You can have money to pay for margins but from where do you learn money management and psychological skills needed to survive. I had the good luck to come out positive even during the debacle of January 2008, but many of the persons I know have been literally wiped out. A very dangerous addiction indeed. What to talk of retail investor, this thing was learnt at a huge price by institutions like Lehman Brothers who took positions more than 1000 times their net worth. A few points movement against their positions and their whole capital was wiped out.

    People are egged on by brokers/agents who will earn even you have to sell your house to pay for margins or your whole portfolio is wiped out.

    DON’T EVER ENTER THIS SEGMENT WITHOUT PREPARATION. And if by chance you get nice profits in the BEGINNING itself, take it and run and never look back..LOL.

  2. I am in support of the precautions that go for the investments in F&O in order to avoid losing money in equity. I affirm with the high risks involved and would suggest a delayed entry for investments in the F&O, by a newbie into the world of stock market. My reasons are many –

    Although most would consider this as a favourable attribute for entry into the online stock trading, I would agree to the contrary, as when I am aware that the market has its participants who are not a client of the commodity or the dealt financial instruments.

    Investment scope into the stocks allows only large investments as the stocks are available in lots and not in single units. So if you lose you mislay a huge amount and if you gain, you may benefit substantially.

    There is no other flexible or negotiable feature in a future contract except for the price of the lot, which is continuously weighed by the market forces.

    One major psychological reason that would deny any of my future investments in F&O is the addiction it can cause. The addiction to speculation can itself be a route to misfortune. With agents and brokers indulging you into more speculative and lengthier games of the market, you may find yourself with insufficient money to take care of nothing but more bills to pay.
    So the thumb rule for F&Os would be – Play safe and invest safe. Know the rules well and take opinion of those who have played before.

  3. Broker’s will never ever say that F&O has high chance of wiping out your whole portfolio in as low as ONE trade.
    If they start saying only this one line to their Client (Bakra/Muppet) then no one in normal sense will EVER invest in F&O.

    Sachin

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