Jun 13, 2000|
Futures are here. Tread with caution.
The Indian stock markets have finally witnessed the reentry of derivatives in the form of index futures. It is a significant move. However caution is required in the manner authorities tread this path.
Read Equitymaster's four part series on Derivatives
Futures will benefit the markets in a number of ways. First it will give a sense of direction to the markets/investors. Second, it will enable investors/funds to hedge their long positions in the market, thus reducing the risk associated with such stock holdings. And lastly, it will serve as yet another investment opportunity for investors looking to 'bet' on the markets in general (it is difficult for a person to buy the index). Indeed, the benefits of such a tool makes one wonder why such a tool was not introduced earlier. Well, there are several reasons for this (and let's avoid the incomprehensible arguments put forward by the government at the time of banning such an instrument).
While the Indian markets were devoid of such a product, two important events (among the many) occurred. These changed the entire risk profile of derivatives. As many investors would have already guessed, the reference is to the financial scams involving Baring's Investment Bank and Sumitomo Corporation, which resulted in billions of dollars of losses. In fact Baring's had to be sold off to ING, as it was unable to meet its liabilities arising from the misadventure. Such scams put the entire investing community at risk of default leading to widespread panic in markets.
Until these events occurred, derivatives were largely considered to be hedging instruments. However, in these cases, it now seems, that the top-level management may have turned a blind eye as they were making 'good' money from such 'trading' activity. 'Trading' activity implying that traders in these firms carried large uncovered positions in the futures market (no hedging involved here).
That futures have been introduced in Indian markets is a step in the right direction. However, authorities need to tread cautiously on this path. Not that speculation should be banned.
After all it helps in price discovery. Just that excessive speculation should be prevented as it has the potential to put the entire system at risk. Controls are a must. This will protect the interest of the investors.
More Views on News
Jun 10, 2017
Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.
Aug 16, 2017
All across the country, the old gods become devils. New, gluten-free gods take their places...
Aug 16, 2017
And what it has in common with beating the stock market too.
Aug 16, 2017
Ensure your financial Independence, and pledge to start the journey towards financial freedom today!
Aug 14, 2017
Last week's correction is making a number of Super Investor stocks look a lot more attractive...
More Views on News
Aug 7, 2017
The data tells us quite a different story from the one the government is trying to project.
Aug 4, 2017
The small-cap space is full of small players that are clear proxies to great growth stories and Indian megatrends.
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 7, 2017
Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407