The reality of derivatives trading
Derivatives are often being referred to as weapons of mass wealth destruction. It’s like a leverage trade.
How do derivatives work?
When you buy derivatives, it helps you ride a position which is sometimes 10x bigger, 20x bigger.
How do traders make money
And in a rising market, or when your betting gets right, what happens is, by putting in Rs 5, you’re able to ride a trade on Rs 100 ownership.
Why are traders prone to losing money
So if Rs 100 becomes Rs 105, it feels like you invested Rs 5, you have a gain of Rs 5, which is a 100% gain. But the reverse also is just as true.
A case of absolute losses
What happens is you put Rs 5 or Rs 10, and you’re riding a trade of Rs 100, and Rs 100 becomes Rs 90, your Rs 10 becomes 0.
Trading is a double edged sword
Because now, if you square up your transaction, your Rs 10 is gone. Understand this, a leverage trade works both ways and that is what derivative trading is.
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In our previous Investors’ Hangout, Dhirendra Kumar talks about the 3 dos and don'ts for every young investor. Click on the below link to check out the full video: