5 things to keep in mind while dealing in the derivatives segment

5 things to keep in mind while dealing in the derivatives segment

Do you remember the first time you got on to a cycle? Your parents fitted the bike with side wheels so that you don’t fall. They also equipped you with a helmet and safety pads to avoid any injuries. Similarly, every time you start a new venture, it is best to know the precautions you should take in the currency derivatives segment in order to avoid making mistakes. This principle applies to the derivatives market too. Here are a few precautions you need to keep in mind when you deal in a derivatives segment.

1) Options before futures
In a futures contract of a derivative segment, you are obliged to follow through with a trade on a designated date and a specific price. For example, you may enter a futures contract to buy 100 shares of stock X at Rs 50 per share after three months. If the price of the share goes beyond Rs 50, you stand to benefit but if it lingers below Rs 50, you would be making a loss.
But in an options contract, you can cancel the contract. In other words, you have the right to buy the stock but not the obligation. Your risk is limited to the amount of money you pay to buy the option. That’s why, if you are a novice investor, it may be better to start with options before moving on to futures trading.

2) Avoid illiquid options
In the derivatives segment in stock market, liquidity means that there are active buyers and sellers of a stock at all times. Generally, individual stocks are more liquid than options. This is because traders buy and sell the same stock in the market. But in case of options, there are multiple contracts available in a derivatives segment. You can choose different options with different time limits and strike prices. As a result, a few options can be illiquid as well because there may be little to no trading going on.

When this happens, the spread between the bid price (how much an investor is ready to pay) and the ask price (how much an investor is ready to sell for) can be huge. When you choose an illiquid option, you may either get an unfavourable price when closing a position or may have to hold the option all the way until it expires.

3) Don’t trade without knowing the associated risks
A number of factors can affect your position in the derivatives segment in market when you undertake a future or an option contract. International price movements, macro-economic factors, changes in government policies and market volatility are some of the factors that could impact price movements. Be aware of all these associated risks before you trade any contract in the market.

4) Avoid market rumours
It is very important to take a calculated and informed decision when it comes to trading in the derivatives segment in share market. The internet is full of rumours and unsolicited tips regarding the best contracts that can help you make money. Don’t pay heed to these tips. Conduct your own research and find out the best transactions that fit into your overall investment plan.

5) Use your call options wisely
A call option offers the buyer the right to purchase a stock at a pre-determined price (also known as strike price). However, a big risk of using options is selling shares of a stock if you don’t already own it. This is known as a short call. This means you are selling a call option and you have to buy the stock at a fixed price in the future. This can pose a big problem if the stock price goes beyond the strike price. You would be forced to buy the shares at a market price that is much higher than the strike price; thus resulting in a loss. It is best to avoid short call until you gain experience in the derivatives market.

To sum up
The derivatives field is large and full of potential. There are a lot of different ways you can make money in this field. However, if you are a beginner, it is important to be cautious when you invest through derivatives. The above list highlights some of the precautions you can take in order to invest successfully in futures and options.

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


What is Online Trading – Meaning, Tips & Benefits

Trading in the stock market has rapidly evolved in the last 30 years. From earlier offline trades done via the phone, we have moved to a trading ecosystem that is completely online. Offline trades earlier used to involve investors calling their brokers to relay an order. After the order was confirmed, the broker would go to the stock market floor to execute the order. The stock markets operated on an open floor trading system where brokers would call out their orders and the prices and transactions would get finalized. This was also called as open outcry where brokers would use hand signals and gestures to communicate with each other. Once the order was finalized along with the price, the share certificates switched hands and also owners. This transfer of share certificates was marked in ink behind the share certificate stating the change in ownership. Once this transfer was done, funds would change hands indicating that the transaction was complete. As cumbersome as this process may sound, all stock transactions the world over followed this system till the 1980s after which stock exchanges slowly began transitioning to dematerialized shares and online trading. What is online trading? Online share trading is nothing but transacting, i.e., purchasing and selling shares online. This is done through the broker’s online trading system. The broker’s online trading system is registered with the stock exchange’s online share trading system and can thus be used to conduct trades. Some of the instruments that can be traded using an online trading account are: • Equity shares• Mutual funds• Bonds• Derivatives• Commodities• Currencies• Any other listed funds Online trading is a convenient way for a person to begin investing in the stock market. It is no longer necessary for your broker to find the right price match based on your orders. This process can completely be done online through the exchange’s price matching mechanisms. Instead of brokers competing to find buyers, the system operates through a matching mechanism where buy orders and sell orders are matched based on the price. The price of the instrument can be obtained from the listed price on the exchange. Online trading allows an investor the flexibility to choose the price at which he wants to sell the instrument and depending upon the order matching system, the order is fulfilled when it is matched. The fund transfer and securities transfer happens within the next two days of the date of transaction, thus making the entire process seamless. With the introduction of online trading, India is looking at an increased participation from first time investors in the financial markets. Online trading in India is extremely easy and each broker provides videos, blogs and customer support to ensure their customers can trade on their platforms with ease. Online trading allows the investor to set different types of orders such as: • Market orders• Stop loss orders• Limit orders These accounts allow the investor to access their holdings and make immediate decisions to enter an instrument or exit it. Benefits of online trading: 1. Cost:The biggest advantage of online trading is the brokerage costs. Trading using an online system is cost effective not only for the broker but also for the investor. The absence of a human element allows brokers to slash their brokerage costs, which makes it very cost effective. 2. Efficiency:Online trading is very efficient. There is very little room for human error. An order once placed is almost always executed. Plus, your online trading account sends emails and messages on the confirmation and execution of orders. 3. Research reports:Most brokers offer a wide range of market research reports and analysis about different market instruments. These research reports give you an insight into the share market. You can rely on these reports because you know that these are made by industry experts. Thus, a research report from a good broker is also bound to save you time that you would otherwise spend in doing research. 4. Scrip tracking:It is possible for investors to track different shares that they’ve invested in. Online trading provides the investor a chance to track the movement in shares. It provides reports like price movements over a period of time, the different buy and sell orders currently placed in the market etc. 5. Watch lists:Traders can put a few shares in their watch lists which provides an easy way for them to track the prices of the stocks that they intend to purchase.. 6. Speed:Using an online trading account is extremely simple. It allows a person to execute a trade in a matter of a few seconds. How to trade online? 1. Open a demat and trading account:The first step to trading online is to open a demat and trading account. A demat account is an online repository or record for all your investments. Whenever you make a trade, the instruments such as shares are debited or credited from your demat account. A trading account is an account that enables you to buy and sell in the stock market. 2. Learn all about the different instruments:For novice investors or traders, it is very important to understand the different instruments and learn about how the markets work. This can help place the right trades and use the stock markets to earn a return. With many resources available online, it is easy to learn all about the market. Before you invest or trade, make sure you know where you’re investing. 3. Pick your investing strategy:This step means to decide if you’re an investor or a trader. If you’re an investor, you are investing for the medium to long term. Traders generally focus on short-term trades which can either be intraday trades or trades over a few months. Both these strategies are vastly different so it is important to know what your strategy is for each stock or mutual fund when you invest. 4. Make your trades:The final step to online share trading is to place the order and make the trades. Depending on your investment strategy, you can purchase or sell the shares. Remember to track your shares and exit at the right moment so you can achieve your earning targets. Online trading meaning has evolved over the years and has made investing and intraday trading affordable and accessible to a large number of people. Considering investing online? Well, why wait? Open a demat and trading account with a leading broker like IndiaNivesh Securities Ltd. Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

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How to select the right debt asset

Did you know there is a whole different world of investments apart from stocks and equity mutual funds? Welcome to the world of debt investments. If you are interested in a steady income, capital protection and tax benefits, then debt investments are the right choice for you. Public Provident Fund (PPF), bonds, debt mutual funds and gilt funds are some of the popular debt funds available in the market. However, before you invest, there are a few important factors you should keep in mind before considering debt funds.How to select the right debt fund investment:a) Past performancePast performance of a debt fund investment is no guarantee of future performance. Yet, it is important to check out how a fund has performed in the past. This is specific for debt mutual funds and it can help you get a better idea of the fund before you invest. Check how the fund has offered returns over different time periods such as six months, one year or even five years. Also compare the debt fund performance against the benchmark in the sector. For instance, a fund may offer 9% returns and you might think it is the best debt fund for 6 months to invest in. But when you compare against the benchmark, you may find that there are other debt funds that offer better returns. As an investor, you should seek to choosing the right debt fund possible for investment. b) Yield to maturityYield To Maturity (YTM) is defined as the total returns expected on a bond if the bond is held unto maturity. In other words, if you invest in a bond and make all the scheduled payments regularly, YTM is the internal rate of return on your investment. It is expressed as an annual rate. YTM is a good measure to estimate if it is worth buying a bond or not. There are many online calculators to help you find out the YTM of a bond. If you find that the returns on the bond are lesser than your desired yield, it is better to search for a more suitable bond. You can also use YTM to compare different bonds that have different maturities and coupon rates. c) Investment goal of the assetThere are many different debt instruments in the market and each asset has a specific investment goal. That’s why it is important to identify an instrument whose investment goal matches your personal investment goal. For instance, imagine you want a regular income and a low level of risk. For this, it is best to invest in government bonds or gilt funds since they offer regular interest payments and they carry very low risk. d) Withdrawal facilityPublic Provident Fund (PPF) is a very popular debt instrument for many investors in the country. It provides a fixed rate of return and offers a high degree of protection to the invested capital. However, it is important to remember that PPF is a 15 year scheme. You cannot make premature withdrawals or closures without meeting certain conditions. In comparison, a debt mutual fund allows you to withdraw amounts whenever you require. This is not to say that debt funds are better than PPF. Instead, it is to inform that in case of emergency, you should know which assets allow quick access to funds. Make sure you know all about the withdrawal facilities available before you invest. ConclusionAs an investor, your primary goal may be to earn the best returns possible. But that shouldn’t keep you from exploring other benefits. Different assets come with different advantages and disadvantages. By keeping the above factors in mind, you can identify the best debt assets that are ideal for 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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  • Mutual Fund Performance - Five ways to measure Mutual Fund Performance

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A well-diversified portfolio helps you to mitigate the risks associated with investing in funds focussed on too few stocks or sectors or asset classes. So, to ensure that you achieve the desired results, you should review the holdings in your mutual fund. You can check the portfolio of your mutual fund by looking at the fund fact sheet. 5. Expense RatioOne of the biggest challenges for mutual funds is the high fees associated with it. Running any mutual fund involves costs that need to be borne by the investor. The expense ratio is the percentage of money spent to pay the salary of the fund manager, his team and other expenses. So, if the expense ratio of a mutual fund is high then it will reduce the overall returns generated by your mutual fund investments. So, while choosing a fund you should also see that the expense ratio is not very high. 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