Why do we Need Additional Extra Income?
We all have routine expenditures such as paying utility bills, groceries, paying rent, or paying children’s school fees. We also need money to buy things that we desire and dream of.
Or, there could be unseen medical emergencies in the family or financial crises in the family, help family and friends.
Then, we have beautiful dreams…such as owning a house owning bigger cars, educating children in premier institutions, traveling and staying in star hotels/resorts, visiting temples, celebrating festivals/marriages with grandeur, visiting family or friends in a faraway place, or outside the country. The list goes on and on…
How do we earn?
To meet our monetary needs, we might work as either blue-collar workers or white-collar workers, professionals, business owners, farmers, or traders. Some of us might get rental income, pension, and interest from Fixed Deposition returns, etc.,
People in a job or profession will earn money in Equated Monthly Installment (EMI) or what is popularly known as salaries. For example, one person can earn Rs. 30,000/month for March, another Rs. 30,000/month for April, and on January two years after joining service, the same person might earn 35,000!!! So all salaried persons fulfill their dreams in EMIs, so to speak.
Business owners earn a lump sum profit in business. After investing in their business, finding a customer for their product or service, fulfilling the order, paying their employees, paying their bank and landlord, and paying the income tax.
Either way, I am sure most of us feel that we are underpaid.
What is Financial Independence?
Now let us for a minute, imagine that we are struck with some misfortune –unfortunate things do happen to good people. Let us say I had to quit my job because I could not take office politics anymore, no growth, paid peanuts, migrate to another city, or I was fired from my job.
If I was a Business Owner, I incurred a substantial loss, (cut-throat competition, price drops, increase in the price of raw materials, lack of sales and therefore lack of profit, etc.)
To counter such situations, wouldn’t it be wonderful if you had a Second Source of Income that you could rely on?
Financial freedom is the ability to sustain the same life that you had before losing your job or before your business failed.
Financial freedom would mean not having to sacrifice and lead a compromised life but being able to live in happiness and with peace of mind.
In order to beat inflation, it is necessary to save and invest in the stock market.
What is Capital Market?
Capital market is a system where savings and investments mobilized by capital suppliers and consumers of such capital. Various entities buy or sell multiple financial instruments and products.
Functions of the Capital Market
- Capital market is a platform for various kinds of savers and investors
- Capital used more productively and profitable for National building (from idle money (capital) put in use of building infrastructures, product, and services for the entire country)
- Capital fuels the economic, industrial and service sector growth
- Multiple small savings by people used to create a long term financial investment
- Trading of securities freely available for buyers and sellers
- Valuation and ownership created and freely transferable.
- Hedging is possible by derivative products.
- Funds available continuously
The capital market is the source of finance for companies and investment opportunities for investors.
Other than the distinction between equity and debt, capital markets are also generally divided into two categories of markets:
1. Primary Market
The primary market is the new shares/paper issue market. It deals with the creation of new securities. Company issues equity shares to the public for the first time for raising capital resource is called Initial Public Offer (IPO). New shareholders will able to participate in contributing to the capital of a company. The functions of the Primary Market are Origination, Underwriting, and Distribution of the share.
The shares issued to the public through an initial public offer. Or the select group of investors in a private placement. A public proposal is open to three categories of investors:
- Qualified institutional buyers (QIBs), Foreign Portfolio Investors (FPIs), Banks and financial institutions, Mutual funds, Insurance funds, Pension funds, and other kinds of institutional players
- High net worth individuals, and non-institutional buyers (NIBs) who invest more than Rs. 2 lakhs
- Retail individual investors (including eligible NRIs and HUFs up to Rs. 2 lakhs in an issue.
A primary market issuance can also issue to a defined group of investors or private placement. A private investment made by a listed company is called a Preferential Allotment. A preferential allotment made to identified Qualified Institutional Buyers (QIB) is called a Qualified Institutional Placement.
Such an offer for sale does not increase or decrease the share capital of the company.
2. Secondary Market
A secondary market is a place where trading takes place in the stock exchange or stock market for existing securities. Securities are bought and sold by the investors in the secondary market or stock market. Functions of the secondary market are:
- Essential company information flow that may affect its share price
- Liquidity to the buyers and sellers
- Continuous trading
The leading stock exchanges in India are the National Stock Exchange (NSE), the Bombay Stock Exchange (BSE), and the Metropolitan Stock Exchange of India Ltd (MSEI).
The Securities and Exchange Board of India (SEBI) is the regulator for the securities market in India. It was established in the year 1988 and given statutory powers on 12 April 1992 through the SEBI Act, 1992.
SEBI is responsible to the needs of the three groups, which constitute the market:
- the issuers of securities
- the investors
- the market intermediaries
The basic objectives of SEBI is to protect the interests of investors, promoting the development of the stock market and regulating the stock market.
National Stock Exchange of India (NSE)
The National Stock Exchange of India Limited (NSE) is the leading stock exchange of India, located in Mumbai. NSE was established in 1992 as the first demutualized electronic exchange in the country.
NSE was the first exchange in the country to provide a modern, fully automated screen-based electronic trading system which offered easy trading facility to the investors spread across all over the country.
NSE has a market capitalization of more than US $ 2,030 Billion, making it the world’s 11th-largest stock exchange as of 30th November 2018.
NSE’s flagship index, the Nifty is used extensively by investors in India and around the world as a barometer of the Indian capital markets. More than 1952 Indian companies have been listed on the NSE.
Main Indexes under NSE:
Nifty 50 Nifty IT Nifty Midcap 50 Nifty PSE
Nifty Bank Nifty Pharma Nifty Auto Nifty Infrastructure
The Bombay Stock Exchange (BSE) is an Indian stock exchange located at Dalal Street, Kala Ghoda, Mumbai, Maharashtra, India. BSE was established in 1875.
The BSE is Asia’s first stock exchange and the world’s fastest stock exchange with a median trade speed of 6 microseconds.
The BSE is the world’s 10th largest stock exchange, with an overall market capitalization of US $ 2,056 Billion as of 30th November 2018.
More than 5749 Indian companies have been listed on the BSE.
SENSEX is the BSE index; it measures the overall performance of the exchange.
Stock Market functions?
In Electronic Trading system Buyers and sellers enter their trades on the broker trading terminals. Signals will transmit it to the stock exchange trading network.
In Stock exchange, matches buy and sell orders electronically. The buy orders executed at a price specified or lower and the sell orders at a price specified or higher. A price-time priority followed in executing orders. Modern markets are thus anonymous. Enables broader participation and liquidity, which ensures that orders matched almost instantaneously.
Buyers of equity shares expected to provide funds for their purchase, and sellers expected to deliver the shares they have sold. This process is called settlement. The clearing corporation does the settlement. Clearing corporation for:
- NSE – NSE Clearing Limited
- BSE- Indian Clearing Corporation Limited
- MSE – Metropolitan Clearing Corporation of India Limited
One can buy the shares in one exchange and sell on the other Exchange is called interoperability. NSE, BSE, and MSE, through the clearing corporations, settle the trade executed on their Exchange.
Leverage is a facility provided by members of stock exchanges to their clients to leverage their short term investments/trading.
For example, if you have Rs 10,000/- in your trading account, you cal buy or sell up to Rs 50,000/- worth shares for day trade (assuming 5X exposure) called as margin trading.
OVERVIEW OF GLOBAL MARKETS
20 LARGEST STOCK EXCHANGES IN THE WORLD- NOVEMBER 2018
|Sl No||Stock Exchange||Short Form||Country||Market Cap in USD (bn)|
|1||New York Stock Exchange||NYSE||USA||22,923|
|2||National Association of Securities Dealers Automated Quotations||NASDAQ||USA||10,857|
|3||Japan Exchange Group||JPX||Japan||5,679|
|4||Shanghai Stock Exchange||SSE||China||4,026|
|5||Hong Kong Stock Exchange||SEHK||Hong Kong||3,936|
|7||London Stock Exchange||United Kingdom European Union||3,767|
|8||Shenzhen Stock Exchange||SZSE||China||2,504|
|10||Bombay Stock Exchange||BSE||India||2,056|
|11||National Stock Exchange||NSE||India||2,030|
|12||Deutsche Börse||Germany, European Union||1,864|
|13||SIX Swiss Exchange||Switzerland||1,523|
|14||Korea Exchange||KRX||South Korea||1,463|
|15||Nasdaq Nordic Exchanges||Denmark, Finland, Sweden, Estonia, Lativa, Lithuania, Iceland, Armenia||1,372|
|16||Australian Securities Exchange||ASX||Australia||1,328|
|17||Taiwan Stock Exchange||TWSE||Taiwan||966|
|20||Bolsas y Mercados Españoles||BME||Spain||764|
NOTE: As on 30th November 2018 BSE stands 10th ranking with more than US $ 2,056 Billion and NSE stands 11th ranking with more than US $ 2,030 Billion.
Stock Market Concepts
Do you want to know the wonderful world of the stock market? Each one of us aspires to have “Financial Freedom.” The stock market is one field which helps us to achieve our goals in the time-frame and period of our earning! Let’s find out more about stock market investing in this section.
One can invest in the share market for Long term or short term on one’s need. Your understanding of the market, time, risk capacity, age, experience, you can be a trader (short term) or Investor (long term). Since share market riskier asset class, it is essential to learn from a professional trainer (not just from a theory/jargon based stock market training institute).
The stock market is a skill-based activity, practicing the learned skill is very important, stock market books (after learning the basic concepts), website resources, videos, both theoretical and practical knowledge about the share market for continuous education of the market.
Proper education in the market helps to appreciate the market and can be a great source of income!
(1) Why does a company go public? Or Public Limited Company!
Most companies started privately by their promoters in the specific business. However, it needs more capital to expand the business. The options for them to borrow either from the bank, financial institution or venture capital. But, they need to furnish collateral securities or may not get sufficient valuation for getting more capital. They need continuous funds for their growing company in the longer-term.
At the expansion stage, companies have the option of inviting the public to contribute to the capital. So companies invite the general public, High net worth individual, big institutions, etc., for issue and subscription of equity shares.
The way to encourage share capital from the public is through a ‘Public Issue’ or an offer to the public. Subscribe to such Public Issues for the share capital, source of funds to the company. After following all the rules and regulations of regulators like SEBI, Exchange, or any other government agency, the company allots shares to the applicants.
A public limited company invites the public at large through prospectus to subscribe to the issue of securities. First time when the company offering the shares to the public is called Initial Public Offer or IPO.
Thus, the “public company” can be defined:
First, the company’s securities trade on public markets,
Second, the company discloses all relevant business and financial information regularly to the public or market.
(2) Investing or trading in stocks?
There are two different ways to make money from the stock market:
- Investing: Buying stocks and staying invested for long term
- Trading: Buying and selling shares within a very short period
Investors are persons who buy stocks with long term goals in mind. They might purchase stocks or shares in a couple of value companies and then hold it for years. They do not worry too much about the market going down because they would have brought shares after doing an in-depth study of the company that they were investing in. So, they are confident that any losses that might see during the downtrend in the market are temporary, and the shares will eventually bounce back to the profit mode. The investors continuously read and analyze annual reports, turnover of the company, profitability, quality of management, pricing power, geographical presence, market share, fair value, etc. Such called Fundamental Analysis. The investor also is interested in all the news on the economy, industry, and company.
On the other hand, traders buy and sell stocks quickly – sometimes they even sell within minutes of buying. They are continuously looking for stocks that might have the capacity to move up or down in a short period. The demand and supply of the shares can be analyzed using Technical Analysis.
(3) Stock Market Products
Investment or trading options available today. Some of the instrument for investment and trading are:
(ii) Derivatives: (a) Futures – Stocks
(b) Options – Stocks
(c) Index – Futures & Options
(iv) Exchange-Traded Funds (ETFs)
(v) Differential Voting Rights (DVRs)
(vi) Mutual Funds (Equity, Debt & Hybrid)
(vii) Systematic investment plan (SIP)
(viii) Initial Public Offer (IPOs)
(xi) Commodity, and
(xii) Currency, etc.
Let’s understand some of the products in detail to make informed decisions in the stock market and to decide what product, risk/rewards, time frame, market knowledge we have to chose suitable products for our investing/trading decision.
Equity represents ownership of the company. For example, If you buy one share of a listed company, you become ‘partial owner’ or the ‘non-committed owner’ of the company. The shareholders enjoy all the ups and downs of the business they “own.” An equity holder enjoys dividends, bonus shares, and voting right in the company they own. Equity shares can use for investment (long term) or trading (short term) purposes. It is also commonly called shares, scrips, and stocks.
As a beginner in the stock market, we have a highly recommended invest or trade in the equity market.
Shares are of two types. (1) Equity Shares and (2) Preference Shares. The main difference being Preference shareholders get the priority for payment of dividend and also the capital at the time of liquidation.
Equity Shares Classification
(1) Large-Cap Share/Stock
Large Cap Stock refers to those companies’ stock which well established. Their market capitalization is enormous, usually close to 1 lac crores or above, and has a dominant presence in the market. Often they are Index Stocks. Companies like Reliance, HDFC, HDFC Bank, ITC, ICICI Bank etc fall under this category. These companies also called Bluechip companies. Investing in these companies are less risky. They move along with the market.
(2) Mid-Cap Share/Stock
Mid Cap Stocks are those companies, which have the potential to grow but small in size usually the market capitalization is above Rs 5,000 crores and below Rs 20,000 crores, compared with large-cap companies. Companies like Jubilant Foodworks, Amara Raja Batteries. Sun Tv, RBL Bank, etc.; these companies have high potential to grow but relative riskier than large-cap companies.
(3) Small-Cap Stocks
Small-Cap Stocks are those companies, small size usually less than 5,000 crores market capitalization companies. Companies like India Cements, Delta Corp, N.C.C, Just Dail, etc. These companies can give very handsome returns (multiple times or multi-bagger) but have a very high risk compared to the above two groups.
Derivatives contract is a product such are futures or options, whose value is dependent on an underlying asset such as equity, commodity, or Index. The settlement price of the contract based on the closing price of an underlying asset, hence the name derivative product.
However, the most popular derivatives are Futures and Options of both stocks and Index.
Futures (Stocks & Index)
A Futures contract legally binding agreement to buy or sell the underlying security at a future date.
A contract is standardized with the specified quantity (lot size), price, and settlement terms. Exchanges open three months trading cycle (i.e., current month/near month, next month (2nd month) and far month (3rd month) at a given time. The contract for the current month needs to be settled (closed) on the last Thursday of every month.
Let us understand this with one practical example:
HDFC Bank contract present month, i.e., 28FEB2019, one lot is 250 shares (in future min. quantity is one lot size) at current market price (CMP) Rs 2150. Total contract amount is 2150 x 250 = Rs 5,37,500/-. Out of which, we can purchase contract at (Span margin + Exposure margin) = Rs 94660/- of (250 shares) one lot.
If we buy the HDFC Bank futures contract if it moves up by rs 20 from our purchase price, we can make a profit of Rs 25 x 250 = Rs 6250/- with the investment of Rs 94660/-. Thus we can get a return of 5.28% on our capital. If we make Loss, also we lose the same amount. If we invest the same money in equity, we can buy only 44 shares. The profit in equity shares would be 25 x 44 = Rs 1100 out of 94660 investment (return of 1.16%).
There more rules to hold a future contract. Mark to Market (MTM) should be maintained. In above example, HDFC Bank future CMP 2150 and we are expecting HDFC Bank future prime will go to 2200 in a couple of days, but HDFC Bank closed today at Rs 2130, we have to maintain balance of initial margin + MTM (rs 20 x 250 = rs 5,000 extra) in our trading account. Suppose the closing price is 2170 (we have not closed the contract); our account gets a credit of rs 5,000. Thus it’s settled at today’s closing price.
Future price initial margin + exposure margin will change from time to time by exchange and stockbroker.
Just like the stock future, we also trade, Index, or sub-index. Some popular available contracts are:
- Bank Nifty
- Nifty IT etc.
Remember, not all the stocks listed in exchanges are not available for future contracts. Around 180-190, liquid stocks/indexes are currently available for future trading. These stocks (addition or deletion), quantities (each lot size), margin (minimum amount required to buy or sell) will change from time to time according to exchange specifications.
Options (Stocks & Index)
An Option is a contract. It gives the right, but not an obligation, to buy or sell the underlying at a stated date and an agreed price. The option buyer pays the premium to buy. The option buyer buys the right to exercise the option. On the other hand, the writer of an option is one who receives the option premium. Therefore he is obliged to sell/buy the asset if the buyer exercises it on him.
Let’s take some practical example:
If you want to book a car with a car dealer, he usually asks at the time of booking for a small down payment. On delivery of the vehicle, you can pay the full amount and take the delivery of the car. Here, we are the buyer of options; the car dealer is the seller of the option. Let’s say we don’t want to take the car delivery; we have to forgo the initial down payment (premium). Meantime some friend needs the car if he is ready to pay a higher amount to our original premium, we can sell the right to him (we have right but not obligation to buy the car). But for the car dealer, he must fulfill (obligation) the contract if the buyer exercises it on him.
Two types of Options: Calls and Puts
“Calls” give the call option buyer the right to exercise the contract. But not the obligation to buy. A specified quantity and specified price on or before a given future date.
“Puts” give the put option buyer the right to exercise the contract. But not the obligation to sell. A specified quantity and specified price on or before a given future date. All the options contracts settled in cash. Now rules are coming in this regard.
Further, the Options are classiûed based on the type of exercise. At present, the Exercise style can be European or American.
The American Option – American options are options contracts that can exercise at any time upto the expiration date. Options on individual securities available at NSE are American type of options.
The European Options – European options are options that can be exercised only on the expiration date. All index options traded at NSE are European Options.
In the money, At the Money and Out of the money in Options.
In- the- money options (ITM): An in-the-money option is an option that would lead to positive cash ûow to the holder if exercised immediately. A Call option is said to be in-the-money when the current price stands at a level higher than the strike price. If the Spot price is much higher than the strike price, a Call is said to be a deep-in-the-money option. In the case of a Put, the put is in-the-money if the Spot price is below the strike price.
At-the-money-option (ATM): An at-the-money option is an option that would lead to zero cash flow if the contract exercised immediately or on expiry. An option on the Index “at-the-money” when the current price equals the strike price.
Out-of-the-money-option (OTM): An out-of-the-money Option is an option that would lead to negative cash flow if it exercised immediately. A Call option is out-of-the-money when the current price stands at a level that is less than the strike price. If the current price much lower than the strike price, the call is said to be deep out-of-the-money. In the case of a Put, the Put said to be out-of-money if the current price is above the strike price.
We usually hear that some investors made huge money today or lost. How do we measure that? Movement of stocks tracked by Index, which is a barometer provided by the exchange. An index is a collection of top companies in different sectors of the economy. The Index tracks any upward or downward movement in these collections of stocks. When we say markets rallied or corrected, we count only this index companies, not other companies. In India, there are two significant indices:
Generic indices such as NIFTY 50, SENSEX
Sectorial indices, such as Nifty Bank, Nifty IT, Nifty Auto, Nifty PSU Banks, Nifty Pharma, etc.,
Some of the other stock exchanges are MSEI, NCDEX, MCX, NMCE, ICEX, etc.,
Two major national level commodities exchanges are Multi Commodities Exchange of India (MCX), National Commodities and Derivatives Exchange of India (NCDEX).
Nifty 50 is a well-diversified 50 stock index in NSE, accounting for 22 sectors of the Indian economy. The Index used for a variety of purposes, such as benchmarking fund portfolios, Index based derivatives, and index funds.
For our understanding, the NSE Nifty50 index is a collection of 50 companies!
SENSEX is a diversified 30 stock index accounting for major sectors of the Indian economy of BSE. Widely used for benchmarking, whether a particular stock can beat the Index or underperform!
For our understanding, the BSE SENSEX index is a collection of 30 companies!
Exchange-Traded Funds (ETFs)
Exchange-Traded Funds are Index Funds that are listed and traded on exchanges like stocks. If the market is going up, we don’t know which particular stocks are going up; instead, we can buy ETFs, like stocks. ETF is a basket of stocks that has the same composition as an Index, like S&P CNX Nifty. The ETFs trading value based on the net asset value of the underlying shares that it represents. Some of the examples: NIFTYBEES, CPSEEFT (PSU stocks), BHARAT 22 ETF, SET GOLD (SBI ETF gold), etc.,
Differential Voting Rights (DVRs)
Differential voting rights (DVR) are equity shares with different voting rights when compared to primary stocks. Two advantages of buying a DVR are:
1) They traded with a considerable discount to the primary equity
2) They give a higher dividend rate.
Some examples of DVR share in India are Tata Motor DVR, Jain Irrigation, Future Retail, Gujarat NRE Coke.
For short term trading purposes, it is recommended.
A mutual fund is a basket of various investments, such as stocks, bonds, and cash. A mutual fund is a pooled money by the investments of individual investors and institutions.
The fund manager applies various analytics and market research to pick up good investment stocks.
Mutual funds are companies that buy pools of stocks and/or bonds as recommended by a fund manager.
Types of the Mutual Funds
Several types of mutual funds are available. Let’s look at some nature of mutual funds.
1. Mutual fund types based on the asset class
(a) Equity Funds
(b) Debt Funds
(c) Money Market Funds
(d) Hybrid Funds
2. Mutual fund types based on the structure
(a) Open-Ended Funds
(b) Closed-Ended Funds
(c) Interval Funds
3. Mutual fund types based on investment goals
(a) Growth Funds
(b) Income Funds
(c) Liquid Funds
(d) Tax-Saving Funds
(e) Aggressive Growth Funds
(f) Capital Protection Funds
(g) Fixed Maturity Funds
(h) Pension Funds
4. Mutual fund types based on risks
(a) Very Low-Risk Funds
(b) Low-Risk Funds
(c) Medium-risk Funds
(d) High-risk Funds
5. Specialized mutual fund types
(a) Sector Funds
(b) Index Funds
(c) Funds of Funds
(d) Emerging market Funds
(e) International/Foreign Funds
(f) Global Funds
(g) Real Estate Funds
(h) Commodity-focused Stock Funds
(i) Market Neutral Funds
(j) Inverse/Leveraged Funds
(k) Asset Allocation Funds
(l) Gift Funds
(m) Exchange-traded Funds
Advantages of Mutual Funds
Diversification: Portfolio diversified as mixing the assets class and different sectors/companies.
Economies of Scale: Large pool buying by mutual funds of collecting with all individuals and average buying the benefit of economies of scale.
Easy Access: Mutual funds can be bought and sold with relative ease as it is trading on the major stock markets, making them highly liquid investments.
Professional Management: Professional fund managers run the fund, researching securities, investment strategies, or taking investment advisors report. Individual investors will have a low-cost way of specialist advisors (indirectly) and experience of professional money management.
Passive earning for the retail investor: It helps younger, novice, and other individual investors who don’t want to manage their money actively.
Style: Investors have the freedom to research more about the fund manager and fund itself. One can choose different styles of management goals that suit the investor.
Disadvantages of Mutual Funds
Fluctuating Returns: Mutual fund returns based on market movement. Equity mutual funds also experience price fluctuations as stocks of the fund varies along with the market movement.
Cash: Mutual fund has to maintain cash position as many people enter and many exits. The fund should keep ample cash is great for liquidity, as ideal money is earning returns.
Costs: Mutual fund houses provide investors with professional management services. They charge fees for their service. The management fees magnify the pain, especially when the fund is not doing good.
Lack of Transparency: Investor does not have data and analysis to back up the fund manager decides to buy or sell a stock. It will offer investors the opportunity to examine the P/E ratio, sales growth, earnings per share, etc. unlike share.
Systematic investment plan (SIP)
Systematic Investment Plan (SIP) is a process of investing a fixed amount of money in mutual fund products at regular intervals, either monthly or quarterly.
For example, you can invest Rs 1000 every month, and one can buy units for your money every month. The advantage of this facility is that one can purchase units at an average cost (some time market is high and some to low).
SIP is a simple investment plan for the beginning phase of investment.
- SBI Magnum Balanced Fund
- HDFC Prudence Fund(G)
- SBI Magnum Gilt Short Term
- Aditya Birla Sun Life Medium Term Plan
Initial Public Offer (IPOs)
When a private company goes public by sale of its stocks for the first time is called Initial Public Offer (IPO). After IPO, the company’s shares listed in the stock exchange. A new investor can buy or sell the stocks in the secondary market.
When the stock listed in the exchange, the opening price is changed according to demand and supply. If the demand for a particular shares/company exceeds the supply shares open higher rate than offering price, otherwise they open lower.
A bond is a financial debt instrument created for raising the capital. It is fixed-income security. It is a loan agreement between the bond issuer and an investor. The bond issuer is obligated to pay a specified amount of money at specified future dates.
The RBI Savings Bonds issued by the RBI on behalf of the Government of India. Individuals and HUFs can purchase with a minimum investment of ₹1,000 and with no upper limits.
The debenture is a financial debt instrument for raising the capital for the company. It is fixed-income security. It includes the payment of interest at a fixed rate until the times the principal sum becomes repayable.
Commodities generally divided into four categories:
1. Agricultural: Food crops such as corn, cotton, and soybeans, livestock such as cattle, hogs, and pork bellies and industrial crops such as lumber, rubber, and wool.
2. Energy: The products include: crude oil, natural gas, heating oil, coal, ethanol and electricity
3. Metals: Precious metals such as silver, gold, platinum, etc., and base metals such as aluminum, nickel, steel, iron ore, tin, and zinc.
4. Environmental: In these category products such as carbon emissions, renewable energy certificates, and white certificates
Main drivers of Commodity Prices include;
- Emerging Market Demand
- US Dollar
Ways to invest in commodities include;
- Physical Delivery
- Options on Futures
- Commodity ETFs
- Commodity shares
- Contracts for Difference (CFDs)
There are some major commodity trading exchanges in India, as listed below.
- Multi Commodity Exchange – MCX
- National Commodity and Derivatives Exchange – NCDEX
- Indian Commodity Exchange – ICEX
- Ace Derivatives Exchange – ACE
Currency trading is an attractive trading segment in the stock market. Globally, $5 trillion of world currencies traded across different indices. Within a pair, there is a base currency, and then there is a quotation currency.
Mathematically: Base Currency/Quotation Currency= Value
For instance, if the pair is USD/INR, we generally say 1 USD = 72 INR.
If you put this relationship in the formulae mentioned above, then USD is the base currency, INR is the quotation currency while 72 is the value.
Secondly, if you are looking to trade in currency, then there are two price points:
Bid Price and Ask Price
i.e., prices at which specific currencies can be bought or sold.
Thirdly, the unit of price fluctuations in the ‘Value’ represented in the form of PIPs where PIP abbreviates for percentage in point.
About Currency Derivatives
The FX future or Currency Future is a contract to exchange one currency for another currency. At a specified date or expiry in the future at a price (exchange rate) that fixed on the purchase date.
On NSE, the price of a futures contract is in terms of INR per unit of other currency. The pairs available are (1) US Dollars (USD), (2) Euro (EUR), (3) Great Britain Pound (GBP), and (4) Japanese Yen (JPY).
Cross Currency Futures & Options contracts on EUR-USD, GBP-USD, and USD-JPY are also available for trading in the Currency Derivatives segment.
• Currency Futures and Options are different from the Equity futures: In currency trading, the underlying asset is the currency pair at the currency exchange rate as compared to equity futures where the underlying asset is the equity share of the respective company.
• Participants in Currency Trading: Traders-Importers/Exporters; Stockists; Hedgers; Arbitrageurs; Speculators
• Date of expiry: All Currency contracts expire two working days before the last business day of the expiry month at 12 noon.
• Trade timings of Currency trading: In NSE for Currency Derivatives, the trade timings are as follows: Trading Session- Monday to Friday- 9:00 AM to 5:00 PM.
Currency trading in India (INR currency pairs)
Currency trading is where you buy and sell international currencies. In India, you can only trade currencies that paired with the Indian Rupee. There are four such regulated pair
• USDINR (US dollar)
• EURINR (European Currency)
• GBPINR (Great Britain Pound)
• JPYINR (Japanese Yen)
Note: Of the above, only Resident Indians and NRIs can deal with the USDINR pair. You can trade these currencies on exchanges like NSE, BSE, and MCX-SX.
(4) Buy-Long-Bull and
Sell-Short-Bear (basic concepts)
(a) What Is Long or Bullish Trend/view?
For example, if Mr. A buys 100 shares at Rs 700 of Infosys Limited. Then he decides to exit his 100 shares at Rs 710. He made a profit of 100 shares x Rs 10 (profit) = Total Profit Rs 1,000/-. In stock market jargon, we say Mr. A was in a long position. We also call this a bullish (expecting the stocks to go upside) trend/view.
(a) What Is Short or Bearish Trend/view?
For example, if Mr. A sells 100 shares at Rs 530 of ICICI Bank. Then he decides to exit his 100 shares at Rs 520. He made a profit of 100 shares x Rs 10 (profit) = Total Profit Rs 1,000/-. In stock market jargon, we say Mr. A was in a short position. We also call this a bearish (expecting the stocks to go downside) trend/view.
It very important for stock market beginners to note that you can sell the shares (equity) though you do not have that share; it is permitted. But you have to buy back the shares (even at a higher value, where you can make a loss) before the close of the stock market. In the futures contract, we can hold our short position until the expiry of the contract.
Thus as a trader, you can catch both upside and downside movement of the stock market. We can play uni-direction of the stock market.
As an investor, you can make money only if the shares go up! For example, we bought a share of Rs 300. If the stocks move above that value only, we can make money. That why we call an investor as Long only buyers!
(5) Margin Trading or
Margin Trading refers to, in Intraday trading, more exposure (multiple times) than what we invested in our accounts. Exchange/broker gives this facility for trading the stock or futures.
Margin trading is a way to maximize your purchasing power by borrowing the amount of money from the stockbroker.
For example, Mr. A has Rs 10,000/- in his trading account. He can buy or sell shares worth Rs 1,00,000/- (if his broker given him 10X exposure) for intraday trading. No cost charged for this service but profit or loss to be born by Mr. A.
(6) Time frame analysis
Whether investing or trading, it is essential to decide on what time frame or for how long? We are investing or trading. Are we buying for a day, week, months, or many years? The dynamics of each period is different. Different techniques, methods, and systems will work more efficiently if we decide our time frame. It will help us have a “Trading Objective” or purpose of investing. Time frame analysis is very important aspect in technical analysis.
(7) Why Stock Market Moves
The stock market price moves every day, hour, a minute, or every second. The opinion of the buyer and seller are formed based on factors such as sentimental (cause and effect), or for technical or fundamental reasons. The market can move based broadly on the following reasons:
News related to the company: News such as financial results, dividend, bonus, joint venture, geographical expansion, new product releases, or increase/decrease in price, etc., related to the company.
News related to the industry/sector: Any new which affects the entire industry/sector such as government policies, economic cycles, interest rates, tax rates, demand expansion/contraction, etc.,
News related to the market: Any general news which affects economy such as crude price, general election, IIP nos, CPI, natural calamities, war, perception of risk in a global context (risk-on or risk-off), etc., which affect the market in general.
(8) Market Participants
Market participants include individual retail investors, HNI (High Networth Individual), institutional investors such as mutual funds, banks, insurance companies, and hedge funds both Indian and Foreign Institutional Investors, etc.,
A few decades ago, most buyers and sellers were retail and high net worth individuals. Over time, markets have become more “institutionalized.” Buyers and sellers are mostly institutions (e.g., pension funds, insurance companies, mutual funds (MF), index funds, exchange-traded funds, hedge funds, investor groups, banks, and various other financial institutions).
Different participants are buying and selling shares for different — time horizon, risk appetite, hedging strategy, the percentage of return, obligation – It is imperative as retail investor guessing and assuming end up in a considerable loss. The retail crowd should get an education in the Stock market and start with small quantities and try for more significant latter as they understand the market, their psych, and, more importantly, their limitation or risk appetite.
(9) Risk To Reward Ratios and
(a) The Risk to Reward Ratios
In Trading, Risk to Reward is a fundamental concept. We compare at what risk, how much returns we are expecting. The relationship between the two (risk and reward).
For example, Mr. A ready to risk Rs 500 per trade for the expected return of Rs 1000. His risk-to-reward ratio is 1:2! As a trader to succeed in the stock market, one should keep improving his risk-to-reward rates to 1:3, 1:4! And should trade only such opportunities — this helps to maximize profits on winning trade at the same time limiting losing trade.
(b) Stop Loss
Stop-Loss (SL) means limiting or stopping loss at a certain point (predetermined). SL is a must concept to be known and practice by traders/investors.
For example, Mr. A taken 100 shares at Rs 300 and expecting the stock will move up to Rs 310. Instead, stocks move down; he takes the risk up to Rs 298. i.e., Rs 2 per shares, is called Stop-loss.
SL order placed on the following basis:
- Time-based SL
- Technical-based SL
- Support & Resistance-based SL
- Absolute value-based SL
- Percentage (%)-based SL
- Risk-to-reward-based SL
(10) How to do Trading
With the technological advancement, Trading has become very easy. Online Trading has made both investors and stock broker’s life at ease.
Investors or Traders need to open a Trading, and Demat account with SEBI recognized Stock Broker. Investors/Traders can trade on the Web browser, Smart Phone, Desk Top, Laptop, and Tablet.
After opening the account with Stock Broker, you can open your Online Trading with the User ID, Password, and 2FA. Then trading account will be linked to your savings account for a smooth transfer of money and shares.
We offer various unique user-friendly trading tools and charts to buy and sell shares that cater our diversified set of traders and investors.
(11) Where do I get company information?
The information about the companies is available in multi-channels and sources. They include:
1. Online Resources: Company website, Exchange both (NSE – www.nseindia & BSE – www.bseindia.com), third party websites, www.screener.in,www.moneycontrol.com, www.equitymaster.com, etc.,
2. Television: ET Now, CNBC TV18, Zee Business, etc.,
3. Newspaper/magazines: Economic Times, Business Standard, Dalal Street, Capital Markets, etc.,
4. Trends analysis: PVR, Inox, and Single screen (single screen v/s multiplex), Cars preference, Apartment/Independent villas. Buying groceries v/s online i.e., Bigbagar, Amazon, Flipkart, etc.,
However, all these mainstream media analyses to be taken only for more in-depth research but while investing one should invest according to his/her ability of capital, ability to take the risk, time frame factors and more importantly stock market education, contrarian views and understanding practical market risk & opportunities, etc.,
(12) Fundamental Analysis
Fundamental analysis of studying and understanding of a stock involves understanding the business of a company. We try to find out what product or service the company in, customer base, pricing power, quality of management, competition, the financial performance of company, sector analysis (the company belongs), government policies, etc. Fundamental analysis is an in-depth analysis of the Company, Sector, and economy.
The main aim of studying the fundamental analysis is determining the “fair value” of stock and identifying whether a stock is undervalued to the fair value or overvalue than the fair value for deciding to buy or not buy that stock.
Fundamental analysis consists of a systematic series of steps to examine the investment environment of a company and then identify opportunities. Some of these are:
- Macroeconomic analysis – which involves economic development (GDP), analyzing capital flows, interest rate cycles, employment, etc.
- Crude, currencies, commodities and demand & supply conditions
- Sector analysis – which involves the study of sector or industry that analyzing company belongs and its characteristics
- Financial analysis of the company – Balance sheet, Profitability, debt ratios
- Valuation of companies and compare with peers.
Approaches to Investments
1. Growth Stocks
In the growth investing approach to fundamental analysis, the investor tries to find such companies, which expected to witness very high growth in business performance in the future. Once the investor has chosen such a company, buys its shares. The investor expects to benefit future high growth of the business of the company.
An investor, who follows the growth investing approach of fundamental analysis, would like to study a company like any other business. The investor would focus on a company’s product, target market, distribution channel, customers, management, financials, etc. The investor wants to know the strength and sustainability of the business of a company in the long term. The aim here is to find a company that is going to increase its earnings, market share, pricing power, differentiated product, or service in the future. Such a company preferred for large investors, which ultimately results in re-rating. Such company price to earnings (PE) ratio will result in multi-times of their earning in valuation.
2. Value stocks
In Value investing, the approach of fundamental analysis is to find the fair value of the share of a company. Analyzing the various business and financial factors, and calculating the fair value of such share, also compares it with the current market price (CMP) of such stock. If the investor figures out the current stock price of the company are lower than the fair value of its stock and buy the shares of such a value company. The investor expects to good return from the rising price of such stock. When the market discovers the discount in the stock value and increases the stock price to its fair value.
The value investing approach would focus on finding the fair value of the company. Investors focus on the assets quality and earning potential of the companies. Then tries to find whose stocks priced at a discount to the fair value. The deeper the discount can find, the better it is!
Some other styles of investing include:
Index funds – Investing proportionately to match index such as Nifty 50.
Momentum investing – Investor identifies momentum in any asset class and will invest till momentum last in any country/index etc.
Yield investment – In this style of investing, fund manager generates above the market or benchmark index income.
Structured investment: In this style, the investment made to suit the specific/exact risk and reward parameters of the investor using sophisticated investment tools and financial products.
- Alternative investment – In this, the investment made on non-conventional products such as weather, art, wines, etc.,
(13) Technical Analysis
Technical Analysis (TA) is a trading tool to identify trading opportunities by analyzing price movement, volume (number of shares traded), and time. Technical Analysis is a method forecasting future price change based on past price movements. Technical Analysis is an art and science to evaluate the better trading possibility or outcome.
Technical Analysis the studying the demand and supply of stocks, indices, commodities, future or any other instrument which has historical data. It uses patterns, indicators, and various other tools to analyze.
Technical Analysis may be used to study for intraday (1 min, 5-min, 10-min, 15-min, 30-min, or hourly), daily, weekly, or monthly price data for many years.
Fundamental analysts evaluate stock/security’s intrinsic value. Technical analysts focus on patterns of price movements, trading signals, and various other analytical charting tools to assess a stock’s strength or weakness.
In other words, Fundamental Analysis of “Why” the price is at a Current Market Price (CMP)? Whereas Technical Analysis focuses on “What” to do at Current Market Price (CMP)?
Technical Analysis Framework
Charles Dow considered being the father of Technical Analysis, on which the Technical Analysis framework derived. Underlying three assumptions are:
- The market discounts everything.
- Price moves in trends.
- History tends to repeat itself.
1. The market discounts everything
Technical Analysis considering only prices and ignoring all fundamental Analysis of the company. Technical Analysis assumes that a stock’s price reacts to everything that has or could affect the company at any point in time.
2. Price moves in trends
“Trade with the trend” is the underlying logic behind Technical Analysis. Once a trend established, the future price movement is more likely to be in the same direction as the trend unless it reverses and creates a new trend. Technical analysts frame strategies based on this assumption only.
3. History tends to repeat itself
People have been using charts and patterns for several decades to demonstrate patterns in price movements that often repeat themselves. The repetitive nature of price movements attributed to market psychology.
How to Use Technical Analysis?
Researchers across the world developed hundreds of patterns, indicators, and signals for the trading system. Trading systems developed for forecasting and trade on price movements. Indicators focused on identifying the current market trend, support and resistance areas, strength of a trend.
Indicators, charting patterms, trendlines, channels, moving averages, and momentum indicators commonly used in the technical analysis.
Some broad types of indicators are:
- Moving averages
- Support and resistance levels
- Certain chart patterns
- Volume and momentum indicators
Who are Trader/Speculators?
A Trader/speculator is a persons who
- trades derivatives, commodities, bonds, equities or currencies
- takes large risks
- sacrifice the safety of their principal amount
- hopes to make large small term gains
- anticipates future price movements
- often use technical analysis and other trading tools to make investment decisions.
- Buys stocks at lower price and sells at higher price
- Sells stocks at higher price and buys at lower price
- Not much worried about the financial reports of a company
- Is interested mainly in quick profits.
To summarize :
Traders/Speculators are typically sophisticated, risk-taking traders with expertise in the market in which they are trading and will usually use highly leveraged investments such as futures and options. For example, purchasing a very volatile stock hopingto make profitsby few movements, in points of the stocks traded.
Investors are those who tend to buy stocks they believe will soon see a large growth in price and then sell them at the top of the market. For Example:
Investments in a company’s stocks which has got strong financial background.
Hedgers buy futures and options mainly to protect their financial interests. For example, a Goldsmith buys a Gold futures contract in order to protect the cost of Jewellery production. This is hedging the risk that Gold prices will rise. The Goldsmith is willing to spend a certain amount to protect against a potentially larger loss in future.
What is Trend?
Trend refers to the direction, course, tendency, swing, shift or movement. In Stock Market Trend indicates the movement of Stock price. The price of stock whether it’s rising or falling can be made out by a technique called Trend Analysis.
Under Trend Analysis there are basically three types of Primary Trends which are as follows:
1. UP TREND
Upward Trend refers to a process of gradual change in the stock price from lower price to higher price. It is defined as “Series of higher highs and higher lows”.
Uptrend, also known as rising trend, is the trader’s favorite trend type. In this trend, stock price trends in upward directions by making series of higher high and higher lows. Though, it is safe to make a buy decision anywhere in uptrend, it gives best returns when bought near pullback or intermittent lows.
Uptrend lines act as support. As long as prices remain above the trend line, the uptrend is considered intact. A break below the uptrend line indicates that demand has weakened and a change in trend could be imminent.
2. DOWN TREND
Downward Trend refers to a process of gradual change in the stock price from higher price to lower price. It is defined as “Series of lower highs and lower lows”.
A downtrend line has a negative slope and is formed by connecting two or more high points. Downtrend lines act as resistance. As long as prices remain below the downtrend line, the downtrend is intact. A break above the downtrend line indicates that supply is decreasing and that a change of trend could be imminent.
3. SIDEWAYS TREND
The sideways trend describes the horizontal price movement that occurs when the forces of supply and demand are nearly equal. A sideways trend is often regarded as a period of consolidation before the price continues in the direction of the previous move.
Sideways Trend is defined as a “series of relatively equal highs and equal lows”
WHAT ARE THE KEY POINTS TO BECOME A SUCCESSFUL TRADER?
Five key points to a great success that one can follow easily:
- NEVER PREJUDGE – A good trader always follows the rules of trading and his decisions are based on the Trading Analysis by using tools and techniques. If anyone anticipates the prices of stock without any base, it will result in sheer Gambling and will tend to loose heavily in the share market.
- AVOID BIG LOSSES – If one masters the technique of avoiding big losses then easily one can make money in the share market. Its similar to swimming against the tides of the Ocean, once you master to drift over every tide then you are a perfect swimmer!
- OPPORTUNITY – Never miss the big opportunity, for this one has to keep an eye on the market always. Any right opportunity, rightly executed will result in Gold!! Practice everyday as per tools the Right Entry and Right Exit for a stock trading.
- PATIENCE – To be a successful trader one has to develop the habit of patience. Stock market is so dynamic that the prices of stocks keep changing every fraction of a second. One has to keep the ‘Monkey Mind’ under control at all times. Stock Market is a good entertainer but to make money one has to be patient.
- FIT & ALERT – A healthy body and a healthy mind is a must to become a good trader. Keep yourself fit, do Pranayama, Yoga. Join Gym or go for a walk. Ensure good amount of sleep and rest to the body to have an alert mind during market hours.
Stock Market Tips?
Below are some of the Do’s and Don’t of Stock Market, though they are not exhastive
- Follow tools and techniques.
- Slow, steady and boring wins the race
- Try to do a lot of research- try to find an edge for yourself which clicks
- Diversify your investments
- Pay close attention to brokerage fee
- Always put Stop losses- manage risk involved in each trade
- Maintain cash savings
- Believe in yourself
- Stick to your strategy
- Always deal with the market intermediaries registered with SEBI / stock exchanges.
- Do not give weightage to market forecasts
- Do not invest according to emotions
- Don’t Panic
- Don’t make huge investments
- Don’t chase performance- Make choice of Long / Short before you invest.
- Don’t deal with unregistered brokers / sub – brokers, or other unregistered intermediaries.
In our Country Reserve Bank of India ( RBI) is the Central Bank and is called the ‘Banker of Banks’, it controls the monetary policy of the Indian Rupee.
RBI was established on 1st April 1935 and its present Governor is Shri Shaktikanta Das.
Some of the RBI Bank rates are stated as below:
Repo (Repurchase) rate also known as the benchmark interest rate is the rate at which the RBI lends money to the banks for a short term. When the repo rate increases, borrowing from RBI becomes more expensive. If RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate similarly, if it wants to make it cheaper for banks to borrow money it reduces the repo rate.
Reverse Repo rate is the short term borrowing rate at which RBI borrows money from banks. The Reserve bank uses this tool when it feels there is too much money floating in the banking system. An increase in the reverse repo rate means that the banks will get a higher rate of interest from RBI. As a result, banks prefer to lend their money to RBI which is always safe instead of lending it others (people, companies etc) which is always risky.
CRR – Cash Reserve Ratio – Banks in India are required to hold a certain proportion of their deposits in the form of cash. However Banks don’t hold these as cash with themselves, they deposit such cash(aka currency chests) with Reserve Bank of India , which is considered as equivalent to holding cash with themselves. This minimum ratio (that is the part of the total deposits to be held as cash) is stipulated by the RBI and is known as the CRR or Cash Reserve Ratio.
When a bank’s deposits increase by Rs100, and if the cash reserve ratio is 9%, the banks will have to hold Rs. 9 with RBI and the bank will be able to use only Rs 91 for investments and lending, credit purpose. Therefore, higher the ratio, the lower is the amount that banks will be able to use for lending and investment. This power of Reserve bank of India to reduce the lendable amount by increasing the CRR, makes it an instrument in the hands of a central bank through which it can control the amount that banks lend. Thus, it is a tool used by RBI to control liquidity in the banking system.
SLR – Statutory Liquidity Ratio – Every bank is required to maintain at the close of business every day, a minimum proportion of their Net Demand and Time Liabilities as liquid assets in the form of cash, gold and un-encumbered approved securities. The ratio of liquid assets to demand and time liabilities is known as Statutory Liquidity Ratio (SLR). RBI is empowered to increase this ratio up to 40%. An increase in SLR also restricts the bank’s leverage position to pump more money into the economy.
Net Demand Liabilities – Bank accounts from which you can withdraw your money at any time like your savings accounts and current account.
Time Liabilities – Bank accounts where you cannot immediately withdraw your money but have to wait for certain period. e.g. Fixed deposit accounts.
Call Rate – Inter bank borrowing rate – Interest Rate paid by the banks for lending and borrowing funds with maturity period ranging from one day to 14 days. Call money market deals with extremely short term lending between banks themselves. After Lehman Brothers went bankrupt Call Rate sky rocketed to such an insane level that banks stopped lending to other banks.
MSF- Marginal Standing facility – It is a special window for banks to borrow from RBI against approved government securities in an emergency situation like an acute cash shortage. MSF rate is higher then Repo rate. Current MSF Rate: 5.65%
Bank Rate – This is the long term rate (Repo rate is for short term) at which central bank (RBI) lends money to other banks or financial institutions. Bank rate is not used by RBI for monetary management now. It is now same as the MSF rate. Current bank rate is 5.65%.
Marginal Cost of funds based Lending Rate or MCLR – the new base rate system for commercial banks to lend the money. RBI implemented from 1st April 2016. Commercial banks’ internal reference rate for charging interest on loans. This system additional or incremental cost for the credits will be calculated and charged on the borrower.