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Section 2: EQUITY
Chapter 1:
Share Market Basics
What are the basics of financial instruments?
A: Let us understand the two fundamental types of investments,
namely bonds and stocks with an example. Eg. Imagine you want to
start your own grocery store. You will need a capital amount to get
started. You acquire the requisite funds from a friend and write down
a receipt of this loan ' I owe you Rs 1, 00,000 and will repay you the
principal loan amount plus 5% interest'. Your friend has just bought a
bond (IOU) by lending money to your company.
Thus a bond is a means of investing money by lending money to
others. When you invest in bonds, the bond you buy will show the
amount of money being borrowed (face value), the interest rate
(coupon rate or yield) that the borrower has to pay, the interest
payments (coupon payments), and the deadline for paying the money
back (maturity dates).
There are several Pro's and Con's to investing in bonds
Pro's
Bonds give higher interest rates compared to short-term
investments.
Bonds are less risky when compared to stocks.
Con's
Selling bonds before they're due, may result in a loss, known as a
discount.
If the issuer of the bond declares bankruptcy, you may lose your
money. Hence you must critically evaluate the credibility of the issuer
of the bond, ensuring that he has the capability to repay the bond
amount.
Now, let us continue with the same example. To accrue more capital
for your new grocery store, you sell half your company to your brother
for Rs 50,000. You put this transaction in writing 'my new company
will issue 100 shares of stock. My brother will buy 50 shares for Rs
50,000.' Thus, your brother has just bought 50% of the shares of stock
of your company.
Thus, to explain stocks:
Stocks, also known as Equities, are shares in a company. It is the
CHAPTER 1: Stock Market Fund
CHAPTER 2: Market Related Co
CHAPTER 3: Stock Market FAQs
CHAPTER 4: Annual Report
CHAPTER 5: Analysis and more
CHAPTER 6 : DEMAT ACCOUNT
Share
Market
Basics
Equity
Futures
Options
Mutual
Funds
Financial
Planning
Share Trading
Basics
Stock Trading
Fundamentals
Stock Market
Concepts
Stock Market
FAQs
Annual
Report
Fundamental
& Technical
Analysis
Demat
Account
Services
Online
Trading
Account
Call &
Trade
Online
Share
Trading
Software
Portfolio
Tracker
SMS
Stock
Tips &
Prices
http://www.kotaksecurities.com/university/Equity1.htmlhttp://www.kotaksecurities.com/university/Equity2.htmlhttp://www.kotaksecurities.com/university/Equity3.htmlhttp://www.kotaksecurities.com/university/Equity3.htmlhttp://www.kotaksecurities.com/university/Equity4.htmlhttp://www.kotaksecurities.com/university/Equity5.htmlhttp://www.kotaksecurities.com/university/DematAccount2.htmlhttp://www.kotaksecurities.com/university/DematAccount2.htmlhttp://www.kotaksecurities.com/university/Equity1.htmlhttp://www.kotaksecurities.com/university/Futures.htmlhttp://www.kotaksecurities.com/university/Futures.htmlhttp://www.kotaksecurities.com/university/Options.htmlhttp://www.kotaksecurities.com/university/Mutualfund.htmlhttp://www.kotaksecurities.com/university/Mutualfund.htmlhttp://www.kotaksecurities.com/university/FinancialPlanning.htmlhttp://www.kotaksecurities.com/university/FinancialPlanning.htmlhttp://www.kotaksecurities.com/university/FinancialPlanning.htmlhttp://www.kotaksecurities.com/university/Equity1.htmlhttp://www.kotaksecurities.com/university/Equity1.htmlhttp://www.kotaksecurities.com/whatweoffer/trinityaccoun.htmlhttp://www.kotaksecurities.com/university/Equity2.htmlhttp://www.kotaksecurities.com/university/Equity2.htmlhttp://www.kotaksecurities.com/university/Equity2.htmlhttp://www.kotaksecurities.com/university/Equity3.htmlhttp://www.kotaksecurities.com/university/Equity3.htmlhttp://www.kotaksecurities.com/university/Equity3.htmlhttp://www.kotaksecurities.com/university/Equity4.htmlhttp://www.kotaksecurities.com/university/Equity4.htmlhttp://www.kotaksecurities.com/university/Equity4.htmlhttp://www.kotaksecurities.com/university/Equity5.htmlhttp://www.kotaksecurities.com/university/Equity5.htmlhttp://www.kotaksecurities.com/university/Equity5.htmlhttp://www.kotaksecurities.com/university/Equity5.htmlhttp://www.kotaksecurities.com/university/DematAccount2.htmlhttp://www.kotaksecurities.com/university/DematAccount2.htmlhttp://www.kotaksecurities.com/university/DematAccount2.htmlhttp://www.kotaksecurities.com/whatweoffer/trinityaccoun.htmlhttp://www.kotaksecurities.com/whatweoffer/trinityaccoun.htmlhttp://www.kotaksecurities.com/whatweoffer/trinityaccoun.htmlhttp://www.kotaksecurities.com/whatweoffer/trinityaccoun.htmlhttp://www.kotaksecurities.com/callandtrade/callntrade.htmlhttp://www.kotaksecurities.com/callandtrade/callntrade.htmlhttp://www.kotaksecurities.com/callandtrade/callntrade.htmlhttp://www.kotaksecurities.com/keat/keat.htmlhttp://www.kotaksecurities.com/keat/keat.htmlhttp://www.kotaksecurities.com/keat/keat.htmlhttp://www.kotaksecurities.com/keat/keat.htmlhttp://www.kotaksecurities.com/keat/keat.htmlhttp://www.kotaksecurities.com/whatweoffer/portfoliotracker.htmlhttp://www.kotaksecurities.com/whatweoffer/portfoliotracker.htmlhttp://www.kotaksecurities.com/whatweoffer/portfoliotracker.htmlhttp://www.kotaksecurities.com/traderresearch/researchalerts.htmlhttp://www.kotaksecurities.com/traderresearch/researchalerts.htmlhttp://www.kotaksecurities.com/traderresearch/researchalerts.htmlhttp://www.kotaksecurities.com/traderresearch/researchalerts.htmlhttp://www.kotaksecurities.com/traderresearch/researchalerts.htmlhttp://www.kotaksecurities.com/traderresearch/researchalerts.htmlhttp://www.kotaksecurities.com/traderresearch/researchalerts.htmlhttp://www.kotaksecurities.com/traderresearch/researchalerts.htmlhttp://www.kotaksecurities.com/traderresearch/researchalerts.htmlhttp://www.kotaksecurities.com/whatweoffer/portfoliotracker.htmlhttp://www.kotaksecurities.com/whatweoffer/portfoliotracker.htmlhttp://www.kotaksecurities.com/keat/keat.htmlhttp://www.kotaksecurities.com/keat/keat.htmlhttp://www.kotaksecurities.com/keat/keat.htmlhttp://www.kotaksecurities.com/keat/keat.htmlhttp://www.kotaksecurities.com/callandtrade/callntrade.htmlhttp://www.kotaksecurities.com/callandtrade/callntrade.htmlhttp://www.kotaksecurities.com/whatweoffer/trinityaccoun.htmlhttp://www.kotaksecurities.com/whatweoffer/trinityaccoun.htmlhttp://www.kotaksecurities.com/whatweoffer/trinityaccoun.htmlhttp://www.kotaksecurities.com/university/DematAccount2.htmlhttp://www.kotaksecurities.com/university/DematAccount2.htmlhttp://www.kotaksecurities.com/university/Equity5.htmlhttp://www.kotaksecurities.com/university/Equity5.htmlhttp://www.kotaksecurities.com/university/Equity5.htmlhttp://www.kotaksecurities.com/university/Equity4.htmlhttp://www.kotaksecurities.com/university/Equity4.htmlhttp://www.kotaksecurities.com/university/Equity3.htmlhttp://www.kotaksecurities.com/university/Equity3.htmlhttp://www.kotaksecurities.com/university/Equity2.htmlhttp://www.kotaksecurities.com/university/Equity2.htmlhttp://www.kotaksecurities.com/university/Equity1.htmlhttp://www.kotaksecurities.com/university/Equity1.htmlhttp://www.kotaksecurities.com/university/FinancialPlanning.htmlhttp://www.kotaksecurities.com/university/FinancialPlanning.htmlhttp://www.kotaksecurities.com/university/Mutualfund.htmlhttp://www.kotaksecurities.com/university/Mutualfund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certificate of ownership of a corporation. In simple terms, when you
invest in a company's stock or buy its shares, you own part of a
company. Thus, as a stockholder, you share a portion of the profit the
company may make, as well as a portion of the loss a company may
take. As the company keeps doing better, your stocks will increase in
value and yield higher dividends.
Dividend:A sum of money, determined by a company's directors, paid
to shareholders of a corporation out of its earnings.
This example covers the 2 major types of investments: bonds and
stocks
Rewinding back to the Stock Market Trading history of India
A: In the earlier days, stockbrokers kept scouting for 'natural' sites to
conduct their trading activities, shifting from one set of Banyan trees
to another. As the number of brokers kept increasing and the streets
kept overflowing, they simply had no choice but to relocate from one
place to another.
Finally in 1854, trading in India found a permanent address, Dalal
Street, now synonymous with the oldest stock Exchange in Asia, The
Bombay Stock Exchange. With a heritage that goes back to over 130
years, BSE was the first stock exchange in the country to be granted
permanent recognition under the Securities Contract Regulation Act,
1956. The exchange has played a pioneering role in the developmentof the Indian Securities Market - one of the oldest in the world. After
India gained independence, the BSE formulated a comprehensive set
of guidelines adopted by the Indian Capital markets. Even today, the
BSE Sensex remains one of the parameters against which the
robustness of the Indian Economy and finance is measured.
The trading scenario in India then underwent a paradigm shift in 1993,
when NSE or National Stock Exchange was recognized as a Stock
Exchange. Within just a few years, trading on both the exchanges
shifted from an open outcry systemto an automatedtrading
environment.
Today, the Indian Securities market successfully keeps pace with its
global counterparts through the use of modern day technology.
Stock market milestones
A: 1875 BSE established as 'the native Share and Stock Brokers
Association'
1956 BSE became the first stock exchange to be recognized under
the Securities Contract Act.
1993 NSE recognized as a stock exchange.
2000 Commencement of Internet trading at NSE.
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2000 NSE commences derivatives trading (Index futures)
2001 BSE commences derivatives trading
Primary and Secondary Markets
Primary MarketA: An Issuer/Company enters the Primary markets to raise capital.
They issues new securities in Exchange for cash from an investor
(buyer). If the Issuer is selling securities for the first time, these are
referred to asInitial Public Offers(IPO's). Summing up, Primary
Market is the means by which companies float shares to the general
public in an Initial Public Offering to raise capital.
Eg. If the promoters of a private company, say XYZ makes its shares
available to investors, company XYZ is said to have entered the
primary market.
Secondary Markets
A: Once new securities have been sold in the Primary Market, an
efficient mechanism must exist for their resale, if investors are to view
securities as attractive opportunities. Secondary Market transactions
are referred to those transactions where one investor buys shares
from another investor at the prevailing market price or at whatever
price both the buyer and seller agree upon. The Secondary Market or
the Stock Exchanges are regulated by the regulatory authority. In
India, the Secondary and Primary Markets are governed by the
Security and Exchange Board of India (SEBI).
For eg. If one of the investors who had invested in the shares of
company XYZ sold it to another at an agreed upon price, a Secondary
Market transaction is said to have taken place. Normally investors
transact in securities using an intermediary such as a broker who
facilitates the process
Introduction to SEBI
A: The Government of India established the Securities and Exchange
Board of India, the regulatory body of stock markets in 1988. Within ashort period of time, SEBI became an autonomous body through the
SEBI Act passed in 1992, with defined responsibilities that cover both
development & regulation of the market while also giving the board
independent powers. Comprehensive regulatory measures introduced
by SEBI ensured that end investors benefited from safe and
transparent dealings in securities.
The basic objectives of the Board were identified as:
A: To protect the interests of investors in securities
To promote the development of Securities Market
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To regulate the Securities Market
SEBI has contributed to the improvement of the Securities Market by
introducing measures like capitalization requirements, margining and
establishment of clearing corporations that reduced the risk of credit
Today, the board continues on its two-fold mission of integrating the
Securities Market at the National level and also diversifying the trading
products to increase the number of traders (including banks, financial
institutions, insurance companies, Mutual Funds, primary dealers etc)
transacting through the Exchanges. In this context the introduction of
derivatives trading through Indian Stock Exchanges permitted by SEBI
in 2000 AD has been a real landmark.
What are Stock Exchanges?
A Stock Exchange is a place that provides facilities to stock brokers to
trade company stocks and other securities. A stock may be bought or
sold only if it is listed on an exchange. Thus it is the meeting place of
the stock buyers and sellers. India's premier Stock Exchanges are the
Bombay Stock Exchange and the National Stock Exchange.
| Back | Top | Next |
Section 2: EQUITY
Chapter 2:Getting Familiar with Market Related Concepts
Once you enter the Stock market, you will frequently come across
terms like Market Capitalization, Small-Cap Stocks, Mid-Cap Stocks
and Large-Cap Stocks. In this section you will get an understanding of
what these terms mean in the context of stock markets.
Let us first understand MARKET CAPITALIZATION
MARKET CAPITALIZATION
A: "Cap" is short for capitalization, the market value of a stock,
indicating the size of the stock available.
Calculating a stock's capitalization
Market Capitalization = Market Price of the stock x The number of
the stock's outstanding* shares
CHAPTER 1 : Stock Market Fund
CHAPTER 2 : Market Related Co
CHAPTER 3 : Stock Market FAQs
CHAPTER 4 : Annual Report
CHAPTER 5 : Analysis and more
CHAPTER 6 : DEMAT ACCOUNT
http://www.kotaksecurities.com/university/Invesfund.htmlhttp://www.kotaksecurities.com/university/Invesfund.htmlhttp://www.kotaksecurities.com/university/Equity1.html#tophttp://www.kotaksecurities.com/university/Equity1.html#tophttp://www.kotaksecurities.com/university/Equity2.htmlhttp://www.kotaksecurities.com/university/Equity2.htmlhttp://www.kotaksecurities.com/university/Equity1.htmlhttp://www.kotaksecurities.com/university/Equity2.htmlhttp://www.kotaksecurities.com/university/Equity3.htmlhttp://www.kotaksecurities.com/university/Equity3.htmlhttp://www.kotaksecurities.com/university/Equity4.htmlhttp://www.kotaksecurities.com/university/Equity5.htmlhttp://www.kotaksecurities.com/university/Equity5.htmlhttp://www.kotaksecurities.com/university/DematAccount2.htmlhttp://www.kotaksecurities.com/university/DematAccount2.htmlhttp://www.kotaksecurities.com/university/DematAccount2.htmlhttp://www.kotaksecurities.com/university/Equity5.htmlhttp://www.kotaksecurities.com/university/Equity4.htmlhttp://www.kotaksecurities.com/university/Equity3.htmlhttp://www.kotaksecurities.com/university/Equity2.htmlhttp://www.kotaksecurities.com/university/Equity1.htmlhttp://www.kotaksecurities.com/university/Equity2.htmlhttp://www.kotaksecurities.com/university/Equity1.html#tophttp://www.kotaksecurities.com/university/Invesfund.html -
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*Outstanding means the shares held by the public
For example, if Stock A has a Current Market Price of Rs 20 per share,
and there are 1,00,000 shares in the hands of public investors, then
Stock A has a capitalization of 20,00,000.
The company's capitalization is an effective parameter to group
corporate stocks.
In the US, mid-cap shares are those stocks that have a market
capitalization ranging from Rs 9,000 crore to Rs 45,000 crore. In India,
these shares would be classified as large-cap shares. Thus,
classification of shares into large-cap, mid-cap, small-cap is made on
the basis of the relative size of the market in that particular country.
The total market capitalization of US markets is $15 trillion. In India,the market capitalization of listed companies is around $600bn.
SMALL-CAP STOCKS
A: The stocks of small companies that have the potential to grow
rapidly are classified as small-cap stocks. These stocks are the best
option for an investor who wishes to generate significant gains in the
long run; as long he does not require current dividends and can
withstand price volatility. Generally companies that have a market
Capitalization in the range of upto 250 Corores are small cap stocks
As many of these companies are relatively new, it is difficult to predict
how they will perform in the market. Being small enterprises, growth
spurts dramatically affect their values and revenues, sending prices
soaring.
On the other hand, the stocks of these companies tend to be volatile
and may decline dramatically.
Most Initial Public Offerings are for small-cap companies, although
these days large companies do tend to source the capital markets for
expansion plans. Aggressive mutual funds are also enthusiastic about
adding small-cap stocks in their portfolios. Because they have the
advantage of being highly growth oriented, small-cap stocks can
forego paying dividends to investors, which enables the profits earned
to be reinvested for future growth.
MID-CAP STOCKS
A: Mid-cap stocks are typically stocks of medium-sized companies.
These are stocks of well-known companies, recognized as seasonedplayers in the market. They offer you the twin advantages of acquiring
Share
MarketBasics
Equity
Futures
Options
Mutual
Funds
Financial
Planning
Share Trading
Basics
Stock Trading
Fundamentals
Stock Market
Concepts
Stock Market
FAQs
Annual
Report
Fundamental
& Technical
Analysis
Demat
Account
Services
Online
Trading
Account
Call &
Trade
Online
Share
Trading
Software
Portfolio
Tracker
SMS
Stock
Tips &
Prices
http://www.kotaksecurities.com/university/Equity1.htmlhttp://www.kotaksecurities.com/university/Futures.htmlhttp://www.kotaksecurities.com/university/Futures.htmlhttp://www.kotaksecurities.com/university/Options.htmlhttp://www.kotaksecurities.com/university/Mutualfund.htmlhttp://www.kotaksecurities.com/university/Mutualfund.htmlhttp://www.kotaksecurities.com/university/FinancialPlanning.htmlhttp://www.kotaksecurities.com/university/FinancialPlanning.htmlhttp://www.kotaksecurities.com/university/FinancialPlanning.htmlhttp://www.kotaksecurities.com/university/Equity1.htmlhttp://www.kotaksecurities.com/university/Equity1.htmlhttp://www.kotaksecurities.com/whatweoffer/trinityaccoun.htmlhttp://www.kotaksecurities.com/university/Equity2.htmlhttp://www.kotaksecurities.com/university/Equity2.htmlhttp://www.kotaksecurities.com/university/Equity2.htmlhttp://www.kotaksecurities.com/university/Equity3.htmlhttp://www.kotaksecurities.com/university/Equity3.htmlhttp://www.kotaksecurities.com/university/Equity3.htmlhttp://www.kotaksecurities.com/university/Equity4.htmlhttp://www.kotaksecurities.com/university/Equity4.htmlhttp://www.kotaksecurities.com/university/Equity4.htmlhttp://www.kotaksecurities.com/university/Equity5.htmlhttp://www.kotaksecurities.com/university/Equity5.htmlhttp://www.kotaksecurities.com/university/Equity5.htmlhttp://www.kotaksecurities.com/university/Equity5.htmlhttp://www.kotaksecurities.com/university/DematAccount2.htmlhttp://www.kotaksecurities.com/university/DematAccount2.htmlhttp://www.kotaksecurities.com/university/DematAccount2.htmlhttp://www.kotaksecurities.com/whatweoffer/trinityaccoun.htmlhttp://www.kotaksecurities.com/whatweoffer/trinityaccoun.htmlhttp://www.kotaksecurities.com/whatweoffer/trinityaccoun.htmlhttp://www.kotaksecurities.com/whatweoffer/trinityaccoun.htmlhttp://www.kotaksecurities.com/callandtrade/callntrade.htmlhttp://www.kotaksecurities.com/callandtrade/callntrade.htmlhttp://www.kotaksecurities.com/callandtrade/callntrade.htmlhttp://www.kotaksecurities.com/keat/keat.htmlhttp://www.kotaksecurities.com/keat/keat.htmlhttp://www.kotaksecurities.com/keat/keat.htmlhttp://www.kotaksecurities.com/keat/keat.htmlhttp://www.kotaksecurities.com/keat/keat.htmlhttp://www.kotaksecurities.com/whatweoffer/portfoliotracker.htmlhttp://www.kotaksecurities.com/whatweoffer/portfoliotracker.htmlhttp://www.kotaksecurities.com/whatweoffer/portfoliotracker.htmlhttp://www.kotaksecurities.com/traderresearch/researchalerts.htmlhttp://www.kotaksecurities.com/traderresearch/researchalerts.htmlhttp://www.kotaksecurities.com/traderresearch/researchalerts.htmlhttp://www.kotaksecurities.com/traderresearch/researchalerts.htmlhttp://www.kotaksecurities.com/traderresearch/researchalerts.htmlhttp://www.kotaksecurities.com/traderresearch/researchalerts.htmlhttp://www.kotaksecurities.com/traderresearch/researchalerts.htmlhttp://www.kotaksecurities.com/traderresearch/researchalerts.htmlhttp://www.kotaksecurities.com/traderresearch/researchalerts.htmlhttp://www.kotaksecurities.com/whatweoffer/portfoliotracker.htmlhttp://www.kotaksecurities.com/whatweoffer/portfoliotracker.htmlhttp://www.kotaksecurities.com/keat/keat.htmlhttp://www.kotaksecurities.com/keat/keat.htmlhttp://www.kotaksecurities.com/keat/keat.htmlhttp://www.kotaksecurities.com/keat/keat.htmlhttp://www.kotaksecurities.com/callandtrade/callntrade.htmlhttp://www.kotaksecurities.com/callandtrade/callntrade.htmlhttp://www.kotaksecurities.com/whatweoffer/trinityaccoun.htmlhttp://www.kotaksecurities.com/whatweoffer/trinityaccoun.htmlhttp://www.kotaksecurities.com/whatweoffer/trinityaccoun.htmlhttp://www.kotaksecurities.com/university/DematAccount2.htmlhttp://www.kotaksecurities.com/university/DematAccount2.htmlhttp://www.kotaksecurities.com/university/Equity5.htmlhttp://www.kotaksecurities.com/university/Equity5.htmlhttp://www.kotaksecurities.com/university/Equity5.htmlhttp://www.kotaksecurities.com/university/Equity4.htmlhttp://www.kotaksecurities.com/university/Equity4.htmlhttp://www.kotaksecurities.com/university/Equity3.htmlhttp://www.kotaksecurities.com/university/Equity3.htmlhttp://www.kotaksecurities.com/university/Equity2.htmlhttp://www.kotaksecurities.com/university/Equity2.htmlhttp://www.kotaksecurities.com/university/Equity1.htmlhttp://www.kotaksecurities.com/university/Equity1.htmlhttp://www.kotaksecurities.com/university/FinancialPlanning.htmlhttp://www.kotaksecurities.com/university/FinancialPlanning.htmlhttp://www.kotaksecurities.com/university/Mutualfund.htmlhttp://www.kotaksecurities.com/university/Mutualfund.htmlhttp://www.kotaksecurities.com/university/Options.htmlhttp://www.kotaksecurities.com/university/Futures.htmlhttp://www.kotaksecurities.com/university/Equity1.html -
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stocks with good growth potential as well as the stability of a larger
company. Generally companies that have a market Capitalization in
the range of 250-4000 crores are mid cap stocks
Mid-cap stocks also include baby blue chips; companies that show
steady growth backed by a good track record. They are like blue-chip
stocks (which are large-cap stocks) but lack their size. These stocks
tend to grow well over the long term.
LARGE-CAP STOCKS
A: Stocks of the largest companies (many being blue chip firms) in the
market such as Tata, Reliance, ICICI are classified as large-cap stocks.
Being established enterprises, they have at their disposal large
reserves of cash to exploit new business opportunities.
The sheer volume of large-cap stocks does not let them grow as
rapidly as smaller capitalized companies and the smaller stocks tend to
outperform them over time. Investors, however gain the advantages
of reaping relatively higher dividends compared to small- and mid-cap
stocks while also ensuring the long-term preservation of their capital.
What drives bull and bear markets?
A: The uses of "Bull" and "bear" to describe markets have been
derived from the manner in which each of these animals attacks its
opponents. A bull thrusts its horns up into the air, and a bear swipes
its paws down. These actions are metaphors for the movement of a
market: if the trend is up, it is considered a Bull market. And if the
trend is down, it is considered a Bear market.
The supply and demand for securities largely determine whether the
market is in the Bull or Bear phase. Forces like investor psychology,
government involvement in the economy and changes in economic
activity also drive the market up or down. These combine to make
investors bid higher or lower prices for stocks.
How can you qualify the market as bull or bear?
A: Bull and Bear markets signify relatively long-term movements of
significant proportion. Hence, these runs can be gauged only when the
market has been moving in its current direction (by about 20% of its
value) for a sustained period. One does not consider small, short-term
movements, lasting days, as they may only indicate corrections or
short-lived movements.
What are stock symbols?A: A stock symbol is a unique code that is given to all participating
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companies in securities trading. Once you know the stock
code/symbol of the company (sometimes referred to as a ticker
symbol) you can easily obtain information about the company. This is
important, as a wise investor will always do a financial analysis before
purchasing a stock.
For ex- tcs stands for Tata Consultancy Services Infy stands for Infosys
Note :-While placing orders with Kotaksecurities.com you need to
type in just the first three alphabets of the company and our site will
display all possible combinations, from which you may select the stock
that you wish to invest in.
Where do I find stock related information?
A: The most accessible avenue to get stock information is the Internet,
business news channels and print media. You could alternativelyaccess theKotak Securities News Channeland get all the information
that you wanted within a matter of seconds. Using Kotak Securities
News Channel, you can get the latest news, on Equity,
Derivatives,Mutual Funds & IPO's
What are rolling settlements?
A: Let us understand Rolling Settlements with an example.
Supposing your friend agrees to buy a book for you from a bookshop,
you will have to pay him for it eventually. Similarly, after you have
bought or sold shares through your broker, the trade has to be settled.
Meaning, the buyer has to receive his shares and the seller has to
receive his money. Settlement is just the process whereby payment is
made by all those who have made purchases and shares are delivered
by all those who have made sales.
A Rolling Settlement implies that all trades have to settled by the end
of the day. Hence the entire transaction, where the buyer has to make
payments for securities purchased and seller has to deliver the
securities sold, have to completed in a day.
In India, we have adopted the T+2 settlement cycle, which means thata transaction entered into on Day 1 has to be settled on the Day 1 + 2
working days, when funds pay in or securities pay out takes place.
'T+2" here, refers to Today + 2 working days.
For instance, trades taking place on Monday are settled on
Wednesday, Tuesday's trades settled on Thursday and so on.
Hence, a settlement cycle is the period within which the settlement is
made.
For arriving at the settlement day, all intervening holidays -- bank
holidays, Exchange holidays, Saturdays and Sundays are excluded.
From a settlement cycle taking a week , the Exchanges have nowmoved to a faster and efficient mode of settling trades within T+2
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Days.
What is the meaning of the term selling short?
A: An investor sells short when he anticipates that the price of the
shorted stock will fall from the existing price. He borrows a share and
sells it. As the share price dips, he buys the same share at a lower price
and returns it back, while pocketing a profit in the bargain. An adage
that describes short selling is ("selling high and buying low'.) Selling
Short (Shorting) is an effective tool for traders as it allows us to profit
from declining stock and index prices.
A definition of "Selling Short"
Selling short implies establishing a market position by selling a security
one does not own, in anticipation that the price of the security will fall.
For eg. Trader anticipates stock ABC will decline
Trader enters order to SELL 2000 shares of ABC at market price and
later buys the 2000 shares of ABC at a much-reduced price. The
difference in the prices of the selling and buying is his profit. However
if the share prices increase after he has sold at a reduced price earlier,
then he ends up with a loss. Hence Shortselling is something that is
speculatory to a certain extent and is done in anticipation of quick
profits.
What is margin trading?
A: Margin trading is trading with borrowed funds/securities. It is
almost like buying securities on credit.
Margin trading can lead to greater returns, but can also be very risky.
While it lets you actively seize market opportunities it also subjects
you to a number of unique risks such as interest payments charged for
the borrowed money.Kotaksecurities.com offers its customers the
facility ofMargin trading.
What are Circuit filters& trading bands?
A: In order to check the volatility of shares, SEBI has come up with the
concept of Circuit Filters. Under this, Sebi has specified the fixed price
bands for different securities within which they can move on a given
day.
Recently, in a bid to check the rampant price manipulation in small-
cap stocks (known as penny stocks), stock exchanges reduced the
circuit filter maximum permissible rise in prices in a day to 5 per cent.Earlier, stocks were allowed to rise up to 20 per cent in a session.
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The NSE has also reduced the circuit filter in all the stocks, which are
traded on a trade-to-trade basis to 5 per cent. As the closing price on
BSE and NSE can be significantly different, this means that the circuit
limit for a share on BSE and NSE can be different.
What is Badla financing?
A: As the term itself signifies, 'Badla' means 'something in return'.
Badla is the charge, which the investor pays for carrying forward his
position. This hedge tool lets the investor take a position in a scrip
without actually taking delivery of the stock, thus carrying forward his
position on the payment of small margin. The badla system of
transactions has been in practice for several decades in the Stock
Exchange, Mumbai and serves 3 needs of any stock exchange:
A) Quasi-hedging:
If an investor feels that the price of a particular share is expected to go
up or down, without giving or taking the delivery he can participate in
the possible volatility of the share.
B) Stock lending:
If a stock lender wishes to short sell without owning the underlying
security, he employs the badla system and lends his stock for a charge.
C) Financing mechanism:
If he wishes to buy the share without paying the full consideration, the
financier steps into the CF system and provides the finance to fund the
purchase The scheme is known as "Vyaj Badla" or "Badla" financing.
For example, X has bought a stock and does not have the funds to take
delivery he can arrange a financier through this carrying-forward
mechanism. The financier would make the payment at the prevailing
market rate and would take delivery of the shares on X's behalf. X will
only have to pay interest on the funds he has borrowed. Vis--vis, ifyou have a sale position and do not have the shares to deliver, you can
still arrange through the stock exchange for a lender of securities. An
investor can either take the services of a badla financier or can assume
the role of a badla financier and lend either his money or securities.
How the Badla system works?
A: On every Saturday, a CF system session is held at the BSE. The scrips
in which there are outstanding positions are listed along with the
quantities outstanding. The CF rates are determined depending on the
demand and supply of money. There is more demand for funds whenthe market is over bought, and consequently the CF rates tend to be
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What are the various types of the risks once I start trading?
A: Market Risk
This is the risk of investing in the stock market in general. It refers to a
chance that a securitys value might decline. Although a particular
company may be doing poorly, the value of its stock can go up
because the stock market value is collectively going up. Conversely,
your company may be doing very well, but the value of the stock
might drop because of negative factors inflation, rising interest rates,
political instability etc that are effecting the whole market. All stocks
are Affecting by market risk.
Industry Risk
This is risk that affects all companies in a certain industry. For eg.
Utility companies, are often viewed as relatively low in risk becausethe utility industry is stable and operates in a predictable environment
with relatively little change. In contrast, internet and other technology
industries are usually viewed as high in risk because the industry is
changing so quickly and unpredictably. The dotcom bubble burst in
the 90s affected the valuation of all stocks in that industry.
All stocks within an industry are subject to industry risk.
Regulatory Risk
Virtually every company is subject to some sort of regulation. It refers
to the risk that the government will pass new laws or implement new
regulations, which will dramatically affect a business.
Business Risk
These are the risks unique to an individual company. It refers to the
uncertainty regarding the organizations ability to perform business or
provide service Products, strategies, management, labor force, market
share, etc.,Which are among the key factors investors consider in
evaluating the value of a specific company.
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Section 2: EQUITY
Chapter 4:Annual Report
What is an annual report and why is it useful to investors?
A: An annual report provides a company's shareholders with
information about its operations. This is an obligation stipulated by
law. This is extremely beneficial to investors because it helps make
informed decisions.
The report tells you how well the company is doing while also
forecasting its future earnings and dividends. The Chairman's letter in
the report also profiles the company's future goals.
Inside the Annual Report
A: Here is what comprises an annual report:
*A letter from the chairman on the high points of business in the past
year with predictions for the next year.
*The company philosophy: A section that describes the principles and
ethics that govern a company's business.
*An extensive report on each section of operations within the
company, describing the company's services or the products.
Financial information that includes the profit and loss (P&L)
statements and a balance sheet. Depending on its income and
expenses, the company will either make profits or show losses for a
year. The balance sheet describes assets and liabilities and compares
them to the previous year. The footnotes will also give you reveal
important information, as they discuss current or pending lawsuits or
government regulations that may impact the company operations.
* An auditor's letter in the annual report confirms that the
information provided in the report is accurate and has been certified
by independent accountants.
How do I obtain an Annual Report?
A: Annual reports are mailed automatically to all shareholders on
record. If you wish to obtain the annual report about a company in
which you do not own shares, you can call its public relations (or
shareholder relations) department. You may also look at the companyweb site, or search the Internet; as there are several sources on the
CHAPTER 1 : Stock Market Fund
CHAPTER 2 : Market Related Co
CHAPTER 3 : Stock Market FAQs
CHAPTER 4 : Annual Report
CHAPTER 5 : Analysis and more
CHAPTER 6 : DEMAT ACCOUNT
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Stock Market
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& Technical
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Internet providing information on public companies.
All publicly listed companies are required to submit the financial
reports available in the public domain as per SEBI regulations.
What are quarterly and other financial reports?
A: Besides the annual report, companies provide several other
financial reports such as a quarterly reports (issued every three
months) and statistical supplements. These however are not as
comprehensive as the annual report of the company.
Quarterly reports are very similar to the annual reports except they
are issued every three months and are less comprehensive. They may
be obtained in the same way as an annual report.
What are Company Earnings?
A: Earnings are a company's net profit. It is the surplus left with the
company after it has cleared all its expenses, i.e. Money paid to
employees, utility bills, costs of production and other operating
expenses The manner in which a company makes its earnings, is
defined by the very nature of its business.
For eg., a cement manufacturer produces cement for sale to its
customers.
Two sources of company earnings are:
Income from sales of goods or services
Income from investment.
Investments generate income for businesses by way of either interest
on loans, dividends from other businesses, or gains on the sale of
investment property.
Thus, company earnings are the sum of income from sales or
investment left after the company has met its obligations.
Why are Earnings important to you as an investor?
A: As an investor who holds shares of the company, you have part
ownership of company.
When you invest in a company's shares, you become a 'part owner' of
the company and you get to share a part of the company's profit as
dividend. Thus, if the company does well and earns more profit, you in
turn to well. If the company reinvents its earnings towards future
growth, you are assured of higher dividends in the future.
Meanwhile, if you lend money to the company by investing in its
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bonds, the company uses part of its earnings to repay interest and
principle on the bonds. The more earnings the company has, the more
secure you can be that the company will be able to make your interest
payments. So, company earnings are important to you because you
make money when the business you invest in, makes money.
How do you use earnings information to make an investment
decision?
A: Your investment goals determine how you use information about
company earnings. If you are an income investor, interested in earning
immediate income from your investments, you probably want to
invest in a company that is paying dividends. If you have a long-term
investment strategy, dividends may not be as important to you. The
"financials" indicate whether a company is oriented for income,
growth, or a bit of both. By comparing the financials for differentcompanies in the same industry, you can find characteristics best
suited to your investment goals.
A convenient way to compare companies is through Earnings per
share (EPS). EPS represents the net profit divided by the number of
outstanding shares of stock.
When you compare the EPS of different companies, be sure to
consider the following:
Companies with higher earnings are stronger than companies with
lower earnings.
Companies that reinvest their earnings, may pay low or no dividends
but may be poised for growth.
Companies with lower earnings, and higher research and
development costs, may be on the brink of either a breakthrough or a
disaster, making them a risky proposition.
Companies with higher earnings, lower costs and lower shareholder
equity, might go in for a merger.
How do I use Fundamentals to make an investment decision?
A: Fundamental Analysis is a method used to evaluate the worth of a
security by studying the financial data of the issuer. But this research
can never accurately predict how the company will perform in the
stock market. It can however be used as a good comparative
framework to know which company will be a better investment
choice.
As an investor, you are interested in a corporation's earnings becauseearnings assure higher dividends and potential for further growth. You
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can use profitability ratios to compare earnings for prospective
investments. These are measures of performance showing how much
the firm is earning compared to its sales, assets or equity.
You can quickly see the difference in profitability between two
companies by comparing the profitability ratios of each. Let us see
how ratio analysis works.
What is Ratio Analysis?
A: The ratio analysis technique is also called cross-sectional analysis,
providing you with important information about a company's financial
strength. Cross-sectional analysis compares financial ratios of several
companies from the same industry and enables you to deduce
success, failure or progress of any business. Thus, a financial ratio
measures a company's performance in a specific area and guides yourjudgment regarding which company is a better investment option.
Some of the important ratios that an investor must know are:
1) Price-Earnings Ratio((P-E ratio):
It is a ratio obtained by dividing the price of a share of stock by
Earnings per share (EPS) for a 12-month period.
2) EPS (Earnings Per Share):
It is that portion of a company's net income, which corresponds to
each share of that company's common stock which is issued and
outstanding. EPS gives an indication of the profitability of a company.
It is calculated using the formula:
EPS = Net Income-Dividends on Preferred Stock
Average Outstanding Shares
3) Current Ratio: Companies need a surplus supply of current assets inorder to meet their current liabilities. They generally pay their interest
payments and other short-term debts with current assets. If a
company has only illiquid assets, it may not be able to make payments
on their debts. It is a type of Liquidity ratio.
Current Ratio = Current Assets
Current Liabilities
Leverage Ratios:
A: Traditionally, leverage is related to the relative proportions of debtand equity, which fund a venture. The higher the proportion of debt,
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the more leverage.
It is a ratio that measures a company's capital structure, indicating
how a company finances their assets. Do they rely strictly on equity?
Or, do they use a combination of equity and debt? The answers to
these questions are of great importance to investors.
Leverage= Long Term Debt
Total Equity
A firm that finances its assets with a high percentage of debt is risking
bankruptcy, higher borrowing costs and decreased financial flexibility;
if its performance cannot help fulfill its debt payments. If a company is
highly leveraged, it is also possible that lender's may shy away from
providing further debt financing fearing the viability of theirinvestment.
The optimal capital structure for a company you invest in, depends on
which type of investor you are. A bondholder would prefer a company
with very little debt financing because of it lowers the risk of him
losing his money.
When a firm becomes over leveraged, bankruptcy can result.
Shareholder's Equity:
A: Shareholders' equity is calculated as the value of a company's
assets less the value of its liabilities. It is the value of a business to its
owners, after all of its obligations have been met. This net worth
belongs to the owners. Shareholders' equity generally reflects the
amount of capital the owners invested, plus any profits that the
company generates.
Bankruptcy
Bankruptcy is a legal mechanism that allows creditors to assumecontrol of a firm when it can no longer has the ability to meet its
financial obligations. Both stock and bond fear bankruptcy. Generally,
the firm's assets are sold in order to pay off creditors to the largest
extent possible.
When bankruptcy occurs, stockholders of a corporation can only lose
the amount they have invested in the bankrupt company. This is called
Limited Liability. If a firm's liabilities exceed the liquidation value of
their assets, (the value of assets converted into cash), creditors also
stand to lose money on their investments.
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Understanding the Balance Sheet
The balance sheet is one of the most important financial statements of
a company. The logic behind producing a balance sheet is to ensure
that the accounts are always in balance and all the company funds can
be accounted for. It is reported to investors at least once a year. You
may also receive quarterly, semiannually or monthly balance sheets.
The contents of a balance sheet include:
What the company owns (its assets)
What it owes (its liabilities)
The value of the business to its stockholders (the shareholders'
equity).
Why should the Balance Sheet be important to you?
A: As an investor you need to ensure that the company you have
invested in, has good potential for future growth and will yield goodreturns. The balance sheet helps you get answers to questions like:
Will the firm meet its financial obligations?
What amount of funds have already been invested in this company?
Is the company overly indebted?
What are the different assets that the company has purchased with
its financing?
These are just a few of the many relevant questions you can answer by
studying the balance sheet. The balance sheet provides a diligent
investor with many clues to a firm's future performance.
What are Assets?
A: Assets are any items of economic value owned by a corporation
that can be converted into cash.
Types of Assets:
Current assets are assets that are usually converted to cash within one
year. Bondholders and other creditors closely monitor a firm's currentassets since interest payments are generally made from current
assets. Also incase the company goes bankrupt, assets can be easily
liquidated into cash and help prevent loss of your investments.
Current assets are important to most companies, as they are a source
of funds for day-to-day operations. It is thus evident, that the more
current assets a company owns, the better it is performing.
Cash equivalents are not cash but can be converted into cash so easily
that they are considered equal to cash. Cash equivalents are generally
highly liquid, short-term and very safe investments.
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Accounts Receivable
Accounts receivable is the money customers (individuals or
corporations) owe the firm in exchange for goods or services that have
been delivered or used but not yet paid for.
As more and more business is being done today with credit instead of
cash, this item is a significant component of the balance sheet.
Accounts receivable is however recorded as an asset on the balance
sheet as it represents a legal obligation for the customer to remit cash.
Inventory
A firms inventory is the stock of materials used to manufacture their
products and the products themselves for future sale. A
manufacturing company will often have three different types ofinventory: raw materials, works-in-process, and finished goods. A
retail firm's inventory generally will consist only of products purchased
that are still to be stored. Inventory is recorded as an asset on a
company's balance sheet.
Long-term Assets:
A: Long-term assets are grouped into several categories like:
A long-term, tangible asset held for business use and not expected to
be converted to cash in the current or upcoming fiscal year, such as
manufacturing equipment, real estate, and furniture.
Fixed assets are long-term, tangible assets held for business use and
will not be converted into cash in the current or upcoming year.
Eg. Items such as equipment, buildings, production plants and
property. On the balance sheet, these are valued at their cost. As the
value of the asset declines over the years, depreciation is subtracted
from all, except land. Fixed assets are very important to a company
because they represent long-term investments that will not beliquidated soon and can facilitate the companys earnings.
Depreciation gives you an estimate of the decrease in the value of an
asset, caused by 'wear and tear' or obsolence. It appears in the
balance sheet as a deduction from the original value of the fixed
assets; as the value of the fixed asset decreases due to wear and tear.
Intangible assets are non-physical assets such as copyrights, franchises
and patents. Being intangible, it becomes difficult to estimate their
value. Often there is no ready market for them. Sometimes however,
an intangible asset can be the most valuable asset a company
possesses.
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What are Liabilities?
A: Liabilities are a company's debt to outside parties. They represent
rights of others to expect money or services of the company. A
company that has too many liabilities may be in danger of going
bankrupt. Eg. Bank loans, debts to suppliers and debts to its
employees. On the balance sheet, liabilities are generally broken down
into Current Liabilities and Long-Term Liabilities.
Types of Liabilities:
Current liabilities
Current liabilities are debts currently owed for taxes, salaries, interest,
accounts payable* and notes payable, that are due within one year.
A company is considered to have good financial strength when current
assets exceed current liabilities.
*Accounts Payable
Accounts payable is one of a series of accounting transactions covering
payments to suppliers whom the company owes money for goods and
services. Therefore, you will often see accounts payable on most
balance sheets.
Long-term debtis a long-term loan, for a period greater than one
year. These debts are often paid in installments. If this is the case, the
portion to be paid off in the current year is considered a current
liability.
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Section 2: EQUITY
Chapter 5: Analysis And More
What is Technical Analysis?
A: Technical Analysis is a method where one studies the market
statistics to evaluate the worth of a company. Instead of assessing the
health of the company by relying on its financial statements, it relies
upon market trends to predict how a security will perform.
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It is a method of evaluating stocks by analyzing stock market related
activity, such as past pricesand volume. Technical analysts do not
attempt to measure a security's intrinsic value, but instead use charts
to identify patterns that can suggest future activity. They believe in
the momentum that the scrips/markets gather over a period of time
and cashing in on the same. Technical analysts believe that the
historical performance of stocks and markets are indications of future
performance.
This method enables 'short-term' investors to gauge companies who
have very good potential to gather increased earnings in the near
future.
What is a Fundamental Analysis?
A: A method of evaluating a stock by attempting to measure itsintrinsic value. Fundamental analysts study everything from the
overall economy and industry conditions, to the financial condition
and management of companies. A fundamental analyst would most
definitely look into the details regarding the balance sheets, profit loss
statements, ratios and other data that could be used to predict the
future of a company.
In other words, fundamental analysis is about using real data to
evaluate a stock's value. The method uses revenues, earnings, future
growth, return on equity, profit margins and other data to determine
a company's underlying value and potential for future growth.
What is an Overvalued Stock or an Undervalued Stock?
A: An overvalued stock can be understood as an inflated hope that a
company will do well. Thus, a stock is overvalued if its current price
exceeds the intrinsic value of the stock. The market may temporarily
price stocks too high or too low and that's how investors determine
whether stocks are being overvalued or undervalued. If a stock is
overvalued, the current price of the stock exceeds its earnings ratio(PE ratio*) and hence investors expect the price of the stock to drop. A
high PE in relation to the past PE ratio of the same stock may indicate
an overvalued condition, or a high PE in relation to peer stocks may
also indicate an overvalued stock
Thus the PE ratio is one of the many ways to determine whether a
stock is overvalued. *A company's P/E ratio is computed by dividing
the current market price of one share of a company's stock by that
company's per-share earnings.
For example, a P/E ratio of 10 means that the company has Rs1 of
Chapter 1: Stock Market Funda
Chapter 2: Market Related Con
Chapter 3: Stock Market FAQs
Chapter 4: Annual Report
Chapter 5: Analysis and more
CHAPTER 6 : DEMAT ACCOUNT
Share
Market
Basics
Equity
Futures
Options
Mutual
Funds
FinancialPlanning
Share Trading
Basics
Stock Trading
Fundamentals
Stock Market
Concepts
Stock Market
FAQs
AnnualReport
Fundamental
& Technical
Analysis
Demat
Account
Services
Online
Trading
Account
Call &
Trade
Online
Share
TradingSoftware
Portfolio
Tracker
SMS
Stock
Tips &
Prices
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annual, per-share earnings for every Rs10 in share price
A stock is undervalued when,if is selling at a much lower price than
what it is actually worth.This can be determined based on
fundamentals like earnings and growth prospects. One of the best-
known measures for finding an undervalued stock is the price earnings
ratio (P/E).
Consider Colgate and Pepsodent, which are in the same industry and
have similar fundamentals. If Colgate has a P/E of 15 and Pepsodent's
is 20, Colgate could be an undervalued stock.
What does Value Investing mean?
A: Value investing is an investment style, which favors good stocks at
great prices over great stocks at good prices. Hence it is often referredto as "price driven investing". A value investor will buy stocks he
believes the market is undervaluing, and avoid stocks that he believes
the market is overvaluing. Warren Buffet, one of the world's best-
known investment experts believes in Value investing.
Value investors see the potential in the stocks of companies with
sound financial statements that they believe the market has
undervalued; as they believe the market always overreacts to good
and bad news, causing stock price movements that do not correspond
with their long-term fundamentals. Value investors profit by taking a
position on an undervalued stock (at a deflated price) and then profit
by selling the stock when the market corrects its price later.
Value investors don't try to predict which way interest rates are
heading or the direction of the market and the economy in the short
term, but only look at a stock's current valuation ratios and compare
them to their historical range. In other words they pick up the stocks
as fledglings and cash in on them when they are valued right in the
markets.
For example, say a particular stock's P/E ratio has ranged between a
low of 20 and a high of 60 over the past five years, value investors
would consider buying the stock if it's current P/E is around 30 or less.
Once purchased, they would hold the stock until its P/E rose to the 50-
60 ranges before they consider selling it or even higher if they see
further potential for growth in the future.
What is Contrarian Philosophy?
A: Investing with a value philosophy can be considered as one form ofcontrarian investing. Buying stocks that are out of favor in the
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marketplace, and avoiding stocks that are the latest market fad is a
contrarian investing strategy. Thus it is an investment style that goes
against prevailing market trends, where investors buy scrips that are
performing poorly now and sell them in future when they perform
well. Contrarians believe in taking advantages that arise out of
temporary set backs or other such reasons that have caused a stocks
price to decline at the moment.
A simple example of Contrarian Philosophywould be buying
umbrellas in winter season at a cheap rate and selling them during
rainy days.
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Section 3 :
Futures Trading
What are Derivatives?
A: A derivative is a financial instrument whose value depends on the values of other underlying variables. A
suggests it derives its value from an underlying asset. For Ex-a derivative, may be created for a share, or anyobject. The most common underlying assets include stocks, bonds, commodities etc.
Let us try and understand a Derivatives contract with an example:A: Anil buys a futures contract in the scrip "Satyam Computers". He will make a profit of Rs.500 if the pr
Satyam Computers rises by Rs 500. If the price remains unchanged Anil will receive nothing. If the stock pri
Satyam Computers falls by Rs 800 he will lose Rs 800.
As we can see, the above contract depends upon the price of the Satyam Computers scrip, which is the under
security. Similarly, futures trading can be done on the indices also. Nifty futures is a very commonly traded
contract in the stock markets. The underlying security in the case of a Nifty Futures contract would be the In
What are the different types of Derivatives?
A: Derivatives are basically classified into the following:
Futures /Forwards
Options
Swaps
What are Futures?A: A futures contract is a type of derivative instrument, or financial contract where two parties agree to trans
financial instruments or physical commodities for future delivery at a particular price.
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The example stated below will simplify the concept offutures trading:
Case1:
Ravi wants to buy a Laptop, which costs Rs 50,000 but owing to cash shortage at the moment, he decides to
later period say 2 months from today.However,he feels that after 2 months the prices of Lap tops may increaincrease in input/Manufacturing costs .To be on the safer side, Ravi enters into a contract with the Laptop M
stating that 2 months from now he will buy the Laptop for Rs 50,000. In other words he is being cautious an
buy the Laptop at today's price 2 months from now.The forward contract thus entered into will be settled at
The manufacturer will deliver the asset to Ravi at the end of two months and Ravi in turn will pay cash deliv
Thus a forward contract is the simplest mode of a derivative transaction. It is an agreement to buy or sell a
quantity of an asset at a certain future time for a specified price. No cash is exchanged when the contr
entered into.
What are Index Futures?
A: As Stated above, Futures are derivatives where two parties agree to transact a set of financial instrumentscommodities for future delivery at a particular price. Index futures are futures contracts where the underlyin
index (Nifty or Sensex) and helps a trader to take a view on the market as a whole.
What is meant by Lot size?A: Lot size refers to the quantity in which an investor in the markets can trade in a derivative of a particular
Ex-Nifty Futures have a lot size of 100 or multiples of 100.Hence if a person were to buy 1 lot of Nifty Futu
value would be 100*Nifty Index Value at that point of time.
Similarly lots of other scrips such as Infosys, reliance etc can be bought and each may have a different lot si
fixed the minimum value as two lakhs for an Futures and Options contract. Lot sizes are fixed accordingly w
the minimum shares on which a trader can hold positions.
What is meant by expiry period in Futures Trading?A: Each contract entered into has an expiry period. This refers to the period within which the futures contrac
fulfilled. Futures contracts may have durations of 1 month,2 months or at the most 3 months. Each contract e
the last Thursday of the expiry month and simultaneously a new contract is introduced for trading after expir
contract.
What are the uses of Derivatives? What are the various derivative strategies that I can use?A: Derivatives have a multitude of uses namely:
a) Hedging
b) Speculation &
c) Arbitrage
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Derivative Services Home
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Derivative Basic
Derivative Futures
Derivative Options
Options Trading
Strategies
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Section 4:
Chapter 1:OPTIONS
What are options?
A: Before you begin options trading it is critical to have a clear idea of what you hope to accomplish. Only t
be able to narrow down on an options trading strategy. Let us first understand the concept of options.
An option is part of a class of securities called derivatives.
The concept of options can be explained with this example. For instance, when you are planning to buy som
you might have placed a nonrefundable deposit to hold it for a short time while you evaluate other options.
example of a type of option.
Similarly, you have probably heard about Bollywood buying an option on a novel. In 'optioning the novel,' t
has bought the right to make the novel into a movie before a specified date. In both cases, with the house an
somebody put down some money for the right to buy a product at a specific price before a specific date.
Buying a stock option is quite similar. Options are contracts that give the holder the right to buy or sell a fix
a certain stock at a specified price within a specified time. A put option gives the holder the right to sell the s
call option gives the right to buy the security. However, this type of contract gives the holder the right, but n
obligation to trade stock at a specific price before a specific date. Several individual investors find options u
because they can be used either as:
A) A type of leverage or
B) A type of insurance.
Trading in options lets you benefit from a change in the price of the share without having to pay the full pric
share. They provide you with limited control over the shares of a stock with substantially less capital than w
required to buy the shares outright.
When used as insurance, options can partially protect you from the specific security's price fluctuations by g
the right to buy or sell shares at a fixed price for a limited amount of time.
Options are inherently risky investment vehicles and are suitable only for experienced and knowledgeable inare prepared to closely monitor market conditions and are financially prepared to assume potentially substan
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What are the different types of Options? How can Options be used as a strategic measure to make
profits/reduce losses?A: Options may be classified into the following types:
a) Call Option
b) Put Option
As mentioned before, there are two types of options, calls and puts. A call option gives the holder the right t
underlying stock at the strike price anytime before the expiration date. Generally Call options increase in val
value of the underlying instrument increases.
By contrast, the put option gives the holder the right to sell shares of the underlying stock at the strike price
the expiry date. The put option gains in value as the value of the underlying instrument decreases. A put opti
where one can insure a stock against subsequent price fall. If the value of your stocks goes down, you can ex
put option and sell it at the price level decided upon earlier. If in case the stock price moves higher, all you lthe premium amount that was paid.
Note that in newspaper and online quotes you will see calls abbreviated as C and puts abbreviated as P.
The examples stated below will explain the use of Put options clearly:
Case 1:
Rajesh purchases 1 lot of Infosys Technologies MAY 3000 Put and pays a premium of 250 This contract all
to sell 100 shares of Infosys at Rs 3000 per share at any time between the current date and the end of May.In
avail this privilege, all Rajesh has to do is pay a premium of Rs 25,000 (Rs 250 a share for 100 shares).
The buyer of a put has purchased a right to sell. The owner of a put option has the right to sell.
Case 2:
If you are of the opinion that a particular stock say "Ray Technologies" is currently overpriced in the month
and hence expect that there will be price corrections in the future. However you don't want to take a chance ,
the prices rise. So here your best option would be to take a Put option on the stock.
Lets assume the quotes for the stock are as under:
Spot Rs 1040
May Put at 1050 Rs 10
May Put at 1070 Rs 30
So you purchase 1000 "Ray Technologies" Put at strike price 1070 and Put price of Rs 30/-. You pay
as Put premium.
Your position in two different scenarios have been discussed below:
1. May Spot price of Ray Technologies = 1020
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2. May Spot price of Ray Technologies = 1080
In the first situation you have the right to sell 1000 "Ray Technologies" shares at Rs 1,070/- the price of whi
1020/-. By exercising the option you earn Rs (1070-1020) = Rs 50 per Put, which amounts to Rs 50,000/-. Y
income in this case is Rs (50000-30000) = Rs 20,000.
In the second price situation, the price is more in the spot market, so you will not sell at a lower price by exe
Put. You will have to allow the Put option to expire unexercised. In the process you only lose the premium p
Rs 30,000.
what is open interest?
A: The total number of option contracts and/or futures contracts that are not closed or delivered on a particul
hence remain to be exercised, expired or fulfilled through delivery is called open interest.
What are Index Futures?
A: As Stated above, Futures are derivatives where two parties agree to transact a set of financial instruments
commodities for future delivery at a particular price. Index futures are futures contracts where the underlyinIndex (Nifty or Sensex) and helps a trader to take a view on the market as a whole.
What is meant by the terms Option Premium, strike price and spot price?
A: The price that a person pays for a call option/Put Option is called the Option Premium. It secures the righ
that particular stock at a specified price called the strike price. In other words the strike priceis the specifie
which the holder of a stock option may purchase the stock. If you decide not to use the option to buy the stoc
are not obligated to, your only cos
