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NSE S&P CNX Nifty 50 or the NIFTY is the prime stock index in India. The NIFTY index is made of top 50 listed companies in the national stock exchange. These companies are selected on the basis of market capitalization and the 50 stocks that have made the NIFTY account for about 58.64% of the total market capitalization. In fact these stocks are the most actively traded stocks in the national stock exchange and NIFTY stocks make about 50% of the total trading volume in NSE. The companies that are listed in the NIFTY index are selected from 21 different sectors and they represent the leading companies in the country. Therefore, NIFTY is a profitable investment proposition for any investor who is looking forward to invest in the index. In fact the growth of the NIFTY index in the recent years have attracted retail investors, institutional investors and foreign investors to invest in the NIFTY either directly or through the index funds. There are primarily two ways to invest in the NIFTY – one is the derivative trading on the index and other is the index funds that are operated by the mutual fund companies.
Derivative trading is a unique financial product that is based on the underlying instrument that may be a stock or index. In national stock exchange derivative trading was first introduced in the year 2000. For trading in the NIFTY index directly you have to derivative instruments – Nifty Future and Nifty Option. In both the cases the value of the derivative is determined by the position of the index. The Future and the Option are basically a contract between the buyer and the seller. Like any other derivative trading the NIFTY is also traded in a lot. You can either buy or sell a lot of 50 or you can trade in mini Nifty that consists of 20 units.
A Future contract is an agreement between the buyer and the seller for buying or selling a lot of NIFTY on a future date. For buying a Nifty Future you have to pay the margin amount of about 15% of the total price of the lot. But this margin amount most likely changes every day depending on the variation of the price in the market that is called the mark to market. When you will gain on the Future contract according to this settled price you will earn the difference and if the index goes down you can wait till the settlement date. But whatever is the price of the lot on the date of settlement you have to close the deal on that very day irrespective of the profit or loss.
In an option contract the contract is between the buyer and the seller for buying or selling one more lots of Nifty on a future date and at a specific price. The buyer of the option pays a premium for owning the option contract and this premium depends on the current position of Nifty and the specific option that the buyer is buying. Though the buyer of the option contract is not liable to honor the option contract the seller of course is obliged to honor the contract if the buyer is exercising the contract.
These are the two most popular ways to do derivative trading on the NIFTY index. Being one of the leading indices in the Indian stock market, the Nifty is preferred by so many investors from all round the globe along with domestic investors. But if you are a beginner in stock market investment then the derivative trading mechanics might seem to you bit complex. Moreover, as little difference in the index has great influence on the Future and Option contracts, it is also too risky to invest in the derivative trading, especially who have little fund and do not want to take chances. For them the most viable solution for entering Nifty is the index funds. These are basically mutual funds that invest in the indices and there are so many profit making Nifty funds that are worth attention.
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