investing: Want to dabble in F&O segment? Why you should avoid the zero sum game when investing

Where does that come from when an equity trader sells a stock at a profit and makes money? The obvious answer is that it comes from whoever bought the stock. That’s correct, but does that mean the person who bought the stock has lost money? Not, at least not unless the buyer has had to sell at a loss. If the price of the stock rises, no one has made a loss. And given that over a period, the markets in general march upwards, equity investors make money on the aggregate. Everyone who invests in stocks understands all this unambiguously.

When someone makes money in futures or options, then what happens? Where does that money come from? What about derivatives? Strangely, the answer to this question is less widely known and even less widely understood, perhaps much less widely. Some time back, I was chatting with a young man who is part of the recent flood of new investors that has hit the equity markets. In case you aren’t aware of this phenomenon, the combination of work-from-home, app-based trading and the lockdown brought in a flood of new investors since mid-2020.

A certain number got bamboozled by crypto, lost their shirts, and then went back to the office, but many have stuck to equity. I asked him the above questions, and despite having been talked into F&O trading, he had no idea and, indeed, had never thought about it. In fact, unlike many investors, he had made an actual effort to educate himself about derivatives and had done so through a variety of materials that brokers had given him and also googled and found on all kinds of websites. As a result, he gave me the whole spiel about the advantages of derivatives, how they enable traders to trade safely, how they promote liquidity, how they encourage discovery price, etc. etc. In short, the entire party line. However, in all this R&D and all this propaganda, no one revealed that every time someone makes a profit, it has to be someone else’s loss.

Unlike buying actual equity, where the economy’s open-ended growth is backing it…

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