We received a dismaying e-mail from a reader ( Ankit Verma, 32 years, Mumbai) last week. He wanted to know how he could recover the Rs 50 lakh he had lost in F&O and leveraged commodity trading. This is his story.
1. STARTED BY INVESTING SMALL AMOUNTS
I started investing in stocks around 2007, when the markets were doing very well. I put small amounts in stocks and earned good returns on almost all my investments. However, my income was not very high and since the invested amount was relatively small, the profits earned were not significant in absolute terms. Instead of investing small amounts, had I put a larger sum into stocks, my gains would have been quite substantial.
2. WANTED TOO MUCH, TOO SOON
My initial success with stocks led me to believe that I can make good money if I leveraged my investments. The futures and options (F&O) segment was very alluring because I could buy 5-6 times more shares with the same amount of money. This was December 2007 and the stock markets were raging. I bought one futures lot of a gas company on the advice of my relationship manager. He encouraged me, saying that if the share price rose by 5%, I would gain 25% on my investment.
3. ALL GAINS WIPED OUT BY ONE LOSS
The F&O segment is a brutal market. When the markets tumbled in early 2008 and my shares fell, the profits I had painstakingly made from small trades in the cash market during 2007 were wiped out by one loss in the futures market. I bought more to lower the average buying price, but it was like catching a falling knife. My losses kept on mounting even as the stocks drifted lower. I was forced to exit when I could not furnish the additional margin demanded by the broker.
“After losing in stocks, I tried to recover my losses by playing the gold futures market”
4. DIGGING DEEPER
Gold is supposed to be a safe haven… but not when you take a leveraged position. I repeated the mistake I had made in stocks and leveraged big time when the yellow metal was trading above Rs 32,000 per 10 gm. At one time, I was long on gold with a holding of 18 kg. And then the safe haven tag suddenly vanished leaving me with huge losses. My misery didn’t end though. Just before the election results, I went short on stocks and lost heavily when the Sensex zoomed. My salary is Rs 60,000 but will be repaying loans of Rs 18 lakh till 2017.
Takeaways From This Real Story
- Stocks are considered risky because you can lose up to 10-20% of your investment in a day. But derivatives are far more risky because you can lose more than you have invested.
- Derivatives sophisticated instruments meant for professional traders and hedge funds. Small investors should stay away from this segment.
- Stay away from day trading unless you are smart enough. Believe us, 95% of traders end up with nothing in their kitti at the end of the day. They gain one day, lose another day.
- Never do something which you cannot understand. Derivatives are bit complex and the people out there are much more intelligent than you. Remember it always.