Whenever I visit my stock portfolio’s demat account, a risk disclosure screen pops up first.
This screen reminds me of the statutory warnings on cigarettes. No matter how bold, prominent, or disruptive the “Smoking kills” warning is, none of the three parties involved, the manufacturer, the smoker, or the government wants to stop it. If the government is so concerned and genuinely wishes people well, why not stop manufacturing cigarettes or ban their sale?
The same logic applies to Futures and Options (F&O). None of the three parties i.e., the dealer, the trader, or the government wants to stop it. The main culprit in both cases is the government because it is the ultimate winner.
F&O involves trading shares on the stock exchange, in layman’s terms, we are buying or selling by predicting what the price of a share might be after 30 days. I personally believe there are only three types of people who can accurately predict the future share price of a company:
1) Those who can monitor all global factors in real time: We should all read the essay “I, Pencil” (adapted by Milton Friedman for PBS television in January 1980). Once you read this, you will realize how many global factors are involved in running a company. If you can monitor all these factors in real time, you can definitely predict a company’s future performance. However, remember that markets run on sentiment, not just fundamentals.
A good, growing, profit-earning company that performs well on the books may not perform well in the market.
2) Those with inside knowledge: You have inside knowledge of the company, such as information about winning or losing contracts, scandals, reshuffling, the loss of key personnel, and more.
3) God: You are “GOD”.
I hope you have identified your category among the three. One thing is certain: you are not in category three. We can discuss the first two categories in this next part of the article.
Category One: Every company uses many components for both raw materials and maintenance. A single missing screw, nut, or bolt can stop production, and any dispute with a government department can halt operations on any given day. Unexpected events, like an FDA inspection in Maharashtra, can tank the shares of companies like Dabur and Cipla. These incidents can happen at any time without prior knowledge, and nobody can accurately factor in accidents or surprise inspections. Every industry is globally integrated, knowingly or unknowingly; for example, the
delivery of Vande Bharat trains was delayed because the train wheels were manufactured in Ukraine. Therefore, observing every single factor is nearly impossible for anyone.
Category Two: Actually, this is the only category that consistently works in F&O. If anyone outside this category is earning continuously, they are someone to learn from. Others are either relying on a fluke or have an unseen advantage, which is why only 10% of traders earn money in F&O. Big fund managers and hedge funds that provide loans, limits, and IPOs all engage in long-term planning. Most of what we hear in the news is because the people on the other side
