Know What is Pre-Market Trading & How it Works in Share Market

Posted by Mehul Kothari | Published on 21 Nov 2019
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Know What is Pre-Market Trading & How it Works in Share Market

Most of us are aware that trading takes place on the stock exchange between 9.15am and 3.30pm. But what if we told you that it is only partially correct. Some trading (though low in volume) also takes place during the extended trading hour periods. Read on to know about more about this additional trading window and its significance.

What is Pre-Market Trading

Pre-market Trading is a global phenomenon and refers to trading that takes place before the usual trading hours. The usual trading hours for Indian stock markets is 9:15 am to 3:30 pm. Pre-open market stock trading is a special trading window of 15 minutes prior to the start of the working hours for the stock markets. Hence, the time frame between 9:00 am and 9:15 am is considered as the pre-open market session. This feature was first introduced by NSE and BSE in October 2010.

The objective behind a pre-market trading

It was observed that there was tremendous volatility in the first couple of minutes of trading hours. The core objective behind having a pre-market trading session is to stabilise the market especially when heavy volatility is expected due to some overnight major events or corporate announcements. These could be election results, reforms or new economic policies, declaration of mergers and acquisitions, delisting of shares, open offers, change (especially downgrading) in credit ratings, debt-restructuring, market rumours etc.

The additional 15 minutes allows the stock markets to arrive at the right premarket stock price and not get carried away by external events or announcements. In India, premarket future or options trading is not permitted.

Pre-market Trading Session – Breakdown of the 15 minutes

The premarket trading period can be further bifurcated into three slots:

Order Entry or Collection
The Order Entry session starts at 9:00 am and lasts for eight minutes. The following activities are undertaken during this timeframe

  • Placing of orders for purchase or selling of stocks
  • Changes or modification in orders
  • Cancellation of orders

After 9:08am (i.e. completion of order entry session), orders are not accepted by the stock markets


Order Match
The Order Matching session starts at 9:08am and continues for the next four minutes. The following activities are undertaken during this timeframe

  • Confirmation of orders placed during the Order Entry session
  • Order Matching
  • Calculation of stock opening price for the regular session that starts at 9:15am

During the Order Match session, one cannot buy, modify, cancel or sell their orders. Limit orders (i.e. order quantity and price is specified) are given priority over the market orders (order quantity and price are not specified) during the execution time.


Buffer Time
The last three minutes of the premarket trading session (i.e. 9:12 am to 9:15 am) is considered as buffer time. 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."

PREVIOUS STORY

Systematic Withdrawal Plans – How to use SWP?

Posted by Mehul Kothari | Published on 20 Nov 2019

Mutual Funds are to financial markets what star kids are to Bollywood – the talk of the town. Campaigns like “Mutual Funds Sahi Hain” have helped to spread awareness about the benefits of mutual funds to the masses. One of the most commonly used MF terms is SIP or Systematic Investment Plans. However, not much is known or talked about its better half – Systematic Withdrawal Plans or SWP. SWPs are considered as the opposite of SIP. Read on to know more about SWPs and how it can be beneficial for you. SWP – Meaning in Mutual Fund parlance Systematic Withdrawal Plan is a facility which allows investors to take out a pre-decided amount from their existing Mutual Fund investments at pre-determined time durations. The frequency of withdrawal can be chosen by the investors basis their requirements. It can be monthly, quarterly, bi-annually or annually. Basis the amount withdrawn in SWP, the equivalent units (as per the NAV on the day of withdrawal) are redeemed. Key features of SWP in Mutual Funds: It generates a regular stream of cash inflows Offers flexibility to investors in terms of withdrawal amount and frequency Can be started at the time of starting investment in a Mutual Fund scheme or can be activated at a later date in an existing scheme. Many investors prefer the SWP route to dividends. This is because dividends attract DDT (Dividend Distribution Tax) while long-term capital gains (till Rs. 1 Lakh) under SWP are exempt from tax. There is an option in SWP to customize the withdrawals: Fixed Withdrawal Option - You can decide to take out a specific amount on a periodic basis. Appreciation Withdrawal Option- If you want to preserve your capital, you can decide to withdraw only the amount of capital gains.  Setting up a Systematic Withdrawal Plan is a simple process. All you need to do is fill up the SWP Form (with the details like the amount to be withdrawn, periodicity etc.) and submit to the fund house or your distributor. Benefits of Systematic Withdrawal Plan Mutual Funds:1. A fixed source of income Systematic Withdrawal Plans become a fixed source of income for investors. For working individuals, it helps to supplement salary or business income. It can also be used as a steady source of income post-retirement.2. Discipline Just like Systematic Investment Plans, SWPs also help to instil a sense of disciplined investing. In SIP you need to invest a fixed sum of money on a regular basis. SWPs automatically redeem pre-determined units of mutual funds, irrespective of market levels. One can plan their monthly expenses as per the SWP amount, which will help them to remain within the budget. Secondly, the fixed withdrawal limit protects you from impulse sell or buy decisions in case of market fluctuations.3. Rupee Cost Averaging Rupee Cost Averaging enables investors to eliminate the need to time their market related decisions. Mutual Fund’s Net Asset Value(NAV) keeps on changing from time to time. Through SWP, investors get the average NAV of the MF over a long duration of time. Hence, it protects them from market fluctuations and ensures that investors do not become dependent on any particular NAV.4. Tax efficiencies From a tax perspective, each withdrawal under SWP is treated the same as equity or debt mutual funds. As the tax is applied only on the amount redeemed, SWP becomes a more tax-efficient alternative as compared to Fixed Deposits or lump sum withdrawals. They are preferred to Dividend Plans too for the same reason. Dividend payouts attract DDT (Dividend Distribution Tax) which is deducted by the AMC before the payout. SWP allows  optimising the tax on capital gains by holding the investments for a longer tenure and splitting the income over multiple time periods. How to use SWPs effectively? All investors can benefit from SWP in Mutual Funds. Here are some examples in which you can include them effectively in your financial planning- Retirement Planning SWP is a great strategy to fund financial needs post-retirement. This facility is especially handy for retirees who do not have a pension or other such regular source of income. Supplement salary income Salaried individuals can use SWP as a second source of income. It can help them fund specific financial goals such as children’s education, purchase of consumer goods, paying off loans, etc. Freelancers The biggest challenge faced by freelancers or self-employed professionals is lack of a steady or fixed income. There may be months where they would be minting money but there could be some dry spells as well. In such cases SWPs help to bring stability to one’s financial life. Nearing your financial goals Many investors use SWP in an extremely smart manner, especially when the markets are doing well. They invest in an equity mutual fund as they have the potential to generate higher returns. Once they reach their desired corpus, they can opt for an SWP. Through this facility, they move the funds from the equity investments to a relatively safer/ non-volatile option such as Bank Deposits, etc.   Final Words Systematic Withdrawal Plans help to cultivate a sense of financial discipline. It can be effectively used as a means to fund your monthly expenses or finance your (or your parent’s) retired life. Not only does it offer regular income but also ensures a controlled and budgeted approach to spending. However, you should try to withdraw only the interest part and keep the capital amount intact. In case you are unable to decide how much is too much, it is best to seek the help of an expert like IndiaNivesh. The team at IndiaNivesh can help you choose the right Mutual Fund scheme and the correct SWP amount basis your financial needs and investment tenure. They also offer a wide range of financial solutions related to broking and distribution, institutional equities, strategic investments, investment banking and wealth management. You can read all about them on 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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Risk Management – What is Risk Management & its Process

Posted by Mehul Kothari | Published on 21 Nov 2019

Risk management is the process of identifying risks, analyzing them and taking adequate measures to curb these risks to achieve the desired results. The term financial risk management is most often associated with businesses; it is equally important and applicable to your investment portfolio. Risk management process in financial investments comprises of determining the risks that exist for the particular investment and implementing strategies to mitigate the risk in the way. Risk management is an important aspect of investing as it helps reduce the risk depending on your individual goals.    Whenever you make investments, you try to look at the potential returns from the investment. However, just like the returns, there is also a degree of risk attached to the investment. Your choice of investment will depend upon your financial requirements and the level of risk you are willing to take for your investments. Types of risk management Longevity Risk People today are living healthier and longer, thanks to the rapid advancements in the medical world. However, living longer also means that you need to plan your investments for a longer retirement. This risk of outliving your money is known as longevity risk. You need to take adequate measures to limit this risk. Some of the ways to can mitigate this risk are by investing for retirement corpus from an early age; keeping a high savings rate in working years, look out for second employment post-retirement, etc. Inflation Risk Inflation is a constant increase in the cost of goods and services in the country. Inflation reduces the purchasing power of money and higher inflation means we can buy fewer things in the future as compared to the past or present for the same amount. As an investor, you need to select assets and implement investment strategies that have potentially higher returns much above the rate of inflation. When you are investing in fixed income instruments such as a Bank FD, Corporate bonds, etc. always be watchful that the return on investment is above the inflation rate. Interest Rate Risk Change in the interest rate can affect your portfolio. When the rate of interest is high, there is a decrease in the value of corporate bonds. A higher interest rate can have impact on an industry or a sector, which in turn could affect your equity investments if they are impacted negatively by the increased rates. Diversifying your investments in different asset classes, choosing debt investments of varying maturity can help you limit the risk associated with the changing interest rate. Liquidity Risk Many people associate liquidity risk with just real estate investments. Undoubtedly real estate is one of the most illiquid assets, but many other investments to have a lock-in period and pre-mature withdrawal attracts a penalty. To protect yourself from liquidity risk, it is important that you have an emergency fund in place and also limit your exposure in assets which are difficult to liquidate or involve incurring expenses. Market Risk Market risk is the risk associated with the decline in the value of your investments due to economic or other developments, which affect the entire market. Market risks are unavoidable when you make any investment, however, you can lower the impact on your investments through adequate measures. As an investor, have a well-diversified portfolio in different asset classes such as equity, debt, gold, etc. as not all the assets would not be affected in the same way or magnitude in any development. Moreover, you can reduce the risk of wanting to time the market by buying stocks at different times to average out the cost of your investments. Credit Risk Credit risk applies to debt investments such as bonds and corporate FDs. It is the risk of the inability of the issuing entity to repay the interest and/or interest on maturity.  As an investor, you can mitigate credit risk by looking at the credit ratings of the issuer. Higher the rating, the lower is the risk. AAA bonds have the lowest credit risk.   Risk management process to mitigate the various types of investment risk in your portfolio Goal setting and investing as per your requirement Investments are made keeping in mind your individual goals and needs, your time frame of investment and your tolerance to risk. Once you are clear about all these things, you can allocate your savings in assets which would help you achieve your goals in the desired time frame.  It is important to remember that long-term investments in growth assets may be volatile in the short-run and you should not make any hasty decisions. Portfolio Diversification Diversification is the process of distributing the investments in your portfolio in different asset classes. Diversifying your investments in different assets such as stocks, bonds, commodities, gold, etc. helps reduce the overall risk of your portfolio as the performance of all the assets is not correlated and in a given economic condition the performance of the asset classes will not be same. Diversification is one of the most crucial risk management techniques for you to mitigate the risk of your investment portfolio as it helps you to take advantage of the different price movements of different assets. Regularly monitor your investments Depending on the performance of various asset classes in your portfolio, their percentage holding in your portfolio may change from the original allocation. Thus, monitoring your portfolio regularly and rebalancing would ensure that your portfolio remains well-diversified. Take financial advice from experts Financial planning and risk mitigation of your portfolio requires knowledge, time and expertise. Taking the help of financial experts, who can guide you to select the right financial products as your risk profile and unique investment needs. Conclusion A disciplined approach to your investments and sticking to the basic principles of risk management will help you achieve your financial goals. If you are unsure on how to manage risk of associated with your investments and need guidance to help you prepare a portfolio most suited to your investment needs and minimising risk, you can consult our financial advisors at IndiaNivesh who can help guide you through your investments and also manage your portfolio risk. 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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They directly play a part in the growth of India's economy and allows investors and borrowers to trade in financial products and services in an easy and smooth manner. To take advantage of the Financial markets and varied investing opportunities, consider the team at IndiaNivesh, which is well-versed with types of markets and regulatory bodies.   Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

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  • SIP – Different Types of Systematic Investment Plans in India
    Posted by Mehul Kothari | Published on 15 Jan 2020

    Mutual funds now are a household name and building a mutual fund portfolio is synonymous with wealth creation. As the mutual fund industry continues to grow leaps and bounds, SIPs are considered one of the key growth drivers for this industry. SIPs help the investors to invest in a systematic and disciplined manners. Online SIP investments starting with Rs 500 per month (for few schemes min SIP amount is as low as Rs. 100 per month); digital distribution and hassle-free onboarding of investors, all have resulted in making an investment for SIPs most favoured investment option. To stay relevant with times and improvise their offerings, AMCs now offer many different types of SIP so that investors can choose the most suitable type of SIP for investment best suited to their individual needs and profile. Here are the different types of SIP investment available for investors- 1. Regular SIP One of the simplest and easiest forms of SIP investment is a regular SIP, wherein you invest a fixed amount at regular intervals. The time interval can be monthly, bi-monthly, quarterly or semi-annually. You can also choose daily or weekly SIPs, though it is not recommended in most cases. When you make your first SIP payment, you are required to choose your desired time interval, amount of the SIP and the tenure of the SIP. In a regular SIP, you cannot change the amount during the tenure of the investment. If you are a salaried employee, choosing a monthly SIP, usually in the first ten days of the month, once your salary is credited to your bank account is highly recommended. 2. Step-up SIP Without a doubt, SIPs help brings about financial discipline in your life. Over time, as your earnings increase, it is important to increase your investments as well so as to keep them aligned with your income level and financial goals. A step-up SIP, also termed as a top-up SIP, is an automated solution to increase your SIP contribution either by a fixed amount or a fixed percentage after a specific time. Using Step-up SIPs will help you reach achieve your goals faster and also help in long-term wealth creation. 3. Flexible SIP For investors with irregular income, even after being well aware of the benefits of SIPs, the biggest reason for not starting a SIP is not being able to keep up with the fixed periodic investments. A flexible SIP is a perfect solution for such investors as it gives the flexibility to start, pause, decrease or increase your SIP. Depending on your flow of funds, you can change the SIP amount seven days before the SIP date. In case, there is no intimation of change, then the default amount entered is deducted for the SIP. 4. Perpetual SIP Normally, when you choose a regular SIP, it has a fixed tenure, with a starting date and an end date. But, if you are unsure about how long you want to continue the SIP, you can opt for a perpetual SIP. In case of a perpetual SIP, you leave the end date column blank and you can redeem your SIP once you have reached your financial goal. If you opt for a perpetual SIP, then it is important that you monitor the returns of your investment, to keep a track of the fund’s performance over time. 5. Trigger SIP A trigger SIP is for seasoned investors, who have sound knowledge of the financial markets and are accustomed to tracking the market performance daily. Using a trigger SIP, an investor can choose an index level, a particular event or NAV to start the SIP. An investor can set trigger points for upside and downside conditions and can redeem the amount on achieving the pre-specified target. Investors can oscillate their investments between debt and equity schemes within the same fund house. A trigger SIP is recommended only for investors who have a thorough understanding of financial markets. 6. SIP with Insurance Insurance is an important part of financial planning. In order to make mutual fund offerings more lucrative, certain fund houses offer free insurance cover if you opt for SIPs with a longer duration. The initial cover is usually ten times the first SIP and gradually increases over time. This feature is only for equity mutual fund schemes. The term insurance offered is just an add-on feature and does not impact the performance of the fund. 7. Multi SIP The multi-SIP enables starting SIP investment in multiple schemes of a fund house through a single instrument. This facility can help investors to build a diversified portfolio. Investors can start SIP in various schemes using a single form and payment instruction, thereby reducing the paperwork involved.   CONCLUSION Over the last few years, SIP returns have earned investor confidence and are the most preferred investment option of retail investors. If you are unsure on how to choose the right SIP for you and want correct guidance, then consult our expert financial advisors at IndiaNivesh for best-suited SIPs for investments.

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  • SME IPO – Meaning, Procedure & Benefits of SME IPO Listings
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A site visit is also conducted by officials at the company’s site. The promoters will be called for an interview with the Listing Committee on satisfactory completion of documentation and site visit and issue an in-principal approval. The Merchant Banker can then file the prospectus with the ROC along with the opening and closing date of the issue. On approval from ROC, the company will intimate the exchange with the required documents and opening date of the issue. As per the schedule, the IPO will be opened and closed to the public for allotment. The company will then submit the documents to the exchange for allotment. Once the allotment is over, the notice of listing and trading of the shares will be issued How can the companies benefit from SME IPO listing? The SME Capital Markets have helped many companies scale up their business. 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