Why do many Traders in India Prefer to trade only NIFTY ?

Nifty Index vs Stock

This Article has been written by @pravinepatil26

Initially when we start daytrading in India, we start with daytrading stocks.

After 2-3 years have passed on, some traders find trading the index to be more productive than daytrading stocks.

Let us look through some of the reasons why many experienced traders in India prefer to trade NIFTY in the later part of their trading career:

  1. Nifty is high volume, less volatile and low spread scrip :

The turn-over of Nifty future and options is almost 75 percentage of total trading. The daily turnover of nifty futures & options is 2-3 times that of ALL stocks traded. Hence Nifty futures and options are very liquid contracts when compared to stocks.

Nifty is less volatile compared to stock because nifty comprise of 50 stocks. The 50 stocks are well diversified consisting of more than 10 different sectors. This diversification in nifty protect us when view about individual stock is wrong.

The spread between bid-ask price of nifty is very low due to high volumes. The lower spreads give better prices to buy and sell. Lower spread is more important for scalpers who rely upon small price movements. Slippages in nifty index is also very less compared to stocks.

  1. Nifty is in the top 10 index futures contracts traded in the world :

Within the Indian derivatives world, the Nifty Futures has a very special place. The ‘Nifty Futures’ is the most traded futures instrument, Indian derivative markets. In fact y Nifty Futures is one of the top 10 index futures contracts traded in the world. So why are you lagging behind, start trading worlds most traded contract?

  1. Hard to manipulate :

Nifty index constitute of 50 stocks. The price movement in nifty is a response to the collective movement in the 50 stocks. Hence there is virtually no scope to manipulate the Nifty index. But the same is not correct for individual stocks. (Remember the cases of Satyam, DHCL, Bhushan Steel etc).

  1. Only ‘systematic risk’ :

At times taking a directional call on a single stock can be a tough task, this is from the risk perceptive. For example let us say I decide to buy Infosys Limited with a hope that the quarterly results would be good. In case the results are bad, then stock would fall heavily and so would P/L.

On the other hand, Nifty futures has a diversified portfolio of 50 stocks. As it is a portfolio of stocks, the movement of the Index does not really depend on a single stock. Occasionally few index heavy weights can influence nifty to some extent. But it does not happen on everyday basis. So while trading Nifty futures, ‘unsystematic risk’ is completely eliminated. We have to deal with only ‘systematic risk’.

  1. Lesser margins :

Nifty futures need much lesser margins as compared to individual stock futures. Nifty’s margin requirement varies between 12-15 percentage. Where as individual stock margins can go as high as 45-60 percentage.

  1. Broader economic call : 

Trading the Nifty futures requires one to take a broad based economic call. While taking directional calls in stocks, one have to consider too many things. From my experience, doing the former is much easier than the latter.

      7. Application of Technical Analysis :

Technical Analysis (TA) works best on liquid instruments. Liquid stocks like nifty are hard to manipulate. Hence nifty usually move based on the demand supply dynamics of the market. This demand and supply mechanics is primary requirement of a TA.

  1. Consumes less time and less energy :

For trading stocks, one would have to scan, monitor and analyze lot of stocks. This is very hectic for mind as well as for eyes which can impact our health. It consumes lot of energy and time as well. While scanning the stock, we can miss important moves in the stocks. On the other hand, trading only one scrip i.e. nifty, we need to monitor single scrip and chances of missing moves are minimal. It saves our energy and time as well.