Investment happens when you save from your earnings and invest in a financial instrument to make it grow in the future. Speculation occurs from investing in a high-risk instrument with the intention of making a quick profit. Investment is about method, planning, adequate time horizon and fundamentals, While speculation is like a whack off the last ball in a T20 cricket match, which could easily get caught.
Equity Derivatives
Speculators also serve the market: they impart liquidity by taking trading positions and risks. However, it is important to note that professional traders, such as broking entities and foreign portfolio investors (FPIs) have the bandwidth to understand the risk, deep pockets, and expertise to take equity derivative positions. But as an individual, you would not have the same bandwidth or funds or expertise to trade in derivatives. Unless you are full-time into trading and have an experience of many years, there is no comparison between a professional broker-trader or financial institution and you as an ordinary investor.
Equity F&O You should invest in equity either directly if you have the bandwidth, or through a mutual fund.
Recent data by the Securities and Exchange Board of India (Sebi) shows that 91.1 per cent of individual traders (about 7.3 million traders) lost money in the equity futures and options (F&0) segment in 2023-24 (FY24).
On an average, they saw net losses of ₹1.20 lakh per person in FY24. During FY22-FY24, 1 1.30 million individual traders incurred a combined net loss of ₹1.81 lakh crore in F&0. Only 1 per cent managed to earn profits exceeding ₹1 lakh, after adjusting for transaction costs.
The 'smart boys: the proprietary traders and FPIs, do it through computer algorithms, known as algo trades, and 97 per cent profits of FPIs and 96 percent profits of proprietary traders came from algo in FY24.
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