Futures & Options - 4 Things to Avoid while Trading in Futures and Options

Mehul Kothari द्वारा पोस्ट | 19 Aug 2019 को प्रकाशित |
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Futures & Options - 4 Things to Avoid while Trading in Futures and Options
For many investors, the next gradual step after mastering the stock markets is venturing into the derivatives segment. Derivatives consist of two key products in India – Futures and Options. However, trading in these can be a tricky business and one can go wrong on many counts. But before we warn you of the pitfalls that you need to be careful of, it is important to know what are futures and options. Correct understanding of futures and options plays an important role in making the best out of investments in this segment. Read on to understand the nuances of the F&O segment and how to trade in futures and options.

Similarities between futures and options
  • Both futures and options belong to the family of derivatives. For the uninitiated, derivatives are financial contracts whose value is derived from an underlying asset (such as securities) or a group of assets (benchmarks such as indexes). Other examples of underlying instruments are bonds, commodities, interest rates, stocks, etc.
  • They are trading products which offer the investor a chance to make profits and hedge their current investments
  • Both futures and options trading happens in the stock market.

Difference between futures and options
  • The major difference between futures and options lies in the obligations or rights of the involved parties. In the case of options, the holder of the contract has the right to purchase (or sell) the underlying financial instrument or asset at the pre-determined price. However, he or she is not obligated to do so. The seller, on the other hand, needs to compulsorily perform their part if the holder chooses to exercise his or her option. In simple words, the holder has an “option”.
  • In the case of a futures contract, both parties have an obligation to fulfill their part of the contract on a specified date in the future at a pre-determined price.
  • In terms of risk, futures are riskier than options. The holder of the futures contract is obligated to buy on the future date at the fixed price even if the security moves against him or her. However, in an options contract, the holder can choose not to no go through if the security price does not move as per his/her expectation.
  • There is an advance payment involved with options contract. The holder of the contract has to pay an amount or premium to get the right to buy or pass in the future. In case the contract holder chooses not to exercise the right, he/she will lose this upfront payment amount. No such charges are there in a futures contract as both the parties need to honor their obligations on a certain date.
  • In the case of a futures contract, the transaction takes place on a pre-determined date. 
  • Futures and options may be conceptually different but their core principle is the same. They provide a chance to make a profit from an index, stock or any other underlying asset without investing the entire sum.
 
Understanding future and options

Now that you know the difference between futures and options, you might think that you are all set to venture into this segment. However, before you do that it is important to understand some important facts about futures and options
  • Futures and options are traded on the stock market. The F&O segment contributes to the maximum trading volume across stock exchanges in the country.
  • The calculation of profits (or losses) is done daily till the time of sale or contract expiry.
  • Unlike the equity market, derivatives come with an expiration date.
  • There are hidden costs involved in the F&O segment. These include brokerage, stamp duty, GST, STT, etc.
  • Options contracts are asymmetrical. In case the price of a stock goes down, the buyer's loss is restricted to the amount of premium paid. However, the seller's loss is limitless potentially.
  • Trading in options is possible even when one is unsure about the market’s direction. One can combine futures and options to trade markets in such situations. One of the USP of the F&O market is the flexibility to choose a non-directional strategy.

Things to avoid while trading in futures and options

If you wish to trade in futures and options, there are some mistakes you need to steer clear of.

Futures Trading
  • Use futures as a trading proxy: This is one of the biggest (and most common) mistakes made by investors in the F&0 segment. The power of leveraging works both ways – in your favor and against it. Futures have the potential for unlimited profits as well as losses. So, one should not get lured by the possibility of exponential profits without considering the impact of losses.
  • Ignore the stop/loss feature: Many people do not make effective use of this important feature. The stop/loss feature is a great risk management tool. One must remember that leverage is a double-edged weapon. It can help as well as hurt. It is important to maintain a disciplined and rigid stop/loss target at the time of trading. On earning the set or desired profit, one must use this feature to exit from the futures position.
  • Sell if another institution is doing so: A big part of the future trading is to create a cash-future arbitrage. Hence, do not start selling your future contracts just because some other institution is doing so. It might be trying to create a position of arbitrage. Following the herd is not a wise way of trading in the F&O segment.
Options Trading 
  • Get attracted by cheaper-priced options: Naturally one would prefer low-priced options as the advance premium payment would also be lesser. However, in such cases, it is important to assess the intrinsic value of that particular option to determine if it is truly underpriced.
  • Holding longs closer to the date of expiration: There are two factors that impact the valuation of options – intrinsic value and time value. As the date of expiry comes nearer, there is a sharp dip in the option price (if it is going to expire at zero value). Hence, timing your exit and setting the target return are crucial aspects to be considered in options trading. Else, one might end up making losses. 

 
How to trade in futures and options

Once you have a thorough understanding of futures and options, it is time to choose an intermediary for your trading purposes. This is a crucial step as the right partner can help you select the right investment opportunities and make the most out of your hard-earned money.

IndiaNivesh is a great choice for all your financial needs. With a rich experience of more than a decade, it offers best-in-class and customized services to its customers. Its in-depth understanding of the market combined with cutting-edge technological tools enables them to support customers holistically. Their long list of recognitions stands testimony to the passion and excellence they display in the financial world.

So, make the right choice of partner and keep it simple. Futures and options are not rocket science once you understand their nuances.




Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

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Commodity Market - Beginners Guide for Commodity Market in India

Posted by Mehul Kothari | Published on 13 Aug 2019

Commodity market in India has a great bearing on our routine lives. The prices of fuel, gas, things at the supermarket, jewellery, etc. are dependent on the prices of the commodities in the commodity market. Since there is a great significance of price change in the commodity on our routine lives, it suggests that commodity if rightly traded can give good returns. This provides an opportunity to the traders to trade in the commodity market and take advantage of the price movement to their benefit. In this article, you will learn about all the details that a beginner must know while entering into a commodity market in India. Let us first learn the basic concept of commodity and its meaning.What is a Commodity?To define commodity in simple words, it is the material that is used as an input for producing refined goods. It is only because of the commodities that we are able to use the goods around us. Examples of commodities include copper, iron, aluminium, zinc, lead, crude oil, natural gas, gold, silver, steel, cotton, grains, pulses, etc.After learning the meaning of commodity, let us now learn about the meaning of commodity trading.What is Commodity Trading?Commodity trading is very similar to stock trading. In stock trading, you purchase and sell shares of the companies, while in commodity trading you purchase and sell commodity products. The commodities are traded on the exchanges where traders look for making profits from the volatility in the commodity market by purchasing and selling them.Let us now learn about the different types of commodity markets in India.Types of Commodity MarketThere are two types of commodity markets in India first are spot market and second are futures market. Spot market is a market where physical commodities are purchases and sold. E.g. Agriculture mandies. Futures markets are the market were commodities are purchases and sold in electronic form through various commodity exchanges.In India, there are three major commodity exchanges where you can trade different commodity items. They are as follows:• National Commodity and Derivatives Exchange – NCDEX• Multi Commodity Exchange – MCX• Indian Commodity Exchange – ICEX From the above, MCX and NCDEX are the two most popular exchanges. On MCX, you can trade in metal and energy and on NCDEX; you can trade in agriculture products. ICEX is known for Diamond trading.The commodities traded on these exchanges can be classified into four types.• Energy – Crude oil, Natural gas • Precious Metals – Gold, Silver, Platinum• Base Metals – Aluminium, Copper, Lead, Nickel, Zinc, Steel• Agriculture – Corn, Beans, Rice, Wheat, Pulses, Spices, etc.Let us now learn who regulates the Indian commodity market. Regulation of the Indian Commodity MarketThe regulatory body of the commodity trading market is the Securities and Exchange Board of India (SEBI). Earlier, the Forward Market Commission (FMC) used to regulate the commodity market. But in 2015, FMC got merged with SEBI.As a beginner, you must know how to trade in the commodity market. In the section of the article, we will learn all the details of how trading can be done in the commodity market.How To Trade In Commodity MarketThe best way to trade in the commodity market is through the futures contract. In a futures contract, there is an agreement to buy or sell a particular commodity at a given price at a future time. Future contracts are available for every commodity. The traders use the volatility in the price of the commodity to make profits. The beginners in the commodity market must begin with small trades so that they understand the risks well and get the experience of taking big trading positions in future.Let us now learn about the advantages of commodity trading in the futures market for beginners.Advantages of Futures Market in Commodity Trading• The volume of trade in the future market is good which makes future contracts very liquid in nature.• When the trade is taken carefully, the future contracts can give you huge profits.• The targets in the long or short future contracts can be easily set.• Futures contracts are highly leveraged investments.• They are affordable as they require minimum deposit to open an account and in return, you get control over full-size contract. Let us now learn how to choose a commodity broker in the commodity market.How to Choose a Commodity Broker?Your entire experience in the commodity market will depend upon the broker you select. The commodity market has grown significantly over the past few years and there are numerous brokers present in the market.While selecting a commodity broker, you must check their credibility and past experience. Another important aspect that you need to check is the charges that the broker quotes and services offered by them. Also, the broker must have a proactive customer support team. This is because whenever you face any problem or snag, it can be addressed immediately. Moreover, it is advisable to compare the different brokers and select the one who provides the services at the most affordable rates.Let us now learn how to open a commodity trading account.How to Open Commodity Trading AccountAfter selecting the broker of your choice, the next thing to do is open the commodity trading account. You must follow the below mentioned steps for successfully opening your account. The first thing to do after the selection of the broker is to fill the account opening form. These forms are available on the broker's website and can be obtained from their offices too. The next step involves the submission of the necessary documents that include PAN card, ID proof, address proof, cancelled cheque and income statement. Now the broker will conduct a verification process to check whether the information submitted by you is correct or not. On receiving the approval from the exchange, the commodity account is opened. The beginners get the information about their account number, password and other necessary details. On the opening of the account, you must submit the deposit margin money. The initial margin money is as low as 5%-10% of the total contract value. Apart from the initial margin, the maintenance margin also needs to be maintained by the account holder. Trading in the commodity market can change your fortune. The sky is the limit to make money in the commodity market. Just follow a disciplined approach and you can be a successful commodity trader. If you are looking to open a commodity trading account, you can consider IndiaNivesh Commodities Private Ltd. We provide the best services at the most affordable rates. Our in-house experts and analysts give you the right guidance for the next trade that you should take. For further information, you may get in touch with us via email or call. We will be glad to serve you.Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

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Best Shares to Buy for Long Term Investment in India

Mehul Kothari द्वारा पोस्ट | 21 Aug 2019 को प्रकाशित |

Stock market is one of the popular investment avenues where you can make huge wealth in the long run. Over the years the Indian stock market has given incredible returns to the shareholders. There are many top shares to buy for long term which have the potential to grow your money. If you make long term investment in the stocks of the right company, apart from the price appreciation, you enjoy many benefits like dividends, bonus shares, preferential shares, etc. However, there are many aspects that you must consider before making long term investment in a stock. Some of the factors include future growth, debt to equity ratio, market’s condition in the future, etc. So, if you are planning to invest for a longer horizon, we have made a list of the few top shares to buy for long term success.Best Shares To Buy In India For Long Term • Aditya Birla Capital Ltd.Aditya Birla Capital Ltd. has a diversified business model that involves life insurance, mutual funds, home finance, etc. The diversity of the business protects it from the slowdown in one particular sector. This leads to good performance in the form of consistent revenue and profitability. The wide and diverse business of the company ranks it among the best shares to buy today for the long term. At present, the company has a market capitalisation of Rs. 3,645.75 crores. • Can Fin Homes Ltd.Can Fin Homes Ltd. is one of the well-performing finance companies of India. The strong financial books provide a good cushion to the company even in the economic slowdown. The reliable management of the company ranks it among the best shares to buy in India for long term. The company is also not severely affected by frauds and crisis in the NBFC sector. The current market capitalisation of the company is Rs. 4,948.01 crores. • Coal India Ltd.Coal India Ltd. is one of the leading companies in the energy sector. The company has a market capitalisation of Rs. 125,565.59 crores. Today, this company is the single largest coal producer in the world. The company operates through 82 mining areas along with 7 wholly-owned coal producing subsidiaries in India. Numerous projects are already in the pipeline and order book is also very strong. Going ahead the company shall continue to fulfill the growing needs of the coal demand across the globe and remain the leader of the market. Therefore, when you think of shares to buy for long term, Coal India Ltd. is a good option. • Dr Lal Pathlabs Ltd.Dr Lal Pathlabs Ltd. is one of the good shares to buy for long term. The company functions in the healthcare sector and has a market capitalisation of Rs. 8,915.89 crores. The company owns top pathology labs in India. With quality manpower and experts, they remain one of the top players in this segment. The company has over 1,000 field executives with more than 6,000 pick up points across the country. What makes it the best shares to buy today for long term is that the company is expected to perform well and cover a good market share in the long term. • Bharat Electronics Ltd (BEL)Bharat Electronics Ltd (BEL) is in the consumer durables sector and has a market capitalisation of Rs. 22,964.89 crores. BEL is one of the leaders in supplying specialized electronic equipment to the Indian Defence Services. Apart from the defense sector, the company has a significant presence in the civilian market as well and supplies numerous products. The list of items produced by the company is long as it caters to many different sectors of the economy. Going ahead the demand for its products is expected to remain robust and the company shall grow well. Bharat Electronics Ltd (BEL) definitely falls in the category of good shares to buy for long term. • NBCC (India) Ltd.NBCC (India) Ltd. functions in the real estate sector and has a market capitialisation of 6,192 crores. Founded by the government of India, the company holds the status of Navratna CPSE. The company has a significant presence in the Project Management Consultancy (PMC), Engineering Procurement & Construction (EPC) and Real Estate Development. With the slow down in the real estate segment, the company is trading at cheaper valuations. What makes its shares to buy for long term is the expected recovery in the economy and faster execution of orders by the company. • RBL Bank Ltd.RBL Bank Ltd. is in the banking sector with the market capitalisation of Rs. 15,960.34 crores. This bank has been rated as one of the best mid-sized banks in India. RBL Bank is one of the fastest-growing private banks of the country and it is continuously expanding its presence across the different states. Currently, the bank has 332 branches in India. In the future, the customer base of the bank is expected to grow significantly. In addition, the reliable management of the bank makes it the best shares to buy in India for long term. The above mentioned are few of the shares to buy for long term. Since there are many companies listed on the stock exchange, it is important to know the different criteria that you need to consider before purchasing stocks for the long term. To assist you in selecting the best shares to buy in India for long term, we have listed down certain points that you may consider.How To Choose Stocks For The Long Run?• FinancialsThe first and foremost thing that you need to do before purchasing a stock for the long term is to analyse the financials of the company. You must check the company’s debt levels, the cash reserves available, provisions made, etc. By understanding the financials of the company, you would come to know if the company will be able to survive in the long run if recession hits the market. • Future GrowthIt is always good to invest in those businesses which show the signs of future growth. Future growth has a direct impact on the profitability of the company. If it is expected that the demand for a company’s products or services would grow in the coming years it would lead to higher profits. Being a shareholder in a company that shows consistent growth not only gives you returns in the form of share price appreciation but also in the form of a dividend, bonus shares, etc. • Government PolicyThe policies of the government have a direct effect on a company. If any sector is expected to receive boost and support from the government then the shares of companies functioning in that sector can be considered for long term investment. While on the other hand, if any sector is going to face many hardships from the government then investment in such companies must be completely avoided. • Competent Management/ Corporate GovernanceWhen you are looking for shares to buy for long term, it is always advisable to look at the quality of the management. A company with good management must be the first choice for any investor. This is because good management always ensures that ethical practices are followed in the company and there is no fraud. Therefore, invest for the long term in those companies where no one can question the credibility of the management. The above mentioned are a few things to consider before purchasing stock for the long term. In India, you can invest in the stock market only if you have a demat account. If you are a beginner and want to invest for the long term in the stock market, you may consider opening a demat account with IndiaNivesh Ltd. Our in-house experts and analysts help beginners and seasoned investors by recommending the long term shares to buy in India.

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  • Know What is Pre-Market Trading & How it Works in Share Market
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This period is used to ensure a seamless transition to regular trading hours. Any abnormalities from the previous two slots are addressed during this time.   Calculation of Opening price during the pre-market stock trading session The opening price of the stock during this session is determined during the second phase i.e. Order Match session. It is done with the help of a specific methodology. This calculation method is referred to as the call auction methodology or the equilibrium price. The stock price which corresponds to the maximum quantity of tradable shares is known as the equilibrium price. It is a factor of demand and supply. The orders placed during the first eight minutes are matched at the equilibrium price and then traded accordingly. Some scenarios: If the highest tradable quantity corresponds to two different stock prices, then the stock price with the lower unmatched orders is taken as the equilibrium price. For example:   Stock Price Order (Buy) Order (Sell) Demand Supply Max Tradable Quantity Size Unmatched Orders (Demand minus supply) 105 1275 1160 25000 20000 20000 5000 99 2000 8000 20000 30000 20000 -10000   Though the maximum tradable quantity is same in both the cases, the equilibrium price will be considered as 105 as it has a minimum unmatched order size If the values of the highest tradable quantity and unmatched orders are same or equidistant, but they correspond to two different stock price, then the above methodology cannot be applied. In this case, the equilibrium price is taken as the stock price which is closer in value to the closing price of the previous day. For example, Stock Price Order (Buy) Order (Sell) Demand Supply Max Tradable Quantity Size Unmatched Orders (Demand minus supply) 105 1275 1160 25000 20000 20000 5000 99 2000 8000 20000 25000 20000 -5000 Assuming the closing price on the previous day was Rs. 110, then the equilibrium price in the above example will be Rs. 105.   What about orders that remain unmatched or are not traded in the pre-open session? Orders that are not traded or remain unmatched are carried forward to the general trading session. The opening price of these orders is determined in the following manner: Limit Orders i.e. orders wherein the price and quantity are already specified are carried forward at the same mentioned price Market Orders i.e. orders wherein the price and quantity are not specified are carried forward at: If the opening price was ascertained during the pre-open trading session but order not traded, then at the determined price If the opening price was not discovered, then they are carried forward at the previous day’s closing price   Stock Markets tend to be overwhelming for many investors. The concept of premarket trading can further compound the complexity level. However, as an investor, you should always remember that help is just around the corner. Professional experts like IndiaNivesh can help to simplify and demystify the entire process. The team at IndiaNivesh keeps a close eye on this Pre-market session to comprehend the mood and strength of the stock market. They track the pre-market stock prices and take the best decisions for your portfolio basis the market sentiments. Moreover, since they offer a wide range of services (broking, mutual funds, institutional equities, private equity, strategic investments, corporate advisory, etc.) they have a holistic view of the market and the economy. Their expert opinion can help you to amp up your investment game. You can read more about their offerings, vision and accomplishments on their website https://www.indianivesh.in/Disclaimer: "Investment in securities market and Mutual Funds are subject to market risks, read all the related documents carefully before investing."

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