F & O - Trading is not good for financial health

Puri effect: how money vanishes

There are people out there who made the money that Puri lost

Citibank’s rogue relationship manager apparently blew up most of the money he ‘diverted’ on the stock markets. Specifically, he seems to have been trading in Nifty derivatives. I almost wish that he had instead run off with the money and was sunning himself on a beach in the Caribbean, wearing a false beard with the money safely laundered into a Cayman Islands account. But alas, it was not to be. Like traders around the country, he found the lure of ‘effendo’ too strong.

Even though ‘effendo’ sounds like a magical spell from Harry Potter (like Confundo and Diffindo), it is not. It is the popular way of pronouncing F&O, otherwise known as futures and options!

But Effendo seems closely related to a Harry Potter spell called Evanesco which makes things vanish. Effendo can make money vanish as if by magic, as it did for Shivraj Puri and his victims.

Now I know the whole story about how derivatives provide depth and breadth to the stock markets, but for a vast majority of retail investors, they are none of that. Instead, as Warren Buffet pointed out, they are nothing but financial weapons of mass destruction.

According to the Gurgaon police, Puri purloined Rs 300 crore, leveraged it up to Rs 1,200 crore and then managed to shrink that down to Rs 175 crore when, in November, the Nifty refused to behave as he had expected it to.

The only thing unique about his story is the scale and the fact that he had stolen the money he was using. There is no shortage of people who are using their own money and losing most of it. The root cause is the widespread promotion of derivatives as a magical way of making money without risk.

The strange thing is that since short-term investing is effectively a zero-sum game, this is sort of true. There are people out there who made the money that Puri lost.

However, if you think there’s an easy, simple and risk-free way of doing that, you could well be on your way to be becoming your own Shivraj Puri!

 

Source: valueresearchonline.com