First step towards F&O Trading

Well well well, not here to talk about the webinars, virtual tradings, start small, avoid FOMO, and all those stuff. All these are certainly important. Just want to share a thought about how do we get the logistics set very right so that we make the most from our deployed capital.

Select the right broker.

Having half a dozen Demat accounts does not make anyone a great trader. We certainly do not need any backup account for trading. Choose just one broker. Enquire with friends about the brokerage of the broker, ensure you do not give any kind of control for the broker to pledge your shares. Let us not forget what happened in Karvy. It's always advisable to check the status of the stocks by trying to put a sell order. One should be able to place an order without any issue if the stock is allocated in his/her name.

Apart from brokerage, we got to see how do we create our capital for trading. For an F&O trader, it is a mandatory must to have margins to trade. Margins could be in the form of

• Cash - most effective and hassle free way. but, if we are going to use only part of the capital, the rest of the money earns us nothing and just lies idle
• Create margins by pledging collateral like stocks. Stocks that we hold could be effectively used this way to provide us margin for trading as they continue to perform in the market and increase in wealth. We get better margins by pledging blue-chip stocks as they would have better liquidity and also their volatility would be less. Depending on broker the haircut range varies between different stocks. Margin created with stock holding will not be considered as cash component by most brokers. one can sell options and hold them across days. but, for any buys or MTM (Mark to Market) losses, liquid cash has to be added to the capital
• The cash component is extremely important and we can create the cash component by investing in funds like Liquid Bees or Liquid Funds and pledging them as collaterals. Most brokers accept these as collateral with 8 to 10 percent haircut and let us use the rest for trading. This margin created is considered as cash component and could be used for tallying overnight MTM losses. What more? These start giving us very decent passive income. Even the most conservative Liquid Funds gives us a return of close to 7.5% PA if held over a period of 10 years. An addition of 7% to the earnings is absolutely a bonus. Even if we make 2% returns a month from our trading, this 7% will push our earnings beyond 30%. 30% is a dream return on any deployed capital
• The margin created by pledging Liquid Fund or Liquid Bees works as cash component to handle the overnight MTM loss. We cannot use this margin to buy stocks and take delivery
• Some brokers accept Fixed deposit as collateral as well. but, the process and procedure is slightly longer as one had to open the FD in the name of the exchange and then pledge it
• Large traders never trade with their money. They pledge their collateral, ensure some passive income keeps trickling in and then play the game
• Ideally, 20% of cash is good to keep. Rest could be through collaterals
• The biggest advantage of Liquid Funds beyond giving the passive income is, the returns are subject to indexation if we hold it beyond 3 years

Every penny counts in the stock market. Being a trader is a loner's life. Get in based completely on your own knowledge and strength. No one here will earn you money. We need to deploy funds wisely to ensure we get the maximum returns.

Personally, I had deployed my capital using liquid funds and keeping 25% in cash. Maybe slowly I will move towards 20% cash and rest in collaterals. There are some key terms that I had not tried to explain as that would dilute the topic. Deploy your capital wisely and make the most. All the very best.