How can I Learn to Trade in Nifty?: The Nifty 50 is India’s broad-market benchmark index that will track the price movements of the 50 largest companies that are listed on the National Stock Exchange (NSE).
This index is widely used by traders to gauge the performance of the stock market as a whole.
One of the primary reasons why the Nifty is considered to be a very good indicator is because it covers companies across 14 different sectors.
Through this, an investor who is willing to invest his capital in the Nifty 50 index will be getting a basket full of different opportunities, which in turn will also reduce their investment risk to a considerably lower level.
How to Trade in Nifty?
There are basically two ways through which you can trade in Nifty.
The following are the two ways:
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#1. Investing in Trade in Nifty:
- Nifty derivatives can be traded in two different ways.
- These derivative contracts will be using the index as an underlying asset.
- This will essentially mean that the price movement of the derivatives is totally linked with the index.
- Since the index is not a stock, you will not be able to take delivery of the same on the expiry of the delivery contract.
- Instead of this, all the index derivatives will be settled on a cash basis at the end of the expiry.
The two ways through which you can trade Nifty derivatives are as follows:
#2. Investing in Nifty through Future Contracts:
- If you have a bullish or bearish view of the Nifty index, you can make use of the index futures contracts to profit from the price movements.
- For example, if the Nifty is trading at 17,000 points on August 14, 2022, and you have a bullish view on the same and presume that the Nifty is going to rise to 18,000 by expiry.
- Then you will need to purchase a Nifty AUG FUT Contract at 17,000.
- Now, if the index is moving according to your expectations and touches 18,000 before expiry, you will immediately square off the position.
- Similarly, if you have a bearish view and thereby expect that the index will fall to 16,000 by the expiry.
- All you will have to do is short-sell the Nifty AUG FUT Contract at 17,000.
- If the index moves as per your expectations and falls at 16,000, then you will immediately square off the position.
- By doing this, you will enjoy your profit.
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#3. Investing in Nifty through Options Contracts:
- You can also use the option contract just like futures to earn a profit.
- Now, consider the same example of you having a bullish view and the Nifty at 17,000 points.
- For this, you can buy the Nifty AUG 18,000 CE option contract because you expect the price to move around 18,000 by expiry.
- Hence, here you purchase a call option contract for the index with the strike price that you will choose.
- Alternatively, you can also purchase the option at a strike price that is lower than the current trading price of the index.
- Here, you will require a whole lot of premiums, which will drive up your initial investment.
- Now that the index is moving as per your expectations, all you will have to do is to square off your position.
- The same is the case with the bearish view.
- Here, you will have to purchase the Nifty AUG 16,000 PE Options Contract because you expect the Nifty to fall at 16,000 points.
- When the Nifty falls, you will be able to enjoy your profits.
Also Read: What is Index Trading?
#4. Investing in Nifty via Mutual Funds:
- Mutual funds are very much like index funds.
- They will feature the same index of stocks that are featured in the index, such as the Nifty.
- This will also allow the investors to track the performance of the index which in turn will allow the investors to take part in the value creation process.
Unlike mutual funds, index funds will be offering you the following benefits:
With the help of Nifty index funds, you will get a chance to invest in all the 50 components of the Nifty 50 index, which will also provide you with broad market exposure.
We hope that the above blog has given you clarity about how to trade in Nifty.
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