The Indian equity market has a long history and there are many participants in it. These participants include retail traders / investors, institutions (Domestic as well as Overseas), prop desks, arbitrageurs, hedgers, etc. Retail participants invest in the market both directly and indirectly through institutions. These institutions are known as Domestic Institutional Investors (DIIs) and comprise of Mutual Funds, Banks, Insurance companies etc.
On the other hand, Foreign Institutional Investors (FIIs) or Foreign Portfolio Investors (FPIs) are overseas entities registered in India and allowed to invest in the Indian stock markets. They play an important role in our market as they hold a decent chunk of overall investment in Indian equities.
FII activity in cash market segment should not be traced as a trading signal because they invest with long term perspective mainly. This data should be used as a helping tool for forming a positional view on the market. For short term trading their future & options activity should be tracked.
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Derivatives or Futures and Options are leveraged instruments to trade in the stock market. There are broadly 3 groups of people who use derivatives-
- Short term traders for making quick buck– most of them want to make a quick buck. Leveraged trading means, you can potentially make 100% returns from a 10% movement in the stock. 100% returns from a 10% move looks lucrative! The only issue is you can lose bigger amount if stock moves in opposite direction
- Long term stock investors for hedging portfolio- these category of people may use derivatives for long term hedging of their portfolio or making some extra return on their stock holdings. They mainly use options. And, the idea is to hedge the portfolio, and not make great returns from short term trading
- Long term investors who buy special long term options with a long term view- These include big investors including Warren Buffett and many others buying warrants, convertible debentures, long term calls etc.
Majority of people who trade in derivatives come in the first category. More than 95% of traders lose money. Mostly these are young people who get job in corporate companies, open a new demat account and want to make some quick money. They are replaced by new traders (as new graduates complete college and get job). The cycle repeats.
Here is an interview of Nithin Kamath where he mentions –
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