online trading
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online tradingTRANSCRIPT
ONLINE TRADING
INTRODUCTION:
The introduction of the Internet has surprisingly changed our way of life as a society. It has defined the way we do business and the way we correspond. The Internet has opened many opportunities for online trading. The financial industry revolves around the Internet. Everything is just a few clicks away. This makes online trading most convenient. But there are still investors who prefer the old fashion way of offline trading and they mainly prefer offline trading for security reasons.
Internet has introduced a way for consumers to manage their money online. Not to mention, Internet has transformed the way investment companies operate their business and has made it easy for private investors to gain straight access to a range of different markets and online tools that were at one point only reserved by the use of investment professionals.
Consumer investing and online trading has dramatically changed over the last decade. Online trading dynamically continues to be redefined. Services have expanded to include integrated management of additional financial accounts. Not to mention, it has subsequently expanded in conjunction with ground-breaking improvements to the traditional trading interface, such as telephone interface systems.
Internet doesn't really change everything nevertheless it definitely changes the approach we work. We all learn in the old-style businesses that we have done in the past such as offline trading. With the advent involving internet we have seen a great deal of improvement in the way trading takes place through online trading. It is among the most affordable means with trading now. You necessarily don't have to be present at a Stock exchange center to know the proceedings in the
market. Here you are unbiased and self-sufficient with knowledge and experience.
Need and importance of the study
Company profile:
Introduction of AVNI Group
“AVNI Group of Companies” is an organization of a highly motivated, disciplined and trained team of Professionals, Managers and Consultants, who day-in-day-out strive to implement cutting edge solutions in
• Debt Syndication, Corporate Finance Advisory, Private Equity and Wealth Advisory
• Equity and Commodity Broking, Insurance Broking and Advisory
• Business Travel and Hospitality Solutions, Ticketing, Vehicle Leasing
• HR Consulting, Training, Finishing School and Talent Pool
• Construction and Property Management Solutions
• Alternate Energy Solutions, Solar and Electrical Instillations, Project Management
• Telecom Solutions, Retail Sales and Distribution, Office Supplies
Our services touch every aspect of commercial and retail domains. We consider being amongst the leading emerging corporate groups in India in the space of Refined Business Intelligence with dedicated focus on t very important aspects which become an integral part of Business Administration.
Our strong confidence comes from our Intellectual approach and a Robust Business Model, Willingness to take on challenges and see them through is our
hallmark because, we know that challenges are the steps of the ladder that takes us higher and higher. When quality and trust are the benchmarks of a good working philosophy, we try to set new standards in the space of our operations.
Our whole-hearted commitment to serve our clients and investors is the booster fuel that propels us forward. We're driven by innovation and we live by it. In our organization, quality and excellence is not just an integral part of the system; but also they are a quintessential part of our very being because, without high standards, we don't measure up to our own ideals.
The AVNI Group of Companies was founded in 2009 and since then we have pursued an unstinted path of growth despite competition. Growth with a social conscience has been our motto. Our long-term goal of building a Global, Multi-product, Multi-brand Company is now becoming a reality.
With the bricks of inveterate faith in ourselves was laid the foundation of the AVNI Group of Companies, and we have since then built a platform where a bright future is churned out every moment we breath. We look forward to bring prosperity to our investors, security to our employees and productivity excellence to our customers and business partners. We plan to follow this path for a long time to come.
AVNI Financial Advisors Pvt Ltd
Financial Advisors is the first entity that came into existence under the AVNI Brand, to be one of the leading Wealth Advisors and Syndicating Partners in the space of Wealth management, broking, Retail and Business Loans, catering to the Financial requirements using the good offices and experience. The company supports the client as a professional and able advisor in guiding one’s financial requirements as an END to The Company has its primary vested interests in Wealth Management by able asset management and advisory (Distribution of Financial Products); Support in Fund Raising Activities like commercial finance/ Debt Syndication/ Private Equity as a Consultant; Proprietary investments into Group Companies as a Principal Sponsor and other activities in financial services.
- Equity and Commodity Broking (Franchisee Model)
- Currency and SPOT Markets Advisory
- Corporate Finance Consulting & Advisory
- Retail Loans Sales & Distribution (DSA Model)
- Third Party Advisory sales and Advisory
• AVNI Managerial Solutions Private Limited
• Credible Insurance Solutions Private Limited
• AVNI Hospitality and Management Services Private Limited
• AVNI Power and Infra ProjectsPrivate Limited
• Suvida Developers (Partnership Firm)
• Vijay Krishna Enterprises (Proprietary Firm)
• AVNI Retail and Distribution Services Private Limited
• Mahati mentoring ServicesPvt Ltd (To be Launched)
• Sri Raghavendra Investments
People Behind AVNI Group:
1) Khanapur Venkata Lakshmi Narsimha Murthy - Director
A Hyderabad based First generation Entrepreneur, A Commerce graduate who is a Retired Medical professional (Govt ENT Hospital, Koti, Hyderabad) has his vested interest in the area of business and foreseen the need of professional services to the industry, and the available unexplored potential in the area of services sector. There started the idea AVNI, with the able support of Team of Professionals and consultants.
However, his confidence in the team is his big asset and the investment. He has partnered to set up his vision and shares the visionary of the Group being one of the leading Corporate Solutions
2) Khanapur Lakshmi - Director
A First generation entrepreneur, who also happens to be the better half of Mr. Murthy, is bringing her vast experience of Academic teaching. Her 35year stint with Education sector is the strengths of Education, Training and consulting initiatives. A Commerce graduate and a Teacher by profession is constantly adding value in driving the business segment with unmatched support.
3) Chandrashekar Pydimukkala – Business Head
An Graduate in Finance from Management School of Wigan and Leigh, sharing the passion and interests of Business management. Carries an experience of Financial Services for over 8 years for now and is very instrumental in the domains of Equity, Research and Financial Analysis to add strength to the offerings of AVNI Financial Advisors.
History of online trading:
The history of online stock trading is a fascinating and revolutionary story about the power of two worlds colliding and changing the industry of stock trading forever. The two that were destined to meet? Public access internet service and electronic stock trading.It’s hard to remember it now, but prior to the combination of the two, investors used to call (via land lines only at the time) a live broker (real person) to place a trade. Similarly, stock brokers used to call investors and “sell” the purchase of a company’s stock. Now with a few keystrokes and a click, an investor can access information and initiate a stock trade with no assistance or advice.
As early as 1969, digital trading systems called electronic communications networks (ECNs) were being used by brokerages to display in-house the bid and ask prices for stocks. By the late 1980s, as the financial industry began to realize the potential of a public internet and ownership of personal computers was
growing in popularity, some of the leading brokerages began to look more closely at ECNs. Several industrious brokerages either developed software or bought companies that had developed software to link up stock traders with current stock price information, thereby matching up buyers with sellers easily and efficiently and with significant cost savings.
I remember the first time I saw a computer with its black screen background and green type. It was 1981 at my local Radio Shack. But just one year later in 1982, the first full service electronic consumer equity trading system for buying and selling stocks, mutual funds and commodities using a PC came online. It was called NAICO-NET and it was offered by a company called North American Holding Corp. located in East Hartford, CT. The system was ANSI based, meaning it was terminal based but IBM PCs could connect to it via a simple application and it connected traders from all over the world. Trades were sent directly to Pershing Corp. (Donaldson Lufkin & Jenrette) for high speed clearing and the trader subscription base quickly rose to over 5,000. And the rest, as they say, is history – the history of online stock trading.
Over the next 10 years, the history of online stock trading developed slowly, temporarily crippled by the stock market crash of 1987, a recession and the Gulf War. Additionally, the costs were still generally high for online access for retail stock traders. It was in the 1990s that things shifted and online stock trading really took off.
Trade Plus was another pioneering company in the history of online stock trading and in 1985 offered some of the very first retail trading platforms on America Online and Compu serve. Trade Plus continued to offer its services to brokerages, but in 1991 one of the founders of Trade Plus, William Porter, created a new subsidiary company called ETrade Securities, Inc.
For retail traders, the coming together of better accessibility to information, the ease of an electronic trade and decreased cost to process a trade enhanced the popularity of online stock trading and it began to take off. By the mid-1990s, more than 20 percent of the nation’s population was investing in stock, compared with
less than 5 percent the decade before. To illustrate the impact this had on E Trades’ bottom line, its revenues increased from $850,000 in 1992 to $11 million in 1994 and was rated as the fastest growing company in America that year. The rush to become an online stock trading broker was on!
Another well-known company, TD Ameritrade, originally started out as a company called First Omaha Securities and in 1995 the company acquired K. Aufhauser & Company, Inc. and its Wealth Web, which had begun offering online stock trading in August 1994. The company that was to eventually become TD Ameritrade continued to merge and acquire other companies, quickly becoming one of the largest online brokerages.
A conversation about the history of online stock trading must include the fact that Charles Schwab, for a long time, had been cornering a huge portion of the financial industry’s market share through branch offices and discount fees. They continued to build market share at a strong pace all through the 1990s. Charles Schwab was only slightly late to the online stock trading party and became another strong leader as an online stock trading provider in the late 1990s, combining their market share with strong promotional activity. They started by providing a web presence in 1995 and at the time had $181.7 billion in total client assets. The very next year their online stock trading went live and in 1996, they ended the year with $253 billion in total client assets. By the next year, 1997, Charles Schwab registered it’s one millionth online account, reached total client assets of $437 billion and ranked as the top online broker in the U.S.
Joining the party, Scottrade.com launched in 1996 and turned the heat up in 1998 with online trades beginning with a low commission rate of $7 per trade.
The ease of online trading for the retail trader and discounted commission fees made online trading more attractive to more people. An advisory group reported that the number of online brokerages jumped from 12 in 1994 to more than 140 by the end of 2000.
Additionally, the ease and popularity of online stock trading opened up a whole new career in the financial industry – day traders to whom many analysts attribute the market volatility of the late 1990s.
This steady and continual influx of cash into the stock exchanges during the 1990s helped to create a very strong bull run as you can see in the monthly chart (1988 through 2001) of the Dow Jones Industrial Average ($INDU) below:
As impressive as the upward climb in value was, look also at the incredible rise in volume. This chart helps to tell the story of the history of online stock trading. The frenzy that easy access and a bull market inspired only helped to perpetuate the upward run that eventually wouldn’t be able to sustain itself with the same strength.
A larger aspect of the history of online stock trading is the way that stock trading has changed from proprietary, broker-driven trading to open-access, consumer-driven trading. That shift has left some potholes in individual trader’s ability to be successful with trading. We, as retail investors have better access – but many have ineffective investment knowledge. Many consumers need to match up greater investment knowledge with the incredible access to be truly successful investors.
Your brokerage firm does everything that is necessary that you enter into the market as an investor. An individual who can conduct accurate research and has now good money management abilities will always succeed with the stock trading
online. There are many benefits rather than limitations in online trading than the offline trading. The first being the costs linked to hiring a broker and paying him. In offline trading the charges of the broker are comparatively higher. You ought to pay them on every trade you need to do. And you cannot be described as a day trader while you are trading offline. It becomes very expensive for you to pay the broker on every transaction for a day trader.
In online trading you don't need to pay the broker something. You would save considerably on the trading commissions. The major difference between the two is the effort of middlemen. While in offline trading you will be surrounded by brokers, in online trading brokers enter only when you need them. The most logical benefits are that you really as an online investor are taking control of your own decisions and your own personal future. You can call one’s own shot numerous times or just one time and after that you can call it a day. There have been several changes in trade ever since trading went online. Anyone could practically invest in a company of their choice. And they are wise enough to get a company that can control the market.
These companies offer various innovative investment options for numerous online traders. This happens with a whole lot of research on the market with the help of various statistical tools. This is absolutely impossible in not online trading. The investor will also be able to trade in forex markets and may purchase a large amount of foreign currency by paying the complete price. This is known as margin trading. This provides investor a buying power which is huge and the outcome i. e. the profits are huge.
In offline trading often there is monopoly and there is hardly time to become a margin buyer. While we know that internet has brought a revolution in every field that exists, it has done a lot of help to trading too. Stock trading online is absolutely paper less. The entire activity comes about on a common platform which can be accessed by investor’s internet. Share trading is done by brokers at one corner in the place and the investor interacts while using the broker from the other corner in the world.
Online trading or eTrade is in addition interactive. It is not just one side reacting to your changes.
Whatever is happening in the account is visible to both the broker along with the investor - while within offline trading you tend to wait for your broker to undertake your errands for you.
One of the majority reasonable advantages in online trading is which you could watch the international stock markets move from your doorstep. You don't have to help call anyone or wait for the newspaper in the mail to check out the international listings. You can even trade as well from another part of the world. If you continue to be an offline trader, it would still remain a dream that you explore the international markets.
Online trading is electronic which means that the trade of securities, bonds, shares, stock, debentures, records, etc. is through a great online broker. This could be the modern day world dealing. Bill Gates truly said together with his experience that Internet will help achieve "Friction free Capitalism" by putting buyer and seller in direct contact and providing more information to both about the other. This is what practically happens whenever you do stock trading internet.
Offline vs online trading....
In Stock market as an investment the panic works as a differential factor in success and failure. If a stock investor is susceptible to panic or reacts early or late for a market it at times serves as a loss. And when you are investing in stock market you have to play in big number of shares to get recognizable figure of profit. You can get profit in low stock numbers but they should turn in huge margin. Which used to be practical before the Hawala and other stock market havoc in 1990s?
Online trading is quite popular lately as it’s more affordable, fast and it’s everything one would want when on a move.
Especially for all the working professionals, for all the investors who travel a lot. Trading from almost anywhere, transferring funds for trading from anywhere is an ease .Now even trading via mobile platforms have come up which is again anything a professional would want when on a move or in a meeting etc.
Of course it has its own advantages and disadvantages when compared to Offline trading.
Basics of online trading:
-Trade from almost anywhere.
-Transfer funds online from anywhere.
-Shares are transferred to and fro online (as compulsory one has to open a demat account with the same broker he wants to trade online with)
-Can trade only to the extent of credit in the trading account.
-Absolutely Real time stock quotes.
-Real time confirmation of trades.
-View trade, accounts, balances, portfolio etc online.
-Less brokerage/commission costs
Basics of Offline trading:
-Call or visit the broking firm and trade.
-Transfer funds online as well as via cheque
-Shares can be transferred online if account is with same broker else can deliver manually too.
-Trading limits can be flexible depending on the relationship with the broker.
-Can’t view real time quotes, would have to depend on the dealer.
-Tele-confirmation of trades.
-Contract notes can be viewed online as well as can be received offline via courier
-Accounts, balances, portfolio etc can be viewed online as well as on request can be received via courier.
-Higher brokerage/commission costs.
Indians are still quite conservative when it comes to using internet and trading via that.
Especially the old generation they would still prefer to call up and place a trade with a broker then trade by themselves online.
Trading online is much secured now, right from banking to trading to depository accounts all are completely secured, safe and ready to handle heaps of transactions at any point of time. While trading online one can trade up to an x limit decided by the broker compared to the credit one has. For example Client A has `500 credit with the broker and the broker generally gives out trading limit to say 5 times the credit. So for client A his limit would be 5x `500 i.e. `2500. The client would then have to pay up the difference in a stipulated time else the broker would sell off his buying to cover the difference at whatever the price the stock is trading in the exchange.
The same way the rules are bit different for clients trading offline. Depending on the relationship one has with the broker / dealer the client can get a huge trading limit. Also the client can take leverage in paying up the difference and if the relationship is very good, the stocks in his account won’t even be sold off to cover the difference.
A broker incurs less cost in online platform then in offline. In online the broker just has a cost of a call center which helps clients to trade via calls in case of some emergency. Whereas in offline the broker has to incur a lot of costs like: dealers, phone calls and much more.
Major advantage one has is offline trading is the help and stock tips / guide received by the dealer. Whereas in online though they get stock tips, but end of it the client is on his own. In case of any major ups and downs, the dealer would call
and give some personal attention to the offline client which is not possible for an online client.
If one wants someone to personally monitor their portfolio, then the only option is offline trading...These are just a few mentioned differences, the list can go on.
Continuation : 3
Typically, an online trading account is linked to a depository participant (DP) and bank account. Find out in which banks your broker has a tie-up with. If you do not have an account in one of those banks for trading, you may need to open one. Three-in-one account is offered by some brokers, wherein all the three accounts are opened with the same organization. This not only helps to transfer money but also to redeem the sale proceeds when you sell stocks from your portfolio. However, the two most important aspects that determine the effectiveness of e-broking platform are the trading software and customer service levels that the broker provides.
If you are going to use internet to buy stocks- The first three steps would be to-
Step 1. Understand how to place orders, modify and cancel them.
Step 2.Learn how to verify your ledger balance, get details of transactions and, in general, learn to navigate through the software.
Step3. Get a grip of the nuances of transferring money online — both to and from the trading account.
I prefer Offline trading over online trading because of many reasons and explanation is as below:-
1. The Offline market is closed hence the chances of fluctuation are none so the investment is made in the desired marker price or else with not much fluctuation.
2. The rise and fall in price is already speculated hence the chances of major set -back are lesser while trading offline.
3. You are aware of the whole day movement of the stock and you can understand what will be its movement tomorrow on which you can earn more.
4. If the investment is with long term goals you will be in a comfortable position to invest in offline market.
Aside to all this you have better opportunity to invest on FPOs and IPOs which means you are more likely to succeed in grabbing a good share at lower price.
Also the short term selling should be preferred in offline market. In offline market you decide the price of the share in a better way as you have seen the movement the whole day along. If you want to purchase the stocks for long term and want to do a short term selling you must go for offline trading. The FPOs and IPOs should be made investment with at the last moment as you can get the deal struck at last moment in lower price. The time to research and compare is more as compared to online market as the prices are not running up and down. Plus you have the whole day whole month and a year chart in front of you. So you have a fairer idea to the stock trend. If you are a short time investor and want to buy stock for short term selling, you must buy it in online market. But selling should not be immediate and hence should be done offline only as you can have better grip of the whole day trading.
But if you are a long term investor and you want to buy stocks you must go for offline trading as the stock has performed in a time period and post analysis you conclude to buy the stock for long term. While you are selling the stock which you hold for long must be sold at online market. As online trading helps you gain an edge on price and helps you square off your stocks immediately and you have cash in hand for trading further in the stock market.
Outcome for the above discussion is as follows:-
Short Term Investor
Buying – Online Trading
Selling – Offline Trading
Long Term Investor
Buying – Offline Trading
Selling – Online Trading
Demonstration of trading software:
You get a good demonstration of the trading software from your relationship manager before you start trading.
Customer service
Since online trading reduces the human interaction you would otherwise have had in an offline account, the customer service team plays a key role in redressing any problem. Remember to enquire about the customer service to existing clients to get an idea of the competency of the team.
Phone trading option
Find out from your prospective brokers on how they usually handle a `market meltdown’. This occurs when the market rises or falls rapidly and the broker gets loaded with orders five-10 times the size of normal orders. The internet is also not reliable all the time. Net connections can get disconnected or disturbed due to several reasons. In such cases, the broker should provide you with an alternate means of placing orders. Most brokers offer what is called phone trading to help their clients during such an untoward exigency. However, these phone trading options are sometimes charged.
Pre market / after-market orders
Find out if the broker will give you an option to place orders before the market opens for the next day. Commonly called the “after-market orders”, you can use this option to place your order the previous day itself when you foresee a busy day ahead.
Try to get details regarding the various trading products that are offered by the brokers and find the one that suits your profile. While some brokers offer a variety of trading products others offer only the basic trading product.
Offline
An offline account is the traditional broking account, wherein you place orders with your dealer either by walking to the office or over the phone. Traders and high net worth individuals with a need for fast and professional execution of orders can consider such options. Since the dealer plays a key role in this model, find out if your dealer is good at execution of orders and is pro-active in information sharing. Remember the dealer’s experience in the market is also a crucial factor. You might also want to negotiate on the trading exposure and the fee that is charged.
Unlike the online model, offline brokers are more flexible with the exposure and the brokerage charged.
Understanding the online trading software
Online trading is nothing but trading via the Internet with the help of trading software provided by the broker. The trading platform may be a source of great confusion to them. It is important that you get a firm grip on the trading platform since it provides all the necessary tools to do technical analysis. You can also transfer funds online from your bank account to your share trading account with the click of a button.
The advantages of using online trading are:
• Fully automated trading process which is broker independent.
• Access to advanced trading tools to perform technical analysis
• Investors have direct control over their trading portfolio.
• Ability to trade multiple markets and/or products (you can trade in BSE/NSE)
• Real-time market data.
• Faster trade execution (very crucial if you are a trader)
• Easy to operate and manage account
• No geographical limits (whether you stay in New Zealand or Dubai you can invest in Indian share market through online trading platforms)
Our discussion is primarily based on the general features provided by a good online trading platform. It’s important that you check the quality and speed of the trading software provided to you by the broker.
LOGIN ID AND PASSWORD:
Your online trading platform should be protected by a login id given to you by the broker and a password of your choice. Password should be changed frequently. Some software prompts you to change your password every 15 days. Further, the facility to ‘lock’ the trading software to one computer would be an additional security measure. With this facility, you will be able to login only from one particular personal computer.
THE MARKET SCREEN:
For a beginner, the market screen might look like a jungle of numbers. It’s nothing to be confused about.
Market screen is the most important window that will help you get your trading done. This window gives a tabular representation of the current market position for selected shares. Each share makes up a row of data that contains the scrip name, its last traded price, last traded quantity, best bid rate, best offer rate, total volume etc. Market Watch window is highly configurable and you can decide which columns are to be viewed and which not, whether you require row or column separators, determine the size of all rows or each column, the color used to display data etc. There are a host of options available on a pop-up menu that can be accessed by right clicking on the Market Watch window. All these windows will be updated dynamically in real time and you need not ‘pull’ or refresh any information. It’s all real time updated. In fact you are in live market.
It will take only one day to understand the market screen. Market Watch window is the prime controlling window from where you can launch your trading actions. You buy or sell a share by clicking on the specific share on the market screen.
INDICES DISPLAY
Trading screen should have indices displayed at a convenient location on the screen. It should display all popular Indices like Sensex and Nifty. The indices display should be capable of being customized to show other indices which you follow. An investor should keep track of the market indices so as to get an overall picture of the market sentiment.
REPORTS
Reports comprise of Order Book, Trade Book, Net Positions, Margin, Exercise Book and Holdings. In any trading terminal, all these reports are dynamically updated without the need to refresh or pull information. From the Reports window you can ‘Modify’, ‘Cancel’, ‘Square Off’ or ‘Exercise’. The appropriate buttons will be enabled/ disabled depending on which action can be taken based on the currently selected row. You can save these reports to a file either in text or CSV format.
CHARTS
Good trading software will provide the following facilities to chart:
• Streaming intraday tick-by-tick charts & historical data.
• Ability to chart multiple companies and open unlimited charts.
• Unique draw tools including trend line customization and Fibonacci tools.
• Different chart type options such as Line, Bar and Candlestick.
• Lots of analysis options including indicators such as MACD, RSI, Williams % R etc for price and volume panels. There are at least 14 indicators that are useful to a trader.
• Facility to save chart as JPEG file.
MARKET ANALYSER
Market analyzer feature would provide top traded, top gainers and top losers with % change, value and total quantity. It would also provide the list of shares that have touched their 52 week High or 52 week low. It would also help to analyze all quotes and extract those where quantity traded exceeds a given figure or transaction value exceeds a given value. This helps you identify large trades and can give you vital clues to where or in which scrip activity is currently happening.
What is a trading account?
As said in the previous lesson, Your Demat account is merely an account which keeps track of which shares or equities you have bought and you currently hold in your portfolio. So there is not much to do as far as ‘operating’ demat account is concerned.
TRADING ACCOUNT
Some of the beginners do not understand relationship between Share Trading account and Demat Account. This short lesson will explain the relationship between Demat account, trading Account and your Bank Account. We will also see how many trading or Demat account you can have in total.
• Trading account is an interface between your Bank account and your Demat account. To buy shares, the first step is to transfer money from your bank account to trading account. For example, if you want to buy 100 shares at Rs 50 , you have to transfer Rs 5000 from your bank account to the trading account.
• The shares that you buy will be stored in the demat account.
• When you sell, your trading account takes back the shares from your Demat account and Sells them in Stock Market and gets back the money.
• If you want your money back into your bank account, you have to give a request online to the broker to transfer it to Bank account. The money gets credited in your bank account in 2 or 3 working days.
• Just as every person is allowed to open as many savings account as he likes, there are no restrictions of the number of Demat Accounts a person can have. You can have any number of demat accounts.
Tools and trading platform
Investors who trade through an online brokerage firm are provided with a trading
platform. This platform acts as the hub, allowing investors to purchase and
sell such securities as fixed income, equities/stock, options, and mutual funds.
Included with the platform are tools to track and monitor securities, portfolios
and indices, as well as research tools, real-time streaming quotes and up-to-date
news releases; all of which are necessary to trade profitably. Often, more robust
research tools are available such as full, in-depth analyst reports and analysis,
and customized back testing and screeners to see how particular investment
strategies would have been realized during different historical periods.
Some of the popular online brokers based in Europe and USA include: E
Trade, IDealing, Interactive Brokers, Scottrade, TD Ameritrade,
and Fidelity. Schwab is an example of a hybrid broker combining a traditional,
brick-and-mortar brokerage house with discounted trading online, with
the usual benefits of both available to customers. Online investing and
trading has seen a rise in India too. Besides independent online portals, fund
houses in the country too are promoting their online transaction portals.
Some popular online investment portals in India are Funds India and Fund
supermart. Commissions vary from broker to broker, depending on the services
included with the account.
SELECTING A DEMAT AND TRADING ACCOUNT
The key criteria for selecting these accounts are:
1. Your purpose/usage. In short, how frequently are you going to buy/sell and is it intraday or delivery based. You may have to choose the Broker whose charges are lowest according to your transaction style.
2. Look at a complete solution and not just one individual product like a demat account. After all, the money in the savings account will be linked to your trading account for buying/selling shares and the trading account will be linked to your demat account for storing the shares. Suppose you have a Savings account with Bank A, and the trading account with Broker B and Broker B trading account does not have a partnering arrangement with Bank A, you will be forced to open a new savings account with a bank which has partnering arrangement with broker B. Usually, most non-bank brokerages have tie-ups with the popular banks for savings bank accounts and demat accounts, but brokerages in a banking group company may have only the same bank as its partner.
3. Think long term. In case you have got yourself a demat account and you have existing shares in it and you want to move to another demat account, transfer of shares is chargeable. Brokers may charge based on number of shares or amount worth or anything. Please find out what this amount is, in case you are ever tired of bad service and you want to change the demat account. These transfer rates are never mentioned anywhere.
4. Technology. Some online stock brokers do a great job in making sure that their clients can always access their accounts, and in turn buy and sell as quickly as possible. But on the other side of things, not all brokers run this smoothly. Due to excess demands on the system, some brokers have a slower load time than others. In fact, this can lead to the server becoming bogged down. This is not common as it once was, but still this can happen.
5. Service. With the demand increasing on discount stock brokers, it is common for errors to occur from time to time. Hopefully this never happens to you, but you never know what the future holds. If you notice a mistake on your account, it is important that you contact the customer support team right away. This will help to ensure that you get the issue worked out
before it causes a snowball effect on your account. In most cases, the broker you are working
with will be apologetic for the mistake, and will do whatever it takes to get the issue resolved
within a matter of minutes. Also, Gauge the level of personal service that a stockbroker provides
as a final step in the selection process. Every investor should be assigned a specific broker or representative to contact at any time.
CONCLUSION
Hope you are now clear about demat and trading accounts and about how to choose an account. Shopping around for your broker is a good idea.
WHAT IS A DEMAT ACCOUNT?
Demat refers to a dematerialized account.
Demat is very similar to your savings bank account. You have to open an account with a bank if you want to save your money, make cheque payments etc. Similarly, you open a demat account if you want to buy or sell stocks. So it is just like a bank account where actual money is replaced by shares.
A ‘dematerialized’ account holds shares in electronic form, saving you the bother of holding shares in paper form. Possessing a demat account is now a prerequisite for stock market investments. So, while your bank account keeps your money safe and transfers it from account to account according to your instructions without bothering you , your demat account keeps your shares safe and transfers it to the next owner when you sell it.
WHO PROVIDES THE SERVICE?
Demat services are provided by banks, financial institutions and stock broking houses. The broking houses in such cases also act as DPs (depository participants) intermediating between the depositories — CDSL or NSDL and the investor. To open a demat account; you have to make an application to a DP and submit required documents. Once you have a demat account to your name, you can open a trading account with a broker of your choice.
The shares bought and sold by you will be reflected in your demat account. Any previously held physical share can also be dematerialized and transferred to the account. The DP, at regular intervals, would provide you with an account statement showing the balance of shares in your demat account and transactions during a period.
In short, to start trading in shares you have to open two accounts-
1. A trading account -with the broker and
2. A de-mat account – Either you choose a bank/financial institution or a stock broker who could provide you the DP services.
CHARGES
The fees charged for DP services differ across the industry. Though the rates change, the charges normally go under the following heads:
1. Account opening fee
2. Annual maintenance fee
3. Transaction fee
Besides the above, depository participants also charge service tax as applicable.
DOCUMENTS REQUIRED
For opening a demat account one needs to provide a set of documents to the agent. They are:
1. Duly completed account opening form and passport size photos;
2. A copy of PAN card as proof of identity;
3 .Personalized cheque/Copy of the bank passbook
4. A copy of passport/voter ID/ ration card as a proof of address.
5. Signing of the DP-investor agreement.
On giving the above papers, the agent would complete the other formalities with the depository and facilitate opening of the account. You would then be given a unique account number (BO ID- Beneficiary Owner Identity), which would serve as a reference number for all further transactions.
A set of delivery instruction (DI) slips will be given to you from the DP. This is almost similar to the cheque book you get when you open your bank account. A DI slip has to be filled and sent to the DP on every delivery (sale of shares) you make. DI slip is an instruction to the DP to debit your account and credit the broker’s account with the specific stock.
Take note that the DI instruction has to reach the DP the very next day after the sale, failing which the securities won’t reach the broker and hence the exchange.
This could result in auction of the security. When you open a demat account with your stockbroker, you also sign and deliver a standing instruction for delivery of stocks that you sell. Hence, the broker handles the delivery system and you need not worry about all this.
ADVANTAGES AND DISADVANTAGES OF ONLINE AND OFFLINE TRADING
The introduction of the Internet has surprisingly changed our way of life as a society. It has defined the way we do business and the way we correspond. The Internet has opened many opportunities for online trading. The financial industry revolves around the Internet. Everything is just a few clicks away. This makes online trading most convenient. But there are still investors who prefer the old fashion way of offline trading and they mainly prefer offline trading for security reasons. Of course, online trading has many pros. There are several wonderful reasons to invest online and consider online trading.
1. Money saving opportunities-The amount of money you save depends primarily on the online brokerage firm that you choose.
2. Instant online access –One can gain instant access to your account, the value of your portfolio updates immediately before your eyes....
3. Enter online trades at any time-One can enter online trades at any time and from anywhere. This is very convenient if you live in a different time zone than the country you are trading in. Not to mention, it is especially fit for investors with busy schedules.
4. With online trading you are in charge
You are in control of your investments. Nevertheless, with all the convenience of online trading there are still investors who prefer the old fashion way of offline trading. Offline trading has lost some popularity but it is still the main form of investing. Offline trading offers many benefits as well.
1. The one benefit that an investor appreciates the most is that they are not alone when making investment decisions.
2. There are experienced and professional brokerage companies that handle their investments for them.
3. Investors are not faced with the challenge of making these vital investment decisions; especially, if they do not have the experience necessary to make the appropriate investments.
4. Also, there is someone there to answer any questions that may cause concerns.
Not to mention, with offline trading mistakes are less likely to take place. No one wants to throw their money away or stand by and watch someone else throw their money away. It may be wise to hire a professional to assist you in making the correct investment decisions if you feel you lack the knowledge necessary.
Features of Offline trading:
1. Call or visit the broking firm and trade.
2. Transfer funds online as well as via cheque.
3. Shares can be transferred online if account is with same broker else can deliver manually too.
4. Trading limits can be flexible depending on the relationship with the broker.
5. Can’t view real time quotes, would have to depend on the dealer.
6. Tele-confirmation of trades.
7. Contract notes can be viewed online as well as can be received offline via courier
8. Accounts, balances, portfolio etc can be viewed online as well as on request can be received via courier.
9. Higher brokerage/commission costs.
Features of online trading:
1. Trade from almost anywhere.
2. Transfer funds online from anywhere.
3. Shares are transferred to and fro online (as compulsory one has to open a demat account with the same broker he wants to trade online with).
4. Can trade only to the extent of credit in the trading account.
5 .Absolutely Real time stock quotes....
6. Real time confirmation of trades.
7. View trade, accounts, balances, portfolio etc online.
8. Less brokerage/commission costs
Offline trading is the traditional way of transacting the shares through a broker probably by means of phone. Online trading is a revolutionary change introduced in 21st century which lead to a huge improvement in the trading volume. This is one of the reasons why the turnovers of stock exchanges increased phenomenally. National Stock Exchange is the first exchange in India to introduce online trading. There are innumerable advantages in online trading when compared with offline trading but still some traders still prefer trading offline due to security reasons.
Advantage of online trading to offline trading:
• Time – Only a trader knows how important time factor is, at the time of trading. Online trading makes it quite easy to place order in a few clicks saving lot of time.
• Money – It also avoids all miscellaneous costs as in case of offline trading, broking firms charge extra for the service they provide.
• Minimizing losses – Trader can square off his positions immediately when markets turn against his positions which is never possible in traditional type of trading
• Buying & Selling – One of the most advantages a trader could experience is trigger trading where he/she need not wait till the required price comes. In case of buying or selling (including stop loss trade), the trader is just a click away to place his order and leave the terminal. So, there is no need to buy at current price or wait till the price arrives. Apart for the above advantages, there are also many advantages in online trading comforting the trader and helps in gaining maximum profits.
What is a share?
Share is the word which contains a meaning called ‘part’ of anything. It is used to refer and represent another term called ‘stock’ in share market. If you want me to explain in detail or classify both, stock is the total amount invested in the company which is divided into shares. It acts just as a security deposit to bring/raise money from investors. By offering part of their company, the owners invite the public to invest in their company which is nothing but Initial Public Offering (IPO). But in general, both the terms are used as same, entities to buy and sell in the stock market.
A physical or virtual document issued and distributed by the company to all its partners is called a ‘share‘. It can be bought by the traders in the stock markets through stock exchanges like NSE or BSE and sell them as when required. Literally, by owning share of a company, the trader becomes one of the partners to whom the company is supposed to provide information to some extent. The company has to announce all the results and earning ratios to all its partners who holds respective stock.
Summary for the article:
• Share is a word used to represent the meaning part of a whole
• This in stock market is used as an investment material
• These are bought by investors to make profit out of it.
• Bought and sold in the grounds called stock exchanges like NSE, BSE etc
• Available in both primary and secondary markets
• Shares can be bought in both physical and virtual forms
• Trading is carried as per the rules of Securities Exchange Board of India
• They can be bought individually and in bulk
• Both online trading and offline trading methods can be used to buy the scrips.
• Demat account and/or trading account is required to purchase shares.
What is a stock market?
Stock market is a medium through which buyers and sellers transact their shares. It is also called as stock exchange where exchange of shares takes place between buyers and sellers. The previous form of securities exchange is physical in nature where as it almost turned now to virtual form which is nothing but online trading. The buyers and sellers place their bids in the online terminal through which they will be executed timely at desired prices. There is a common question in every fresher’s mind, what will be the investment required to enter into the stock market. Well, though the answer is very simple, its description is vast in nature. There is no minimum investment rule that can be started with. It is open to everyone, from individual rupee investor to institutions and hedge fund traders.
There is a common disbelief that share market is a place where excess shares are stored and deliver to buyers when they place their bids for purchase. It is very important to note that a transaction takes place only between buyer and seller. If the bid placed by the buyer and ask placed by the seller are not matched, transaction does not takes place. Coming to industries point of view, stock market is a very important source to raise funds. Without this, it would have never been so easy for the economy to grow as fast as the present day’s one. More importantly, funds invested in stock market by FIIs reflect the present and upcoming growth of respective country’s economy. Thousands of crores are flowed directly to markets instead of banking deposits as investors find this as a good and high return sector comparatively.
History of market seems to have no particular date of birth as trading was done in one or the other form for many centuries. Around 12th – 13th centuries, bankers used to trade in government securities which has given rise to this form of transactions. There is also certain group of people to argue that share markets existed in ancient period too. In the mid-18th centuries, more particularly in the start of 19th century, complete shape was brought to stock market by western stock exchanges which were later adapted by almost all the countries in the world.
Summary of the article:
• Stock market is a place to buy and sell shares
• Shares are bought or sold through stock exchanges
• Companies are required to register/list through SEBI
• Share market is a way to raise funds for industries
• Market is a way to earn by investing in stocks.
What is a Stock Exchange?
Stock Exchange is a place where exchange of shares takes place. Many, around 20+ exchanges like National stock exchange (NSE), Bombay stock exchange (BSE), Hyderabad exchange (HSE), Calcutta exchange (CSE), Delhi exchange (DSE) etc., exits in India. In simple for explanation purpose, exchange is similar to a film theatre where the same film is being played in 2 different theatres (same stock trading in 2 different exchanges). It’s totally the trader’s/investor’s wish in which they have to trade. Every company which needs to be traded in particular exchange must be listed. Respective listed company has to pay annual charges to the respective exchange. Same company can be listed in any number of exchanges fulfilling their criteria.
The reason for which the same company needs to register in more than one exchange is liquidity, allowing traders from different markets to buy and sell at ease. For this, I would like to go with an example assuming there are two fruit
markets ‘A’ and ‘B’. Any company which enters in to the market to sell their product will obviously looks forward to sell in both the markets instead selling in just ‘A’ market and asking customers to buy only from market ‘A’. Later case may result in loss of business due to less number of buyers and sellers while the former one eases the customers of ‘A’ and ‘B’ to buy at ease.
But if you ask me which exchange you have to choose, once again I would suggest you to enter in to the market where more number of buyers and sellers turn around. so if the same scrip is listed in two exchanges, NSE/BSE and a local exchange, its always better to enter in to NSE or BSE rather entering in to a local stock exchange due to the above reasons. Two major exchanges in India are NSE and BSE.
Summary of this article:
• Stock Exchange is the place where exchange of share takes place.
• Good exchanges are those which have high liquidity.
• Traders can opt any exchange they wish to trade.
• Famous exchanges in India are NSE and BSE.
• Around 25 exchanges are registered in India.
What is NSE?
National Stock Exchange, NSE is one of the major stock exchanges not only across Indian but all over the world. This exchange is located in Mumbai and it is the 9th largest exchange when it comes to market capitalization. It is also the largest exchange of India in daily turnover and no. of contract trades for both equity and derivative markets. Total numbers of companies listed are around 2000 in equities segment and around 200 in derivative segments. For the companies to trade in derivatives, they need to meet the guidelines of NSE in all aspects including turnover and volumes consistently.
National Stock Exchange has its index as Nifty which is derived after two words ‘NSE‘ and ‘FIFTY’ – N from NSE and IFTY from FIFTY combining which gives us a word NIFTY.
The reason why fifty is used as the second word is that, as all other countries, this exchange too spotted 50 top performance large cap sector stocks which are fundamentally good with strong earnings ratio. These fifty stocks are grouped as Nifty50 which is nothing but National Stock Exchange Fifty.
There is misbelief that this exhange is owned by government or SEBI. But the fact remains that this is owned by renowned financial institutions, banks and insurance companies of India. Interestingly, very less foreign institutional investors, FII too owns stake in NSE. National Stock Exchange originated in the year 1992 as a tax paying company initially which later turned into stock exchange. It is the first stock exchange in India to introduce derivatives segment in the year 2000.
Major Indices of NSE:
• S&P CNX NIFTY
• CNX NIFTY JUNIOR
• CNX 100
• S&P CNX 500
• CNX MIDCAP
• CNX SMALLCAP
What is BSE?
Bombay stock exchange is the oldest exchange in Asia with the highest number of companies listed in the world. When it comes to market capitalization, BSE is the 8th largest stock exchange in the world and 4th in Asia stepping just ahead of NSE. Around 5000 Indian companies listed in Bombay exchange equity segment contributing a great trading volume. The total market capitalization of equity is
around USD 1.6 trillion. BSE did not have particular date of establishment but it is said that it started its journey in the year 1850 which later became an official organization in 1875. Bombay stock exchange is the first stock exchange in India to get recognized by the Indian Government.
Bombay exchange has its index called SENSEX derived from the words “Sensitive Index“, which is calculated using “Free Float Market Capitalization Weighted Index”. It is also called as BSE 30 which is named after grouping well sounded 30 Indian fundamentally and financially strong companies under one category. Compared with Nifty, Sensex is the oldest index originated its birth on 1st of January, 1986 with base value taken as 100. Bombay exchange has equity, future and option segments to trade. Official website of Bombay stock exchange is
Indices of Bombay Stock Exchange
• SENSEX
• BSE – 100
• BSE – 200
• BSE – 300
• BSE – PSU
• BSE – TECk
How trading is performed?
In general, trade is the synonym of a purchase, sell or exchange of good. In stock market, the act of buying or selling shares is called as trading. The same is also called as investing, of course with a good difference between them which will be explained in our next posts. Once after the trading account is allotted to the client, he can buy or sell the shares as per his time and price.
Basic parameters required to place an order for a trade are name of the srcip/share, price at which the clients wishes to buy/sell, quantity of shares. It’s important to note that it’s not required to buy/sell the shares at the time of
placing order. Pre-orders can also be placed which get will execute when the price of the share triggers the order price. The former type of orders is called current market price orders or market to market order whereas latter type of orders is known as trigger orders.
CLASSIFICATION OF TRADES:
Based on Action:
• Long – First buying and later selling of those shares will be executed.
• Short – First selling and later buying of shares will be executed.
Based on Time Frame:
• Intraday – Buy and selling (or) selling and buying to be executed in the same day.
• Short term – Buying the securities and holding for a shorter time period probably around 3 to 6 months.
• Long term – Buying the stocks and holding for a long term of year or more are said to be long term trades.
Based on contract:
• Equity – Equity/Cash are simplest trades where any number of shares can be sold or bought with no time limit.
• Futures – In futures, only multiples of lot sizes (fixed no. of shares) are permitted to trade which are different for different scrips with time boundary within which one needs to square off their positions.
• Options – Same as futures, trading in fixed lot sizes and time limits but with different strike prices and premiums.
Based on Companies:
• Index Trading – Just like companies, trading can also be executed on index like Nifty,
Bank nifty, CNX IT etc
• Stock Trading – All other than indices are called stocks/scrips or companies
Cash trading
Cash trading is one of the types used in stock market by the traders and investors to buy or sell shares. This is a simple way to buy and sell with no time boundary. First thing to note in this kind of trading is that there is no limitation on the number of shares to buy to sell. Traders can buy even a single share without any limitation. Also, once bought, they can sell them whenever required which means traders can turn investors by holding the shares if reasonable/expected price is not in the market. There is no time limit on this, shares can be hold for infinite number of years. There is also no minimum requirement for capital investment.
Next important point in equity trading is that, in derivatives trading, traders can hold long or short positions for more than 1 day whereas in equity trading, short sell tradings are supposed to square off before the market closing on the same day. Traders must not carry forward their short positions in any way, denying which results in penalty around 20% in auction market. In short, in cash trading, long trades are eligible for intraday, short term and long term buy short trades are eligible only for intraday. Apart, these tips are divided into indexes and stocks. As said in our previous article, virtual scrip’s like nifty, bank nifty, cnx IT etc., are called as index stocks where as companies which exist in real are said to be stock scrips.
From companies’ point of view, it’s easy to get listed in equity trading when compared to derivatives segment which requires certain trading volumes consistently. This is the reason there is a vast difference in the number of scrips which are listed only in equity and scrips which are in both segments.
Summary of the article, Cash trading:
• Equity trading is eligible for long and short trades.
• Short positions must be squared off intraday without fail.
• Long positions can be carried over for required number of days.
• Margin required to trade in cash trading is high.
• No exposure allowed, in case holding for long time as futures.
• Companies listed in equity trading are more than that of future segment.
• Cash trading is best suitable for short and long term investors.
What is future trading?
Future trading is a revolutionary system that brought many changes in the world of stock market. Before proceeding further, let me put some questions...
What would you do even if you know markets will fall in next 1 month of time if there is no derivative trading?
Yes, as cash trading does not permit short trading for more than 1 day, traders have to rely on derivative trading for some reasons.
As the name itself contains a word “Derive”, it tells us the definition, “security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset”. Derivative trading is classified into future trading, option trading, forward contract, swaps etc.
Let us put this in a simpler way, on January 1st, a person ‘M’ comes to a contact with shopkeeper ‘N’ that he want delivery of 1 book on January 27th at the same current market price, say Rs.10, which is running on the contract day, January 1st
(person ‘M’ has to pay the agreed amount at the time of contract i.e., January 1st to ‘N’).
On January 27th if the market price of the book is above 10, say Rs.13, the person ‘M’ will be in the profit as he already went into contract and paid at a price (Rs.10) less than the price on January 27th (Rs.13). As well, if the price on January 27th is less than Rs.10, say Rs.7 its obvious to say the the shopkeeper ‘N’ will be in profit as he sold the book for a price (Rs.10) greater than current price of January 27th (Rs.7).
Here, the person ‘M’ is in a view that market price of the book might raise till January 27th and so he paid an amount of rs.10 in advance the shopkeeper ‘N’ is in a view that book price might fall till January 27th and agreed to take a sum of Rs.10 in advance as per the contract.
In the above example, January 27th is the final date of contract which is called as “EXPIRY” that would be the last Thursday of the month. If buyer or seller failed to square off on the last day of the contract, it will be done automatically by the exchange. In general, three expiries are available in Indian stock market, where traders can come into a contract with 3rd month and hold the stock for 90 days.
The most important feature of future trading is that, it allows shorting the markets for the same period of contract time where you become a seller with a view that markets might fall in the near future. There is no need for the traders who are in short to square off their positions in intraday. Apart, there are also other important advantages like hedging and arbitrage which are explained in our next posts. Future trading is also available in nifty. Traders can make use of Nifty future trading to make their portfolios safe by hedging concepts.
Summary for Future trading:
• Future trading allows to go long (buy and sell) and short (sell and buy back) trades.
• Time frame to hold the stock will be till the last Thursday of the month.
• Derivative trading discounts the price for every lot.
• Contracts can be exercised anytime till expiry.
• Future trading is available in nifty and stocks.
• Used to trade in combination with other segments like cash to hedge.
• Profit and losses in future trading are high when compared with cash trading.
what is options trading
Option trading is another classification from derivatives. Technically speaking, options are defined as “The right, but not the obligation, to buy (for a call option) or sell (for a put option) a specific amount of a given stock, commodity, currency, index, or debt, at a specified price (the strike price) during a specified period of time”. As there are very complex definitions and explanations, traders are often unable to understand what exactly options and option trading’s. In this article we try our best to explain you in the simplest way we can.
Initially we would like to introduce that every stock which is trading in futures also trades in options. The expiry time remains same as it is for future, mostly last Thursday of the month.
Options are once again divided in to ‘call option’ and ‘put option’ simply called as ‘CALL’ and ‘PUT’ respectively. When the price of particular share increases, the call option (CALL) increases and PUT decreases. As well, when the price falls down, interestingly reverse happens, PUT value increases and CALL value drops. So first thing we got here is there is no immediate reason to short sell options even if you predict that markets will fall also due to the following reason: If a trader knows that particular price of the share is going to fall, he can buy put and when the price falls, his put raises and puts him into profit. Of course when he knows markets go up, he purchases the call and makes the most out of it. So, in both the cases, the trader is buying the option, CALL or PUT. Finally, every option carried two terms with it – Strike price and premium which are discussed in our next articles.
Summary of the article:
• Option trading is performed with call options or put options
• Best suitable for low investment traders
• Options trading give a good opportunity to earn more in less time.
• Call options to be bought when markets are expected to go up
• Put options are to be bought when markets are expected to go down
• High risk traders can make advantage of this kind of trading
• Risk reward ratio is very high when compared with cash or futures trading
• In this trading type, profit is unlimited with limited amount of risk
• Capital requirement is less when compared with the other two types of trading
• Hedging and speculation are the applications of option trading.
Strike price
Strike price is another important term used in options trading. It is the price at which the option can be exercised. In simple, it is the betting or expectation price where you think markets may go up to. Let us take nifty call put for better understanding. For instance, if nifty is trading at 5480 and you think markets may move further 220 points UP, then one can opt to buy a Nifty CALL of 5700 strike price (5480+220=5700) — ‘Nifty 5700 CE’. (5700 is not the buying price value but only an estimated level till where nifty many reach in the near future, moreover it’s just like a name given to that option. Current buying price value is called premium where you buy, say it as Rs.40) As well if you predict that nifty may crash 280 points more, you can opt to buy a Nifty PUT of strike price 5200(5480-280= 5200) — ‘Nifty 5200 PE’ (say its current price/premium is around 50).
NOTE: Strike prices are available only with a difference of 100. So trader has to opt for 5600
CALL, 5700 CALL or 5800 CALL .
Now what is my profit if my expecting is correct?
In the first case, if you expectation is correct, you would get a profit around 220 points. You predicted market when the price is around 5480 and as per your expectation nifty travelled from 5480 to 5700 (220 points). At the time of your buying, we assumed the premium/current price is around 40. When market reaches your expected level of 5700, you get 40+220=260 where you get a profit of 220 points leaving your initial investment 40 points. Now if the lot size of nifty is 50 shares, you would get a final amount of Rs.13, 000 (260 points X 50 shares) — 11,000 profit and 2,000 investment return.
In the second case, if your bet is correct, nifty fell from 5480 to 5200 and at the time your PUT buy, say the current price of premium is 50, you get 50+280 = 330 points in which 280 is the profit and 50 being your investment return.
Summary of strike price:
• Strike price is the term used to refer the gap between expected move and current nifty price
• Strike prices are available with a difference of 100 points for nifty index
• Based on current price, strike prices are divided into ITM, OUT and ATM (moneyless of options)
Premium price
Premium price is nothing but the options current market price value. Once again, not to be confused with strike price this is just the betted/predicted/expected figure to which the stock may reach in the near future. Premium price is made up of two values – Intrinsic value and time value.
Intrinsic Value + Time Value = premium (Option’s current market price)
Intrinsic Value
Before reading about intrinsic value, we suggest you to go through our ‘Moneyless of Options ‘article. First thing we would like to bring to your notice is that, there will be intrinsic value only to ITM, In the Money Options. There will be no intrinsic value to Out the Money or at the Money options.
Intrinsic value is the difference between current stock value and strike price of particular option.
If we take nifty as example, say nifty is trading at 5668 and we want to calculate strike price for 5600 CALL (ITM). The difference between current market price (5668) and strike price (5600) is 68. So the intrinsic value is 68. This is because the option call we took is IN THE MONEY option.
In the next example, take OUT THE MONEY Option call; say 5700 CE and current trading price as 5668. The formula remains same with the difference between current market value and strike price, 5668-5700 = -32 which is negative in nature. Even AT THE MONEY options leave a balance of Zero. To conclude, intrinsic value does not exist for Out the Money option calls.
For PUT option, formula stands totally reverse, Strike price – Current Trading value as we have read in our ‘Moneyless of options’ article that the IN THE PRICE Option calls are the one which above the current trading price.
FOR CALL/PUT option, INTRINSIC VALUE EXITS ONLY FOR ‘IN THE MONEY’
OPTIONS AND NOT FOR ‘OUT THE MONEY’ AND ‘AT THE MONEY’
Time Value
Like intrinsic value, time value is not an easy calculation to perform. Before, we first try to let you know what exactly time value is. In simple, it’s like an Ice cube which melts with the time. In the starting of the month, maximum time value exits and as time progresses, time value too comes down irrespective of market movement, up or down. It is nothing but just like the interest you get for bank deposits. A person who purchases an option at the start of the money gets a higher rate of interest and the one who purchases at the end of the month does not get anything as the time is zero. This rate of interest, ‘r’ exactly resides at the power in the formula. So, if the time value is zero at the end of the month, anything power zero is zero and so the time value also. In general, it is said that the option looses 1/3 it’s time value in the first half days and 2/3 in the second half of its expiry. The best way to calculate time value is ‘Premium-intrinsic’ value which is just the other way of our original formula.
TIME VALUE STARTS WITH MAXIMUM AND ENDS WITH ZERO IRRESPECTIVE
OF MARKET VALUE, INTRINSIC VALUE AND STRIKE PRICE
So, if you buy Nifty 5600 CE when markets are at 5668 at a premium of 80, the intrinsic value is 68 and the remaining value (80-68=12) is the time value of the option at the particular period.
Important point to note that if the markets remain there at 5668 till the end of the month, the premium becomes 68 with only intrinsic value as time value nullifies to zero.