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Investing in the stock market can be a rewarding experience, but it comes with risks. If you're considering investing in the stock market, it’s essential to understand the basics.
Without the proper knowledge, you may incur losses instead of profits.
In the stock market, investors can trade in multiple ways, primarily in the Cash Market and Futures and Options (F&O).
A common question for new investors is whether they should buy stocks in the cash market or through F&O. The choice depends on your investment goals and strategies. Let’s dive deeper to understand the differences.
Key Differences Between Cash Market and F&O
1. Margin Money in F&O vs. Full Payment in Cash Market
Varun Dubey explains, “If you buy stocks in the cash market, you need to pay the full price.
For instance, purchasing 100 shares at ₹100 each requires ₹10,000 upfront. However, in F&O trading, you only need to pay margin money, not the full price.”
Cash Market: Requires full payment upfront.
F&O Market: Only requires a fraction of the total amount as margin money.
This difference makes F&O more accessible for investors looking to leverage smaller capital, though it also involves higher risk.
2. Buying Stocks Individually vs. in Lots
Cash Market: You can purchase even a single share if you want. There’s no compulsion to buy in bulk.
F&O Market: Stocks are traded in pre-determined lots, meaning you must buy a set quantity.
For example, if the lot size for a stock is 100 shares, you cannot purchase fewer than that in F&O.
3. Short Selling Options
Cash Market: Short selling is not an option.
F&O Market: Allows short selling, making it a suitable option for traders who wish to profit from a stock's price decline.
4. Corporate Actions Benefits
Corporate actions like bonuses, dividends, and stock splits are a significant difference between the two trading methods.
Cash Market: Investors receive corporate benefits as they are shareholders of the company.
F&O Market: Traders in F&O do not get corporate action benefits, as their contracts are adjusted rather than granting direct rights to bonuses or dividends.
5. Shareholder Status
Cash Market: Buying a stock here makes you a shareholder of the company, with rights and benefits.
F&O Market: Trading here doesn’t confer shareholder rights, as you’re merely speculating on the stock price.
FAQs
1. What is the cash market in the stock market?
The cash market is a segment where investors buy and sell shares by paying the full price upfront. It allows individuals to become shareholders of the company.
2. What are Futures and Options (F&O)?
F&O are financial derivatives that let traders speculate on the future price of stocks. You pay margin money rather than the full price, but you don't gain shareholder rights.
3. Can I buy a single stock in F&O?
No, stocks in F&O are traded in lots. The minimum quantity is determined by the lot size for that stock.
4. Why don’t F&O traders get corporate action benefits?
F&O contracts are speculative and get adjusted for corporate actions. Traders don’t hold the actual stock, so they aren’t eligible for benefits like dividends or bonuses.
5. Which is better: Cash Market or F&O?
The choice depends on your investment goals and risk appetite. The cash market is ideal for long-term investors, while F&O is better suited for experienced traders looking to leverage or hedge.
Understanding these differences is crucial for making informed investment decisions. Whether you choose the cash market or F&O, ensure that your strategy aligns with your financial goals and risk tolerance. Happy investing!
