When it comes to the stock market, there are different instruments for investors to put their money in. One such mode of investment for short-term traders and investors is futures and options.
What are futures and options?
Futures and options are derivative contracts. Derivatives are instruments whose value is determined by an underlying asset. For example, a stock future’s value is determined by the price movements of the underlying share. A copper commodity option’s value is based on the price movements of copper.
Derivative contracts are basically a contract between two or more people with regards to the underlying asset. These contracts are not settled. Only the price difference is exchanged between the parties.
Basics of Futures and Options:
Let us understand futures and options meaning.
A futures contract is an agreement between two or more parties where the delivery is fixed or committed. The difference between the market price and the contract price will have to be paid on delivery of the contract. A futures contract binds the two parties, i.e., the contract has to be settled. This means that at least one party benefits from the contract.
A futures contract can be based on any of the following:
Futures contracts must be settled between the parties even if one of the parties makes a loss in the process. The settlement date is usually mentioned in the futures contract.
There are two positions you can take in a futures contract. You can go “long”, which means you can decide to purchase or you can go “short” where you decide to sell.
Delivery or settlement in a futures contract is mandatory. However, in an options contract, you have the choice whether to settle the contract or not. It gives the investor a right but not an obligation to buy or sell the assets. This means an options buyer can disregard settling the contract if he finds there is no profit in it. The option holder can exercise the option at any point of time before the settlement date as well.
When buying an option, you need to pay a small sum called option premium. In case you don’t wish to settle the option, your loss will be restricted to the option premium amount paid. There are two types of options contracts:
• Call option
• Put option
In the call option, you go along with regards to the underlying asset, i.e., you are bound by the contract to purchase the underlying asset. A put option is the exact opposite where you are bound by the contract to sell the underlying asset. A call option trader believes the price of the underlying will exceed the contract price. In contrast, a put option trader believes the price of the underlying asset will fall below the contract price.
It is very important to understand the futures and options basics before investing in these instruments. Derivatives are inherently risky since the price movements cannot be predicted. You may want to take help from the research reports that are given by experts at IndiaNivesh Ltd. that will help you better understand the futures and options market.
How to trade in futures and options?
Futures and options are standardised contracts that are governed by the stock exchange rules. Since these are standardised, the minimum quantities of underlying assets are already stated by the stock exchange. The contracts between the two parties are fairly consistent with only the underlying assets, the delivery date and the price changing.
To invest in futures and options, you need to open a demat account and a trading account with a reputed broker like IndiaNivesh Ltd. It is possible to purchase futures and options online since these are listed on the stock exchange.
You can pick the futures or options contract you want to invest in through the trading account. For example, if you wish to purchase one lot of the index futures, you can pick that on your trading account and invest in it. In case of options, you need to pay a premium on the options contract.
The prices of futures and options change every day. As a trader, you can decide to sell your futures or wait till the end of the contract. These contracts can generally be of the following durations:
- Near month – one month
- Next month – two months
- Far month – three months
The profit or loss on futures and options is calculated daily and either debited or credited from the trader’s margin.
To trade in futures and options in stock market, each trader needs to maintain a margin amount with his broker. When a derivative contract is purchased, the entire amount doesn’t have to be deposited. Only a small margin amount has to be deposited. The profit or loss isn’t debited or credited to this margin account unless the derivative contract is sold or settled. In case the minimum margin amount is reached, the trader gets a call to infuse further funds into the margin account.
Brokerage on futures and options has to be paid when the futures or options contract is bought or sold.
A futures contract is settled daily and the value is carried forward the next day. For example, suppose a trader purchases Nifty futures for 8000. The first day, the Nifty goes down to 7900. This means the trader has made a loss of Rs. 100. This loss is debited from his margin account and the price of 7900 is carried forward the next day for settlement. This is called Marked to Market or MTM settlement. When the futures contract expires, the price on the day before the settlement date is compared with the spot price and the difference is settled.
The settlement for options contracts are a little different. While purchasing options, a premium has to be paid. The entire premium amount doesn’t have to be paid, only the difference based on premiums outstanding and receivable for each investor.
The options trader has a choice to sell the option before expiry and book his profits. The system automatically settles options contracts by matching them on expiry. The settlement value is the difference between the options value and the spot price.
Derivatives are complicated instruments which require a level of expertise before investment. If you are considering investing in F&O segment, then it is better to get the futures and options basics understood perfectly before investing to prevent losing any money. Be sure to restrict your trades till you get experienced to reduce your losses. However, if you’re a savvy investor, derivatives provide another means to earn from the price differentials in the market.
Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
What is Intraday Trading and How to Do It?Stock market offers numerous opportunities to traders. In fact, it is one of the daily sources of income for many people. The reason why stock market trading is popular is because it has potential to generate enormous wealth. Moreover, with the right trading strategy in place, the sky is the limit for making profits. In this article, we will learn about intraday trading meaning and its related concept.Let us first learn about what is intraday trading.What is Intraday Trading?Intraday trading or day trading is buying and selling the stocks or securities on the same day. To put it in simple words, intraday trading is squaring off the transaction on the same day it takes place. The main objective of the trader in intraday trading is to book profits on the same day and not carry any overnight position in the market.As you are now very well aware of the intraday meaning. Let us read about some tips that would help you in becoming a successful intraday trader. The tips for Intraday Trading are as follows;Intraday Trading Tips• Trade in Liquid StockSince intraday trading involves squaring off the transaction on the same day, trading in liquid stocks is recommended. Liquid stocks means the stocks that have higher volume and one can easily find buyers and sellers for these stocks. Intraday trade can be settled only when there are sufficient buyers or sellers to purchase or sell a stock. This is possible only when the trading volume is high in stock. • Follow the NewsAnother important intraday trading tip is following the news regarding stocks. Stocks which are in news are often the most volatile. Intraday traders want to trade in volatile stocks due to big price movement which gives them immense opportunities. Also it is easy to predict the price movement of the stocks that have news inflow. A positive news brings the price up whereas a negative news brings the price down. • Technical ChartsTrading on the basis of technical chart reading is always the best. Charts help in predicting the future price movement. The different patterns on the chart suggest the possible future movement in the stock price. Technical chart reading is possible only after good training. If you want to trade in stocks on the basis of chart reading, you can open a demat account with IndiaNivesh. • Prepare a Trading ListTrading in a particular script or stock gives you a better hold of those stocks. You are able to easily predict the price movement in those stocks and trade accordingly. One can prepare a trading list after detailed analysis and in-depth study of the stocks. • Resistance LevelsAnother important intraday trading tip is trading as per the resistance levels of the stocks. The resistance levels of the stocks is that level beyond which the stock does not move. A trader keeps a watch on the resistance levels of the stock and then takes a trade. When the stock breaks the resistance levels, the trader quickly takes a position in that stock and grabs the advantage of sudden price movement. • Top Gainers and Top LosersTop gaining and losing stocks of the day offer immense opportunity to traders to trade in them and make a good profit. However, the selection of stocks for trading must be done carefully. Blindly following the list of top gainers or losers for intraday trading can lead to heavy losses and wipe out your capital. • Weekly Movement of StocksThe traders often trade in stocks after seeing their weekly price movement. They take the position in the stocks after studying the weekly close of the stock price. A detailed analysis of stocks suggests which stocks are suitable for intraday trading. As you are now aware of the tips for intraday, let us have a look at how to do intraday trading.How To Do Intraday TradingThe first and foremost requirement for Intraday Trading is to open a trading and demat account. The demat account can be opened with any broker who provides these services. Selection of a broker must be done by comparing the brokerage rates and services offered by the different brokers in the market. IndiaNivesh is one such broker that provides hassle-free services at competitive rates. After opening the demat account, the beginners in the stock market must know when they can execute intraday trades and the timings of the market. Timings of the Stock MarketThe stock market in India is open from Monday to Friday. Saturday and Sunday are holidays. The stock markets opens at 9 a.m. and closes at 3.30 p.m. The intraday traders can take positions in the stocks during the above-mentioned time period. It is recommended by the experts to avoid taking any trade position during the first trading hour of the market as during that time the stock market is volatile and taking an intraday position can be a risky strategy.Let us now have a look at the benefits of intraday trading.Benefits of Intraday Trading There is no risk of taking overnight positions in intraday trading. Any adverse event after the closure of the market does not affect the intraday trader. In intraday trading, traders have higher margin in comparison to the investors. The potential of Intraday Trading to generate returns is very high. If right trades are taken, an individual can make fortune out of intraday trading. The brokers often give a discount to the intraday traders and charge lesser brokerage. The goal of the Intraday Trading is to generate higher profits. If you are a beginner in the stock market, you can start intraday trading with lower amounts initially. And when you are well equipped, you can slowly increase the trading amount. All you need to do is trade in the right stock and understand the correct entry and exit points of the stock.Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
Investing in equities is one of the best ways to grow your capital to reach your financial goals. You can either invest in equities through the secondary market, where you buy shares that are already traded in the market or you can invest in the primary market through an IPO or Initial Public Offer. IPO investments are generally considered very risky since the market has not evaluated the performance of the company. In some cases, the shares lose their value on getting listed and that may take years to recover. However, there are benefits to this as well. The company shares may skyrocket in sometime and you may earn huge profits as well. It is possible to make smart investment in IPOs by asking a few questions before you invest. IPO investment is not simply investing in a popular issue. It is a legitimate way to increase your earnings through capital gains and dividends. This is why it is better to know the company before putting your funds in it. Here are 5 questions to ask before you invest in an IPO: 1. Company financials:Before putting in your hard earned money in an IPO investment, it is important to look at the company financials. There are a few indicators that you can check as a potential investor: Sales, operating profits and net profits quarter on quarter Expenses and composition of expenses such as sales expenses, administrative expenses, depreciation Debt levels Assets Cash and cash equivalent balances among others To evaluate the performance of a company, there are certain financial ratios that you can calculate. These ratios measure the performance of the company in terms of utilisation of assets, composition of assets, financial health etc. Some important ratios to calculate are: Debt equity ratio which calculates the ratio of debt and equity in the company’s balance sheet. The ideal debt equity ratio is 2:1, which means the debt should not be more than 2 times the equity of the company. Return on Equity ratio measures the income earned for the shareholders. This ratio can be compared for each year to find out whether the company is growing its earnings. Current ratio measures the ratio of current assets to current liabilities. This helps to understand whether the current assets will be enough to meet the current liabilities when they fall due. The ideal current ratio should be 2:1 at the least. Quick ratio measures the quick assets i.e. current assets without illiquid assets such as inventory and debtors against current liabilities. The ideal quick ratio should be 1:1 ideally. By evaluating these ratios, you can get an idea about the financial performance and health of the company. This can help you decide whether the investment is worthwhile or not. 2. Peer performance:This is a crucial indicator while making an investment decision. Peer performance should be evaluated in a similar manner to the company’s performance i.e. by checking financial ratios and the expense and income figures. An important part of this analysis is to also look into the sector in which the company is operating. If the company is operating in a distressed sector, or a sector facing a lot of structural issues, it is probably better to avoid investing in the IPO and decide to invest at a later date. 3. Share valuation:Each company that is about to list puts out its share valuation. There are different types of issues; fixed price issues where the price is decided and a book building issue. In the book building issue, the share price is usually set up as a price band and the final price depends on the different bids received. The cap price is a maximum of 20% of the floor price. The company has to disclose the basis for valuation of shares in their prospectus. The prospectus is available on the stock exchange websites and on the company website. 4. History of the company:This doesn’t refer to just the financial performance of the company. It also refers to how the company grew to its present size. It also includes information about the company promoters and the current management team. A company’s management can go a long way in determining its future success. One way to find out about the history of the company and its current and future growth potential is to read the annual reports of the company. As a part of the Director’s Report, there is generally an exhaustive summary on the company’s past and an outlook for the future. It also briefly touches on the management. It is important to look at the number of directors in the company, especially independent directors. The reason for doing such exhaustive fundamental research is because a strong management team will ensure funds are used properly to grow the company. 5. Fund usage: As per SEBI rules, a company that wants to list its shares on the stock exchange has to disclose the usage of funds in the prospectus. It is important to verify the reason for the company’s listing. A listing is essentially a fundraising exercise. If you’re recommended investing in a particular IPO, you can question before investing in IPO. Most companies use the funds for their growth and expansion. Besides the above 5 factors, there are numerous other small points that you may want to consider before investing in an IPO. Wondering where you can find these? Well, you can refer to the research reports by experts in the field. You can find such reports from IndiaNivesh Ltd. and you can get them by opening an account with IndiaNivesh Ltd. If you’re wondering how to invest in IPO in India, there are two ways: Offline investment Online investment In an offline investment, a form needs to be filled up by the investor and share ASBA account details. This needs to be submitted to your broker who will enter it in the system and submit your application. Online investment in an IPO is possible through your trading account. If you’re thinking on how to invest in IPO online then you can check your online trading account for an option to put in a few lots. Once the issue is closed and shares are allotted, the money will get debited from your bank account. By making sure you do adequate due diligence, you can ensure you use an IPO to grow your capital. Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
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