UNDERSTANDING THE BASICS OF STOCK MARKET

UNDERSTANDING THE BASICS OF STOCK MARKET

STOCK MARKET IS A PLACE WHERE THE BUYERS AND SELLERS MEET FOR A TRADE TO TAKE PLACE.

A BUYER OR A SELLER CANNOT INTERACT WITH EACH OTHER DIRECTLY, HENCE A BROKER IS NEEDED WHICH ACTS BETWEEN THE TWO.

STOCK MARKET STARTS WITH A STOCK OR A SHARE.

WHAT IS A STOCK/SHARE?

WHAT WE KNOW AS A SHARE, THE SAME THING APPLIES.

A SHARE IS A PART OF A BUSINESS. BY OWNING A SHARE, YOU ARE BECOMING AN OWNER OF A BUSINESS.

ACCORDING TO THE LATEST PROVISIONS OF THE SEBI, ONE CAN OWN EVEN A SINGLE SHARE OF A COMPANY.

EXCHANGES
THERE ARE MAINLY THREE EXCHANGES IN WHICH TRADES TAKE PLACE. BSE, NSE AND MCX. STOCKS AND INDICES ARE TRADED IN THE FIRST TWO WHEREAS COMMODITIES ARE MAINLY TRADED IN MCX.

WHAT IS BSE/NSE?

WELL EVERYONE KNOWS ITS FULL FORMS. WHAT IS IMPORTANT TO KNOW IS WHAT IS THEIR DIFFERENCE AND THE MATTERS RELATED WITH IT.

 THERE ARE 1696 LISTINGS IN NSE, WHEREAS 5611 IN BSE(WHICH KEEPS CHANGINGING WITH TIME).

IT MEANS THERE ARE MANY COMPANIES WHICH ARE LISTED ONLY IN BSE, COMPANIES LIKE SALZER ELECTRO, SPICEJET, ANUH PHARMA, ETC.

AND TILL DATE, I HAVE SEEN ONLY ONE COMPANY WHICH IS LISTED ONLY IN NSE, THAT IS, SKM EGG PRODUCTS LTD.

THERE IS NOTHING TO WORRY IN THIS PART THOUGH.

AND ONE CAN TRADE STOCKS, THROUGH ANY EXCHANGE WHERE SCRIPTS ARE LISTED IN BOTH THE EXCHANGES.

NOTE: TRADING TAKES PLACE ONLY IN THESE TWO EXCHANGES IN INDIA, NSE AND BSE.

WHAT IS REQUIRED FOR A TRADE?

ONE NEEDS TO HAVE A DEMAT ACCOUNT AND A TRADING ACCOUNT TO TRADE IN A RECOGNISED EXCHANGE.

DEMAT ACCOUNT OR A DEMATERIALISED ACOUNT.

FOR TRADING IN DERIVATIVES, A TRADING ACCOUNT IS SUFFICIENT. BUT FOR DELIVERY SHARE TRADING(OR, RATHER INVESTMENT), A DEMAND ACCOUNT IS REQUIRED.

IN THE INITIAL STAGES, SHARES WERE TRADED USING PAPERS AND CHEQUE..THE PROCESS WAS TIME-TAKING.

LATER, IT WENT THE DEMATERIALISED WAY, WHICH MEANS SHARES CAN BE HOLD IN A DEMAT ACCOUNT.

SO NOW, FORGET ABOUT THE OLD PROCESS.

SHARES ONCE BOUGHT GETS TRANSFERRED INTO THE DEMAT ACCOUNT AFTER 3 DAYS FROM BUYING.

ACCORDING TO STOCK MARKET TERMS, IT IS CALLED T+3.

IT VARIES FROM ONE BROKER TO OTHER, THOUGH.

WHO TRADES IN A STOCK MARKET?

RETAIL TRADERS/INVESTORS, MUTUAL FUNDS, ULIPS, DOMESTIC INSTITUTIONAL INVESTORS(DII), FOREIGN INSTITUTIONAL INVESTORS(FII),ETC.

BROADLY,TRADING ARE OF TWO TYPES-

-INTRADAY(BUYING AND SELLING IN THE SAME DAY)

-DELIVERY(BUYING AND SELLING AFTER SOME DAYS)

SHORT-SELL:

SHORT-SELL IS SELLING AND BUYING, UNLIKE BUYING AND SELLING, WHICH CAN BE DONE ONLY INTRADAY.

THE FIIs ARE NOT ALLOWED TO SHORT SELL THOUGH.

DELIVERY TRADING CAN AGAIN BE CLASSIFIED INTO 2/3 TYPES.

WHO IS A SCALPER?

 A SCALPER IS ONE WHOSE TIME HORIZON IS FEW MINUTES TO AN HOUR. A SCALPER DOES NUMEROUS TRADES A DAY.

TRADING AND INVESTING-

THE PRIMARY DIFFERENCE BETWEEN TRADING AND INVESTING IS TIME HORIZON.

TRADING TIME HORIZON VARIES FROM A MINUTE TO A YEAR, AND INVESTING TIME HORIZON VARIES FROM A YEAR TO LIFETIME.

TRADERS RIDE ON MOMENTUM OR NEWS. AND INVESTORS RIDE ON GREAT BUSINESSES, OR BUSINESS MODELS WHICH CAN DELIVER IN THE LONG RUN.

THERE ARE THREE PRODUCTS WHICH ARE PRIMARILY TRADED-

-EQUITY(STOCK MARKET)

-CURRENCY(USDINR,EURINR,GBPINR,JPYINR,ETC)
THE CROSS CURRENCY PAIRS LIKE EURUSD,GBPUSD,USDJPY ETC WILL BE INTRODUCED SOON. RBI AND SEBI HAVE ALREADY GAVE THE GO-AHEAD SIGNAL.

-COMMODITY(GOLD, SILVER, OTHER METALS, AGRICULTURAL GOODS, ETC)

IN CURRENCY AND COMMODITIES, TRADING DOES NOT TAKE PLACE IN SPOT PRICES OR PRICE OF THE UNDERLYING INSTRUMENT. TRADING HAPPENS AS IN DERIVATIVES, IN FUTURES AND OPTIONS IN CURRENCY WHEREAS ONLY FUTURES IN COMMODITES.

EQUITY CAN FURTHER BE CLASSIFIED INTO-

-EQUITY CASH(WHICH WE MAINLY KNOW AS SIMPLE SHARES)

-EQUITY DERIVATIVES.

EQUITY DERIVATIVES CAN FURTHER BE -CLASSIFIED INTO-

FUTURES, AND OPTIONS.

FUTURE AND OPTIONS

IN THE EQUITY DERIVATIVES AREA, THERE ARE MANY STOCKS AND INDICES TRADED WHICH HAVE AN EXPIRY DATE, BEFORE WHICH YOU NEED TO SQUARE OFF YOUR POSITION. FUTURE AND OPTION PRICES ARE DETERMINED BY GREEK METHODS OF DELTA, THETA,ETC.

FUTURES

FOR FUTURES, EVERY SCRIPT(OR COMPANY) HAS DIFFERENT MARGIN REQUIREMENT AND HAVE ITS OWN LOT SIZE.

WHEREAS FOR OPTIONS, THE MARGIN REQUIREMENT IS ONLY THE (PREMIUM*LOT SIZE).

BENEFITS OF TRADING IN DERIVATIVES-

ONE CAN EARN LARGER PROFITS IN A RELATIVELY SMALLER PERIOD OF TIME, LIKE, IN OPTIONS, CAPITAL CAN BE DOUBLED IN A DAY OR A WEEK, WHEREAS CAPITAL CAN BE CREATED TO A LARGE SIZE BY TRADING IN FUTURES.

THE REAL BENEFIT OF TRADING IN DERIVATIVES-

MONEY CAN BE MADE IN BOTH THE SIDES, EVEN IF THE STOCK PRICE INCREASES OR IT DECREASES.AND,YOU CAN HOLD SHORT EVEN FOR DAYS. 

IN FUTURES, ONE CAN BUY/SELL A SCRIP AND REVERSE LATER.

OPTIONS

IN OPTIONS,ONE CAN BUY/SELL, CALL/PUT OPTION.

FOR SELLING OPTIONS, THE MARGIN REQUIREMENT IS HIGH, WHEREAS IT IS A SMALL FOR BUYING OPTIONS.
ADDITIONAL INFORMATION AND KNOWLEDGE:
http://dipesh-majumdar.blogspot.in/2015/03/understanding-option-greeks-use-of.html
http://dipesh-majumdar.blogspot.in/2015/03/option-strategies-option-strategies.html

REAL-LIFE EXAMPLES

HOW IT ACTUALLY HAPPENS?

(GIVING A REAL LIFE EXAMPLE FROM A INSTANCE HAPPENED SOMETIME BACK)-

I GAVE A FUTURES BUY CALL ON COLGATE AT 1830 AND GAVE A TARGET PRICE OF 2000(WHICH MEANS AN UPSIDE POTENTIAL OF JUST 9%)

FOR FUTURES TRADING IN COLGATE, MARGIN REQUIREMENT IS AROUND 18000, AND LOT SIZE IS 125.

PROFIT MADE FROM THIS CALL-125*(2000-1830)= 125*170=21250.

HENCE THE CAPITAL APPRECIATED MORETHAN 100% IN THIS CALL.

TAKING EXAMPLE OF ONE OF ANOTHER CALL-

BUY NIFTY 8800 CALL OPTION 3 LOTS @180 AND SELL @283.

NOTE, FOR NIFTY, THE LOT SIZE IS 25.

HERE, MARGIN REQUIREMENT IS (3*180*25)=13500

PROFIT FROM THIS CALL-25*3*(283-180)=7725, WHICH IS A CAPITAL APPRECIATION OF 57%

WHERAS NIFTY MOVED JUST AROUND 250 POINTS DURING THIS PERIOD, WHICH MEANS, PROFIT OF (250*25)=6250, A CAPITAL APPRECIATION OF AROUND 35%.( THE MARGIN REQUIREMENT OF NIFTY FUTURES IS AROUND 18000)

THESE ARE THE DIFFERENCE IN CASH, FUTURES AND OPTIONS.

BUT THE REAL PART IS-

THE LOSS WILL RUN INTO A HUGE AMOUNT IF ONE GOES WRONG IN TRADING FUTURES AND OPTIONS. IN SOME CASES, IT CAN WIPE OUT YOUR ENTIRE CAPITAL.

AS I HAVE WRITTEN BEFORE, MONEY CAN BE MADE TO A LARGE AMOUNT BY DERIVATIVES TRADING, THERE ARE MOST PEOPLE TRADING IN THE DERIVATIVES PART, MOSTLY OPTIONS, BECAUSE OF WHICH EVEN THE GOVT. HAS INCREASED THE SECURITIES TRANSACTION TAX(STT) ON OPTIONS FROM 0.017% TO 0.05%.

NOTE
IN DERIVATIVES, THE LOT SIZE AND HENCE THE MARGIN REQUIREMENT CHANGES WITH TIME AS PER NSE GUIDELINES.

RISKS-

THERE IS A GREAT SAYING, “HIGHER THE RETURN, HIGHER THE RISK”.

THE SAME RULE APPLIES HERE, IN DERIVATIVES TRADING.

ACCORDING TO STATISTICS, 97% OF THE TRADERS LOSE THEIR MONEY, WHEREAS THE REMAINING 3% WIN, WHICH MEANS THOSE 3% WIN THE LOST MONEY OF ALL THOSE 97% OF TRADERS.

THESE ARE THE PRIMARY THINGS ONE NEEDS TO KNOW BEFORE ENTERING THE MARKET.

MANY INTERESTED PEOPLE ALSO FACES DILEMMA REGARDING CHOOSING A BROKER.

BROKERS

THERE ARE TWO TYPES OF BROKERS.

-ONE IS THE AGE-OLD RETAIL BROKERS, WHO PROVIDE SERVICES, WHICH IS MAINLY TECHNICAL AND FUNDAMENTAL INSIGHTS OF COMPANY OR THE OVERALL MARKET.THEY PROVIDE RELATIONSHIP MANAGERS FOR EACH AND EVERY CLIENT, WHO TAKES CARE OF THEIR CLIENT’S TRADES(THEY ACTUALLY BURN ACCOUNTS OF THEIR CLIENTS).THEIR BROKERAGE CHARGES IS HIGH AS THEY PROVIDE RESEARCH.

BENEFIT:EXPOSURE TO RESEARCH REPORTS.

EXAMPLES:KOTAK,SBI,OTHER BANKS,SMC,SHAREKHAN,MOTILAL OSWAL,ETC

-AND THE OTHER, THE NEWLY FORMED, DISCOUNT BROKERS,THEIR BROKERAGE CHARGES ARE LOW.THEY DOES NOT PROVIDE RESEARCH. YOU HAVE TO TAKE YOUR OWN DECISION IF YOU TRADE WITH THEM.HERE, THE DEMAT ACCOUNT CHARGES IS HIGH THOUGH.

EXAMPLES-ZERODHA,RKSV,TRADEJINI,SAS,ETC.

SO, NOW YOU ARE DONE TO BE THE NEXT BIGGIE OF THE STOCK MARKET.

TO UNDERSTAND THE MARKET EVEN BETTER, FOE MORE INFORMATION AND KNOWLEDGE, YOU CAN ALSO GO TO:http://www.investopedia.com

HOPE THE POST HELPS YOU.

THANK YOU.