Shares, stocks or equities are basically one and the same thing. Buying a share in a company means buying a fraction of the capital of a publically listed company. When an investor buys shares of a company, he practically owns a part of the business of the company. Share prices tend to fluctuate constantly in response to the company's performance, market scenario and economic environment. Investors buy shares in expectation of an increase in their price in the future.
Where are the Equities Traded?
In India, there are two primary exchanges; the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).
Why should I Invest in Equities?
Shares or equities are an extremely popular asset class for investors around the world. Equity markets have historically outperformed every other type of investment and are generally held as an attractive way of creating long term wealth by investing in shares of good companies. Share prices of a company tend to increase following the consistent revenue and profit generation and investors who had bought these shares earlier at a lower value tend to benefit as a result. In addition to this capital gain, well performing companies also tend to give dividends to the shareholders out of the profit they make.
How to Invest In Equities?
Investors can buy or sell shares through an agent, commonly referred to as "stock broker". Investors can simply open an account with the broker and buy/sell shares in a publicly listed company which is listed on any of the major stock exchanges in the country. Opening an account with a broker is a straightforward process and it can be done quickly by submitting documents like ID proof, residence proof and bank details etc. Once an account is opened, an investor can transfer funds according to his convenience and start transacting in shares and other securities like commodities, equity derivatives etc.
What is Day Trading?
Day Trading which is also referred to as intra-day trading involves buying and selling of stocks within the same trading day or squaring-off your trade on the same day. Stocks are purchased, not with an intention to invest, but for the purpose of earning profits by harnessing the movement of stock indices.However, intraday trading is riskier than investing in the regular stock market.
What is the difference between Primary Markets and Secondary Markets?
When a company comes out with an initial public offer (IPO) it is called the primary market. The normal purpose of an IPO is to list the stock in the share market. Once the share gets listed it starts trading in the secondary market. The difference between the primary capital market and the secondary capital market is that in the primary market, investors buy securities directly from the company issuing them, while in the secondary market, investors' trade securities already issued. In secondary market, an investor can buy shares directly from a seller and the stock exchange or broker acts as an intermediary between two parties.
What is Fundamental and Technical Analysis?
Fundamental analysis is about understanding the business of the company, its growth prospects, its profitability, its debt etc. Technical analysis focuses more on charts and patterns and tries to find out past patterns to apply for the future. Fundamentals are used more by investors while technicals are used more by traders.
What are Sectors?
A sector is a group of securities that share similar characteristics, such as building materials, transport and engineering companies. It is an area of the economy in which businesses share the same or a related product or service. Dividing an economy into different sectors allows for more in-depth analysis of the economy as a whole.
What Makes Stock Prices Go Up and Down?
If there are more sellers than buyers, stock prices will tend to fall. Conversely, when there are more buyers than sellers, stock prices tend to rise. However, there's a compilation of factors that determine whether stock prices rise or fall. These include the media, the opinions of well-known investors, natural disasters, political and social unrest, risk, supply and demand, etc.
What is Dividend?
Companies distribute a small portion of a company's earnings to its shareholders. This becomes an important source of earnings for investors who stay involved in the share market for a longer period of time. However, the size of this dividend is not known to investors as it depends on company profits and is at the discretion of the company's directors. Companies can either pay fixed rate, referred to as preferred dividends, or they can pay variable dividends based on the earnings, known as common dividends.
What is the role of a Broker in the Share Market??
The broker helps you execute buy and sell trades. Brokers typically help buyers find sellers and sellers find buyers. Most brokers will also advise on what stocks to buy, what stocks to sell and how to invest money in share markets for beginners. They will also assist in how to trade in stock market. For that service, the broker is paid brokerage.
What is DEMAT Account?
The full-form of DEMAT A/C is dematerialization account. It's an account where your bought shares will be deposited in electronic format like how your money is kept in your savings account as electronic format after deposit. There is a term called DP(depository participant) who has a right to open up demat accounts & most of the brokers have got this DP license to open up a demat account for you.
What are the charges applicable on Stock Trading?
Statutory charges like GST, stamp duty and STT are imposed by either the central or the state government. The broker does not get these payments. The broker just collects these on your behalf and deposits it with the government.
What is SEBI?
SEBI refers to Securities and Exchange Board of India. Because the bourses (stock market) have inherent risks, a market regulator is required. The SEBI is provided with this power and has the responsibility of developing as well as regulating the markets. The basic objectives include protecting investor interest, developing the share market, and regulating it's working.
How does Equity Market work?
ABC Limited is a privately owned company that is currently worth Rs10,000,000. The owners want to raise some money so that they can expand the business overseas. To do this, they sell a portion of the business by issuing stock at Rs2 per share. This means ABC becomes publically listed. You decide it looks like shrewd investment so you buy Rs10,000 worth of stock. At Rs2 per share that gives you 5000 shares, or a 0.1% stake in the company. Your investment turns out to be a good one. By the time ABC releases its first annual earnings report, its share price has risen to Rs3 and your investment has grown to a value of Rs15,000. You can now either sell your shares, or hold onto them in the hope of future profits. However, share prices can go down as well as up and if ABC plc had gone down in value you could have lost money. For that reason, it is incredibly important to research both the company you are thinking of investing in and their wider industry before you buy any shares.
What are the risks involved in Equity Trading?
Since equities don't pay a fixed interest rate, they don't offer guaranteed income. Hence, with equities comes the risk factor. There are various risks involved in equity investment that affects your returns such as changes in economic environment namely, changes in interest rates, inflation, market risks to name a few. While investment in equities is not risk-free because of various risk factors, being regulated by Securities and Exchange Board of India (SEBI) you can be sure that there is no counterparty risk.
How can an Investor manage risk efficiently?
As an age old saying goes, 'not putting all eggs in one basket, your equity portfolio should not be concentrated to one particular investment style or a particular sector. Most risks associated with investments in shares can be reduced by using the tool of diversification. To reduce the risk, diversify your portfolio pyramid and make sure that your portfolio consists of shares across various sectors and industries like automotive, engineering, financial services, information technology. Also make sure the companies are all located in different regions and that the companies you have invested in belong to large-cap, mid-cap and small-cap clan.
How to build a Portfolio of Stocks?
A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, as well as their funds counterparts, including mutual, exchange-traded and closed funds. Portfolios are mostly held directly by investors and/or managed by financial professionals. The first step towards building a portfolio is to have a clear goal. Once you have that, then it's relatively easy to build the rest of the portfolio in a way that's suitable for meeting your goals. Secondly, a focused and disciplined approach with limited number of stocks can help improve performance of the portfolio. Thirdly, diversifying your investment portfolio can help by spreading around your money to a number of stocks.A well-diversified portfolio is important because in the event that one or more sectors of the economy start to decline, it will remain strong over time and reduce the likelihood of taking a significant hit as the market fluctuates.
What is Economic Environment?
The economic environment refers to the state of the economy in a country or region. Economic conditions are considered to be sound or positive when an economy is expanding and are considered to be adverse or negative when an economy is contracting. Economic indicators which can be used to define the state of the economy or economic conditions are the unemployment rate, levels of current account and budget surpluses or deficits, GDP growth rates, and inflation rates. An improvement in economic conditions would lead investors to be more optimistic about the future and potentially invest more as they expect positive returns. The opposite could be true if economic conditions worsen.
What are Company Earnings?
A Company's Earnings is an official public statement of a company's profitability during a specific period, which is usually defined as a quarter (three calendar months) or a year. It is often evaluated in terms of earnings per share (EPS) - this is the most important indicator of a company's financial health. When the company has been profitable leading up to the announcement, their share price will usually increase after the information is released.
What is PE ratio?
The price to earning ratio (P/E Ratio) is a valuation ratio of a company's current share price compared to its per-share earnings. P/E is one of the most important and interesting ratios used to compare the price and value of a particular stock. Usually higher the P/E ratio, the more premium is the stock and vice versa. A high P/E ratio doesn't necessarily mean that a stock is expensive and should be sold. It simply means that investors are willing to pay a premium to hold the stock.
What is Dividend Yield?
The dividend yield is a financial ratio that measures the amount of cash dividends distributed to common shareholders relative to the market value per share. Dividend yield is the relation between a stock's annual dividend payout and its current stock price.A security's dividend yield can also be a sign of the stability of a company and often supports a firm's share price. Normally, only profitable companies pay out dividends. Therefore, investors often view companies that have paid out significant dividends for an extended period of time as "safer" investments.
What are Derivatives?
A derivative is an instrument whose value is derived from the value of one or more underlying, which can be commodities, precious metals, currency, bonds, stocks, stocks indices, etc. Four most common examples of derivative instruments are Forwards, Futures, Options and Swaps. The value of a derivative is based on the expected future price movements of their underlying asset. Derivatives are often used as an instrument to hedge risk for one party of a contract, while offering the potential for high returns for the other party. Derivatives have been created to lessen fluctuations in stock, bond, commodity, and index prices; changes in foreign exchange rates; changes in interest rates etc.
What are Futures?
Futures are exchange-traded contracts to sell or buy financial instruments or physical commodities for a future delivery at an agreed price. There is an agreement to buy or sell a specified quantity of financial instrument commodity in a designated future month at a price agreed upon by the buyer and seller.The contracts have standardized specifications like market lot, expiry day, unit of price quotation, tick size and method of settlement.
What are Options?
An Option is a contract that grants its owner the right, but not the obligation, to make a transaction in an underlying commodity or security at a certain price within a set time in the future. The underlying commodity or security could be anything. Equity shares are one major type of underlying asset. The right to sell a security is called a 'Put Option', while the right to buy is called the 'Call Option'. Just as futures contracts minimize risks for buyers by setting a pre-determined future price for an underlying asset, options contracts do the same however, without the obligation to buy that exists in a futures contract.
What is the tax treatment for Equity Investment and other charges that are levied?
Tax Treatment: Long Term Capital Gains Tax (LTCG): The Union Budget 2018-18 proposes a Long-term capital Gains tax on sale of Equity shares / units of Equity oriented Fund if more than Rs 1 lakh at @ 10% without the benefit of indexation from i.e. from 1st April 2018. Short Term Capital Gains Tax (STCG): It is payable at 15% if securities are held for less than 1 year. Other charges:
1. GST- Central Goods and Services Tax (CGST) @9% and Integrated Goods and Services Tax (IGST) @9% are payable to the government for every trade executed.
2. Transaction Charges - Transaction charges are levied as follows - (For NSE @ 0.00325% and for BSE@ 0.00275%)
3. SEBI charges - Rs 20 per crore on total turnover.
4. Stamp duty charges - Stamp duty are 0.0002% for intraday and 0.01% for delivery.
5. Securities Transaction Tax – STT is levied by government on every transaction done on stock exchange (NSE or BSE). The STT is 0.1% on buy and sell for Equity delivery. 0.025% on sell for Equity intraday. 0.01% on sell side for Equity Futures and 0.1% for sell side of Equity options (Levied on premium)
What are Derivatives?
Derivatives, such as futures or options, are financial contracts which derive their value from a spot price, which is called the “underlying”. The term “contracts” is often applied to denote the specific traded instrument, whether it is a derivative contract in commodities, gold or equity shares. The world over, derivatives are a key part of the financial system. The most important contract types are futures and options, and the most important underlying markets are equity, treasury bills, commodities, foreign exchange, real estate etc.
What is a Forward Contract?
In a forward contract, two parties agree to do a trade at some future date, at a stated price and quantity. No money changes hands at the time the deal is signed.
Why is Forward Contracting useful?
Forward contracting is very valuable in hedging and speculation. If a speculator has information or analysis which forecasts an upturn in a price, then he can go long on the forward market instead of the cash market. The speculator would go long on the forward, wait for the price to rise, and then take a reversing transaction making a profit.
What are the problems of Forward Markets?
Forward markets worldwide are afflicted by several problems:
Lack of centralisation of trading,
What is a Futures Contract?
Futures markets are exactly like forward markets in terms of basic economics. However, contracts are standardized and trading is centralized (on a stock exchange). There is no counterparty In futures markets, unlike in forward markets, increasing the time to expiration does not increase the counter party risk. Futures markets are highly liquid as compared to the forward markets.
What are the various types of derivative instruments traded at Exchanges?
There are two types of derivatives instruments traded on Exchanges; namely Futures and Options: Futures: A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Options: An Option is a contract which gives the right, but not an obligation, to buy or sell the underlying at a stated date and at a stated price. While a buyer of an option pays the premium and buys the right to exercise his option, the writer of an option is the one who receives the option premium and therefore obliged to sell/buy the asset if the buyer exercises it on him.
Options are of two types - Calls and Puts options: Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date. Puts give the buyer the right, but not the obligation to sell a given quantity of underlying asset at a given price on or before a given future date. All the options contracts are settled in cash.
Further the Options are classified based on type of exercise. At present the Exercise style can be European or American. American Options - American options are options contracts that can be exercised at any time upto the expiration date. Options on individual securities available at NSE are American type of options. European Options - European options are options that can be exercised only on the expiration date. All index options traded at NSE are European Options.
What are the various products available for trading in Futures and Options?
Futures and options contracts are traded on Indices and on Single stocks.
Why should I trade in Derivatives?
Futures trading will be of interest to those who wish to:
Invest - take a view on the market and buy or sell accordingly.
Price Risk Transfer- Hedging - Hedging is buying and selling futures contracts to offset the risks of changing underlying market prices. Thus it helps in reducing the risk associated with exposures in underlying market by taking a counter- position in the futures market.
Leverage- Since the investor is required to pay a small fraction of the value of the total contract as margins, trading in Futures is a leveraged activity since the investor is able to control the total value of the contract with a relatively small amount of margin.
Thus the Leverage enables the traders to make a larger profit (or loss) with a comparatively small amount of capital.
Options trading will be of interest to those who wish to:
Participate in the market without trading or holding a large quantity of stock.
Protect their portfolio by paying small premium amount.
Benefits of trading in Futures and Options:
Able to transfer the risk to the person who is willing to accept them.
Incentive to make profits with minimal amount of risk capital.
Lower transaction costs.
Provides liquidity, enables price discovery in underlying market.
Derivatives market are lead economic indicators.
What are the benefits of trading in Index Futures compared to any other security?
An investor can trade the ‘entire stock market’ by buying index futures instead of buying individual securities with the efficiency of a mutual fund.
The advantages of trading in Index Futures are:
The contracts are highly liquid
Index Futures provide higher leverage than any other stocks
It requires low initial capital requirement
It has lower risk than buying and holding stocks
It is just as easy to trade the short side as the long side
Only have to study one index instead of 100s of stocks
What is the expiration day?
It is the last day on which the contracts expire. Futures and Options contracts expire on the last Thursday of the expiry month. If the last Thursday is a trading holiday, the contracts expire on the previous trading day.
What is the concept of "In the Money", "At the Money" and "Out of the Money" in respect of Options?
In- the- money options (ITM) - An in-the-money option is an option that would lead to positive cash flow to the holder if it were exercised immediately. A Call option is said to be in-the-money when the current price stands at a level higher than the strike price. If the Spot price is much higher than the strike price, a Call is said to be deep in-the-money option. In the case of a Put, the put is in-the-money if the Spot price is below the strike price. At-the-money-option (ATM) - An “At-The Money” option is an option that would lead to zero cash flow if it were exercised immediately. An option on the index is said to be “at-the-money” when the current price equals the strike price. Out-of-the-money-option (OTM) - An out-of- the-money Option is an option that would lead to negative cash flow if it were exercised immediately. A Call option is out-of-the-money when the current price stands at a level which is less than the strike price. If the current price is much lower than the strike price the call is said to be deep out-of-the money. In case of a Put, the Put is said to be out-of-money if current price is above the strike price.
Is there any margin payable?
Yes. Margins are computed and collected on-line, real time on a portfolio basis at the client level. Members are required to collect the margin upfront from the client & report the same to the Exchange.
What are the risks associated with trading in Derivatives?
Investors must understand that investment in derivatives has an element of risk and is generally not an appropriate avenue for someone of limited resources/ limited investment and / or trading experience and low risk tolerance. An investor should therefore carefully consider whether such trading is suitable for him or her in the light of his or her financial condition. An investor must accept that there can be no guarantee of profits or no exception from losses while executing orders for purchase and / or sale of derivative contracts.
How are the contracts settled?
All the Futures and Options contracts are settled in cash on a daily basis and at the expiry or exercise of the respective contracts as the case may be. Clients/Trading Members are not required to hold any stock of the underlying for dealing in the Futures / Options market. All out of the money and at the money option contracts of the near month maturity expire worthless on the expiration date.
What is Opening Purchase Transaction?
An opening purchase transaction is one that creates or increases a long position in a given option series.
What is Opening Sale Transaction?
An opening sale transaction is one that creates or increases a short position in a given option series. Such a sale is also referred to as "writing" an option contract.
What is Closing Purchase Transaction?
A closing purchase transaction is one that eliminates or reduces a short position in a given option series. Such a purchase is commonly referred to as "covering" a short option position.
is Closing Sale Transaction?
A closing sale transaction is one that eliminates or decreases a long position in a given option series.
What is Open Interest?
Open interest refers to the number of outstanding contracts in the exchange market.
What is a Mutual Fund?
A mutual fund is a professionally-managed investment scheme, usually run by an asset management company that brings together a group of people and invests their money in stocks, bonds and other securities. Mutual funds are pooled investment vehicles actively managed either by professional fund managers or passively tracked by an index or industry..
What is Systematic Investment Plan (SIP)?
SIP has become a very attractive way of investing for retail investors over the years. SIP basically involves investing a fixed amount at regular intervals in mutual fund. Investors can invest small amounts of money in daily, weekly, monthly or quarterly basis instead of investing a lump sum at one go.
What is the primary role of Mutual Funds?
Mutual fund is a fund of funds. A mutual fund combines the funds of individual investors and invests them in variety of financial securities like equities/debt. A mutual fund holds a variety of investments which can make it easier for investors to diversify than through ownership of individual stocks or bonds. It has emerged as a great option for investors who are willing to take risks for higher rectums and do not have required expertise or time for handling their investing activities.
What exactly do Mutual Funds offer for Investors?
Mutual funds have turned out to be a very useful investment option for investors who lack the time or knowledge to make traditional and complex investment decisions on their own.
How do Mutual Funds function?
A mutual fund basically collects money from investors, pools it together and invests it in various options like stocks, bonds or both. The investing decisions are taken by professionally equipped managers who understand the market well, and try to create value for the investors over a period of time.
How can an investor participate in Mutual funds?
As an investor, you can buy mutual fund 'units', which basically represent your share of holdings in a particular scheme. These units can be purchased or redeemed as needed at the fund's current net asset value (NAV). These NAVs keep changing, according to the fund's holdings.
How are the investor’s interests protected while investing in Mutual Funds?
All the mutual funds are registered with SEBI. They have to function within the provisions of strict regulation created to protect the interests of the investor.
What makes Mutual funds attractive for retail investors?
The biggest advantage of investing through a mutual fund is that it gives small investors access to professionally-managed, diversified portfolios of equities, bonds and other securities, which would be quite difficult to create with a small amount of capital.
What is Net Asset Value (NAV)?
NAV is the value of a fund's asset less the value of its liabilities per unit. In simple terms, NAV = (Value of Assets-Value of Liabilities)/number of units outstanding.
What are Sponsors, Trustees and AMCs?
A mutual fund is set up in the form of a trust that has a Sponsor, Trustees, Asset Management Company (AMC). The trust is established by a sponsor(s) who is like a promoter of a company and the said Trust is registered with Securities and Exchange Board of India (SEBI) as a Mutual Fund. The Trustees of the mutual fund hold its property for the benefit of unit holders. The trustees are vested with the power of superintendence and direction over the AMC.
An Asset Management Company (AMC) approved by SEBI manages the fund by making investments in various types of securities.
What is NFO?
A new fund offer (NFO) is the first time subscription offer for a new scheme launched by the asset management companies (AMCs).
What are Open-ended Funds?
Open ended funds buy and sell units on a continuous basis and allow investors to enter and exit as per their convenience.
What are Close-ended funds?
Close-ended funds have a fixed maturity. Investors can buy units of a close-ended scheme from the fund only during its NFO. The fund makes arrangements for the units to be traded post-NFO in a stock exchange. This is done through a listing of the scheme in a stock exchange.
What are Interval funds?
These funds combine features of both open-ended and close-ended schemes. They are largely close-ended, but become open-ended at pre-specified intervals.
What is Return grade?
Return grade is the rating given to a fund based on its particular attributes. A return grade is defined as a quality rating of the stock or the bond based on the returns it offers to the investor and is used for the risk-return profile assessment.
What is Asset Under Management (AUM)?
AUM is the relative size of mutual fund companies that is assessed by their assets under management (AUM). When a scheme is first launched, assets under management would be the amount mobilized from investors. If the scheme has a positive profitability metric, its AUM goes up; a negative profitability metric will pull it down.
What is diversification and how does it help investors?
Units of a Mutual Fund scheme give investors exposure to a range of securities held in the investment portfolio of the scheme. Thus, even a small investment in a mutual fund scheme can give investors a diversified investment portfolio.
What is Commodity Market?
Commodity market is a marketplace for facilitating trading in different commodities. Market can be a derivative or spot market. In the derivatives market, different financial instruments like futures and options are specifically traded based on the commodities. On the other hand, in spot market commodities are sold and brought for the immediate delivery. Such financial instruments like ‘futures’ are often traded in the online commodity exchanges.
What are Commodity Futures?
Commodity Futures are the contracts for selling or buying particular quantity of the specific commodity at the future date. It is quite similar to the Stock futures and Index futures but underlying occurs to be the commodities in place of indices and Stocks.
How does Futures Trading work?
Future trading is known as trading of the future contract. The future contract purchaser possesses the right to buy commodity of similar quality, quantity in particular time period from seller of the contract.
What are the advantages of Online Commodity Trading?
Fair Price Discovery and Transparency: Trading in the commodity futures is often considered as transparent and through the large-scale participation; fair price discovery process is confirmed as well. Also large participation illustrates expectations and the views of the wider section of people who are concerned with the commodity.
Online platform: Processors, traders and producers along with importers or exporters for the purpose of managing price risk widely use the online platforms offered by NCDEX/MCX.
Hedging: It gives form to the producers in order to hedge positions based on their exposure within the physical commodity.
Simple Economics: The mechanism of commodity trading is depended on the simple economics that is, supply and demand. The price of the commodity is quite higher if its demand is higher and vice versa.
Low margins: Future traders of the commodity are needed to deposit quite low margins; roughly it is 5% to 10% of the contract’s total value, which is much lower in comparison to other classes of asset.
No counter party risk: Commodity Futures possesses Clearing Houses, just like exchanges within equity market that confirm the fact that contract terms totally fulfils and thus is responsible for eliminating the risk associated with the counter party.
Wide participation: The emergence of online trading enabled a wide expansion within the commodity market over the years.
Evolved pricing: The development in the participation could minimize risks of the cartelization, confirming the holistic perspective towards the commodity. Thus, pricing can be more or less irrational and more practical resulting in the Discovery Mechanism of fair price.
Who regulates the Commodity Market in India?
The SEBI oversees and regulates the Indian commodity market.
Who invests in Commodities?
d. Agencies providing agricultural credit.
e. Commodity financers
f. Large scale consumers like jewelers, refiners, textile mills
g. Arbitrageurs, Speculators, Hedgers
h. Corporate possessing risk exposure in the commodities
What is a Commodity Exchange?
Commodity Exchange is the market place where the commodity trading is taken place. Currently, there are three exchanges of national-level within the country where commodity trade can take place like National Commodity and Derivative Exchange (NCDEX), Multi Commodity Exchange of India LTD (MCX) and National Multi Commodity Exchange of India Ltd (NMCE). There are 21 smaller exchanges as well offering the commodity trading at regional level.
What types of Commodities are available on Exchanges?
Investors have lot of choices when participating in commodity market. There are different types of metals like Gold, Silver, Copper, etc. Energy counters like Crude oil and Natural Gas are also traded. A number of agriculture commodities like Chana, Soybeans, Turmeric, Wheat etc are also available for trading.
What is Margin?
In the market of commodities, an individual only pays very small portion for the actual trade value. In this case, it is not required to pay for the whole sum upfront like the purchasing of stocks or the spot market. This is known as the Margin. More simply, the Margin is understood as the amount an individual is needed to deposit with the broker earlier to performing any kind of commodities trade on any type of exchange.
What is Mark to Market (MTM)?
Each value of trades and contracts are often adjusted for reflecting the current price of market. This is known as Mark to Market (MTM). Also, the very day when an individual enters into the futures contract, MTM or Mark to Marketing is considered as the very difference between closing price of the day and the entry value. In the context of carried forward position or stature, it is considered as the difference between the market price of day and closing price of the earlier day.
What is Hedging?
A hedge is considered as the investment mitigating the very risk of adverse movements of price of any asset. Commodity prices often keep on fluctuating. In order to hedge against such price risks, players are required to sell or buy positions in the futures markets of commodity. It is primarily the sellers/producers of the commodities for e.g., farmers’ producing wheat and the bulk buyers/consumers of the commodities (like the manufacturers of bread who utilize the wheat as raw material) that are undertaking hedging in various commodities.
What are Warehouse Receipts?
Warehouse receipts are known as titled documents that are issued by the warehouses to the depositors against much deposited commodities. Through delivery and endorsements such documents are transferred. Such commodities can be claimed only by the receipt holders from warehouses.
What are Lot Sizes and Delivery Quantities?
When in Commodity Futures Market, an individual trades, that person possesses standardized contract. This means, every trade possesses certain common characteristics.Such common quality is prescribed by Lot Size. The individual is thus responsible for trading in the multiples of such quantity or the lot. However, delivery quantity can differ from the size of minimum lot. This is known as Delivery size.
Thus, for example, if the size of delivery was 200 gms and one lot for the commodity was 100 gms, then the individual requires for the trading at least in two lots for being eligible for the delivery.
What is Contango?
Contango is a situation where the futures price of a commodity is above the expected spot price. It refers to a situation where the future spot price is below the current price, and people are willing to pay more for a commodity at some point in the future than the actual expected price of the commodity. This may be due to people's desire to pay a premium to have the commodity in the future rather than paying the costs of storage and the carry costs of buying the commodity today.
What is Backwardation?
This is considered as the very opposite of Contango. This occurs when the futures price is lower than the commodity’s spot price; therefore, backwardation opines that future expiration of contracts will be traded at higher price comparing to the expiration of contract.
What is spread in Commodities Trading?
This is considered as the difference between future prices of specific commodity over various tenures. For example, commodity’s future price may be Rs. 100 for the contract of 1 month and for 2 months contract Rs. 110. Such Rs 10 difference is known as Spread.
What are the factors Impacting Commodity Prices?
Commodity prices normally tend to respond to the expected trends in demand and supply. For agriculture commodities, seasonal patterns, weather conditions, stock levels in major mandies and arrivals also play a critical role in daily price variations. For commodities like Gold, Silver, Copper, Crude etc, global price movement in these commodities, cues from currency markets and the general global economic conditions shape up the price behaviour.
What are Currencies?
Currency or the Foreign Exchange is a generally accepted form of money, including coins and paper notes, which is issued by a Government and circulated within an economy.
How are Currencies Quoted?
Unlike the other financial assets, the price of any currency is always versus another currency – for example the US Dollar versus the Euro. The two currencies in the quote are known as a pair which consists of a ‘base’ currency and a ‘counter’ currency. In a quote of USD/EUR (US Dollar to Euro) the ‘base’ currency is USD and the ‘counter’ currency is EUR.
What is Forex Market?
Forex (Foreign Exchange Market) – is a gigantic financial market in the world where foreign currencies are traded by participants spread all over the globe. The market has no certain place of auction, conduction and is a package of various trading, investment and speculative operations with currencies which are carried out virtually 24 hours a day.
Who participates in the Forex Market?
The global banking enterprises (central, commercial and investment) influence the current market situations the most, but recently the number of other market participants (international corporations, companies which manage assets, futures and options traders and private investors) have grown.
What is Online Currency Trading?
Markets are places to trade goods. The same goes with FOREX. The Forex Goods (merchandise) are the currencies of various countries. Online Currency Trading is the act of buying and selling international currencies using the internet based platforms. Banks and financial trading institutions engage in the act of bulk currency trading. Individual investors can also engage in currency trading, attempting to benefit from variations in the exchange rate of the currencies.
How does the Currency Market bring Buyers and Sellers together?
The currency or the foreign exchange market is normally based on currency trading platforms, where different major currencies of the world are traded. The foreign exchange market works as a medium to bring two parties together who wish to trade currencies at some agreeable rate. For instance, you can exchange one country’s currency for that of another simultaneously at some exchange rate. If you want to sell Indian rupee (INR) to buy the US dollar (USD), there must be someone else who wants to sell dollar for rupee at the same exchange rate. The Currency Trading (FOREX) market is the biggest and the fastest growing market in the world economy. Its daily turnover is more than 2.5 trillion dollars, which is 100 times greater than the NASDAQ daily turnover.
Which Exchanges offer Currency Trading in India?
Currency trading on the national level is offered by National Stock Exchange (NSE), Bombay Stock Exchange (BSE) and Metropolitan Exchange.
Who are the Regulators of the Market in India?
The exchange traded currency derivative market is regulated by SEBI through the recognized stock exchanges. The Foreign Exchange Management Act is the law, which regulates the Foreign Exchange Market. The regulatory authority for the Indian Foreign Exchange Market is the Reserve Bank of India (RBI).
Who can trade in Currency Markets?
Corporates and individuals (e.g. importers and exporters), Investors, Traders, Hedgers, Speculators and Arbitrageurs can trade and benefit from currency markets.
What are Currency Futures?
Currency Futures are exchange organized contracts which determine the size, delivery time and price of a commodity. Futures can easily be traded because they are standardized by an exchange.
What are Currency Options?
A Currency Option is a contract that grants the buyer the right, but not the obligation, to buy or sell a specified currency at a specified exchange rate on or before a specified date. When you take an option to buy an asset it is called a ‘call’ and when you obtain the right to sell an asset it is called a ‘put’. To determine whether it is profitable to exercise an option, the current market price (spot price) and the price in the option (strike price) need to be compared.
What are Long and Short positions?
Short Positions are taken when a trader sells currency in anticipation of a downturn in price. Making this move allows the investor to benefit from a decline. Long positions are taken when a trader buys a currency at a low price in anticipation of selling it later for more. Making these moves, allows the investor to benefit from changing market prices. Since currencies are traded in pairs, every forex position inevitably requires the investor to go short in one currency and long in the other.
What factors affect Currency Trading?
Various economic factors, domestic and international, affect the movement of a currency. Exchange rates are determined by factors, such as interest rates, economic confidence and current account on balance of payments, economic growth and relative inflation rates.
What is Bid and Ask in Forex Trading?
"Ask" is the price at which broker/dealer is willing to sell. It is also called as an "Offer". “Bid” is the price at which broker/dealer is willing to buy.
What is Spread?
The Spread is the difference between the BID and the ASK price in the market quotes.
How to Trade Currency Futures?
A Currency Future, also known as FX future, is a futures contract to exchange one currency for another at a specified date in the future at a price (exchange rate) that is fixed on the purchase date. On NSE, the price of a future contract is in terms of Indian Rupee per unit of other currency, e.g. US Dollars. Currency Future contracts allow investors to hedge against foreign exchange risk. Currency Derivatives are available in four currency pairs viz. US Dollars (USD), Euro (EUR), Great Britain Pound (GBP) and Japanese Yen (JPY). On the NSE, Cross Currency Futures & Options Contracts on EUR-USD, GBP-USD and USD-JPY are also available for trading in Currency Derivatives segment.
What is the importance of Forex Market from the business/economic perspective?
In a globalized world, every business is subject to the risk of unforeseeable changes in business environment. Volatility in exchange rate affects your business growth and can be significant depending upon the underlying exposure. If you are an exporter, importer or have foreign currency loans, you are directly exposed to exchange rate fluctuation.
How to frame a Trading Strategy using Charts?
Making sound trading decisions and developing a sound and effective trading strategy is an important foundation of trading. Before developing a trading strategy, a trader should have a working knowledge of technical analysis as well as knowledge of some of the more popular technical studies. Charts are a very useful tool in determining the short term trends in currency values and traders can track the price movements regularly to take decisions while trading currencies.
How to use Support and Resistance Levels while Trading?
Determining "support" and "resistance" levels is the key for successful trading decisions. The market normally trades above its support levels and trade below its resistance levels. If a support or resistance level is broken, the market is then likely to follow through in that direction. These levels are determined by analyzing the chart and assessing where the market has encountered unbroken support or resistance in the past.
What are the Market Timings for trading Currencies in India?
On NSE/BSE, currency futures and options can be traded between 9:00 a.m. to 5:00 p.m. from Monday to Friday
How to Manage Risk Effectively?
Traders should trade in small quantities and maintain a disciplined approach while trading in currencies. Given the volatile nature of the market and its strong linkage with other asset classes like equities, commodities and debt markets, cutting a trade at the right time is critical. Also due importance needs to be placed on keeping strict stop losses.
What is the Daily Settlement Price for Currency Futures?
On the NSE/BSE, the daily settlement price for Currency Futures is calculated on the basis of the last half an hour weighted average price.
What is the Tick Size for Currency Futures in India?
On the NSE/BSE, tick size or the smallest movement in currency futures is 0.25 paise or INR 0.0025.
What is a Depository?
A depository is an organization where the securities of an investor are held in electronic form. A depository can be compared to a bank. Besides holding securities, a depository also provides services related to transactions in securities.
Who is a Depository Participant (DP)?
As an investor, you open a securities account with a DP. DPs are attached to the depositories very much the same way as commercial banks are attached to RBI. All interactions including account opening, dematerialization, transactions, pledge etc. are done through the DP.
How many types of Depository Participants are available?
National Securities Depository Ltd. (NSDL) and Central Depository Services Ltd (CDSL) are the two DPs available in India. NSDL is the first depository to have started in India, whereas CDSL followed suit. However, most of the services offered by both these depositories are similar. Today, almost all the companies listed in dematerialized form with NSDL are available with CDSL.
Who is a Beneficiary Owner?
The person who holds a demat account is a beneficiary owner. In case of a joint account, the account holders will be beneficiary holders of that joint account.
What is a DP ID?
A DP ID is the number of the depository participant allotted by the depository.
How do I select a DP?
You can select your DP to open a demat account just like you select a bank for opening a savings account.
What is a Demat Account
Demat account lets you keep securities in an electronic form instead of the physical form. It thus eliminates the risk of forgery, theft and manipulation of share certificates.
What the advantages of having a Demat Account?
As an investor you will enjoy many benefits if you buy and sell shares in the depository mode. The following are some of the benefits you will enjoy:
No bad deliveries.
No risk of loss, mutilation or theft of share certificates.
No stamp duty for transfer of shares.
Reduced paper work.
Fast settlement cycles.
Low interest rates on loans granted against pledge of dematerialized securities by banks.
Low margin on securities pledged with banks.
Increase in liquidity of your securities because of faster transfer and registration of securities in your account.
Instant disbursement of non-cash benefits like bonus and rights into your account.
Regular account status updates available from MODES (Modes Optimization and Delivery Estimation System) at any point of time.
What is Online Trading?
Online trading of financial securities like shares and commodities has become extremely popular over the years. Online trading in securities is facilitated through an online platform that gives investor’s access to real time quotes of shares and other financial securities traded on various exchanges. One can buy/ sell financial instruments such as equities, commodities, currencies and mutual funds with ease using the online trading platform. In common terms, online trading refers to buying and selling securities via the Internet or other electronic means like computers/mobile phones etc.
Why Online Trading has become popular?
Online trading offers real-time quotes and facilitates instant trade execution without any delay. Investors have grown used to this facility following the speed and comfort it offers in comparison to calling up a broker for transacting in shares/commodities. Instant fund transfers via online payment gateways and quick access to market information, charts, news and other useful tools also make it extremely use friendly and convenient. At SPFL, our robust support and dynamic monitoring systems make it possible to sort out any technical problems/glitches instantly without delay.
What are the Major Advantages of Online Trading?
Online trading offers instant access to security prices and takes less time as compared to offline trading. A quick and easy access to trading records also makes it highly attractive. With the latest tech innovations, online trading is easily possible through applications devised for mobile phones and as such, investors can participate in trading from any place and time.
When did Online Trading start in India?
The Securities & Exchange Board of India (SEBI) approved Internet Trading In January 2000. It noted that Internet trading can take place through order routing systems, which will route client orders to exchange trading systems for execution. Thus a client sitting in any part of the country would be able to trade using the Internet as a medium through brokers' Internet trading systems. BSE provides online trading system known as BOLT and NSE’s online trading system is known as NEAT (National Exchange for Automated Trading).
How are the Funds transferred Online?
Funds can be easily transferred to the online account through payment gateway without any delay. Investors can also withdraw or transfer their funds to Bank Account with complete ease.
What are safety measures an online investor must know?
While investing online, investors should take some safety measures like never sharing their password with anyone and changing it at periodic intervals. Investor should also ensure that sufficient funds are available in his account and regularly pay margin to the broker.
Which financial assets could be traded by using online account?
An investor can trade in various financial securities like Shares, Commodities, Currencies, Mutual funds etc.
What are different types of orders an investor needs to keep in mind while trading online?
With a market order, the customer instructs his or her brokerage firm to buy or sell a stock at whatever the price is when the trade is executed. With a limit order, the investor specifies the price at which he or she is willing to buy or sell. Limit orders can help protect customers from rapid price changes when markets are moving fast.
How is the Security and Authentication maintained in online trading?
Every Online Account is protected with a unique User ID and 2-levels of password authentication. Investors can prevent unauthorised transactions in account by updating mobile numbers/email IDs with stock broker. This would ensure that investors receive information of all transactions directly from Exchange on your mobile/email at the end of the day.