When people invest in shares, two useful things they can do are create personal indices and trade futures. These help them manage their investments better and increase profits. This article explains what these two terms mean and how understanding them can improve investing strategy. We will cover the basics of creating a personal index and how futures trading in stocks works with examples.
Understanding Personal Indices:
A personal index is a way for investors to track the performance of what they invest in stock market. It is much the same as a stock market index, for instance, the Nifty 50 or the S&P 500, but it is customized to reflect the investor’s specific portfolio. By creating a personal index, investors can get a clear picture of how their investments are performing over time.
How to Create a Personal Index:
Creating a personal index is relatively simple. Start by listing all the investments in your portfolio, including stocks, bonds, mutual funds, and any other assets. Assign each investment a weight based on its value in your portfolio. For example, if you have ₹50,000 invested in stocks and ₹25,000 invested in bonds, the weights would be 50% for stocks and 25% for bonds.
Calculating the Personal Index:
Once you have assigned weights to each investment, you can calculate the value of your personal index. It is done by multiplying the weight of each investment by its return and summing the results. For example, if your stocks returned 10% and your bonds returned 5%, the value of your personal index would be:
(50% * 10%) + (25% * 5%) = 5% + 1.25% = 6.25%
Benefits of Personal Indices:
One of the main benefits of personal indices is that they provide a way for investors to invest in share market and track the performance of their investments in a more meaningful way. Instead of just looking at individual stock prices or fund returns, investors can see how their entire portfolio is performing relative to a benchmark.
Introduction to Futures Trading:
Futures trading is a kind of investment where investors buy or sell contracts that compel them to buy or sell an asset at a certain price on a specified date in the future. Futures contracts are generally used to hedge against price movements in commodities, such as oil or gold. Still, they can also be used to speculate on the future price fluctuations of financial assets, such as stocks or stock indices. Investors can use any investment app to facilitate their futures trading activities.
How Futures Trading Works:
In futures trading, investors can take two positions: long or short. A long position means the investor agrees to buy the asset at a specified price in the future, while a short position means the investor admits to selling the asset at a specified price in the future. The aim of futures trading is to profit from the difference between the buying or selling price specified in the contract and the actual price of the asset at the time of the contract’s expiration. This is a way to invest in equity.
In closing:
Personal indices and futures trading are two important tools that investors can use to head their investments and potentially increase their returns. By creating a personal index, investors can track the performance of their portfolio in a more meaningful way. At the same time, futures trading offers the opportunity to profit from price fluctuations in an expanded range of assets.