StockIsy

Tag: share market

  • WARREN BUFFETT – THE KING OF STOCK MARKET

    WARREN BUFFETT – THE KING OF STOCK MARKET

    AGE – 88 YEARS OLD

    BORN – OMAHA, NEBRASKA, U.S.

    EDUCATION – COLUMBIA BUSINESS SCHOOL (1950 – 1951)

    NET WORTH – 8430 CRORE USD

     

    Warrent Buffett is an American business magnate, investors, speaker & he is the chairman CEO & the largest shareholder of Berkshire Hathway. Warren Buffett was born 30 August,1930, in Omaha, Nebraska. Warren Buffett is an investment guru & one of the richest & most respected businessman in the world. Buffett’s grandfather also ran grocery store & Buffett’s father howard, was a local stockbroker & banker who later become Republican congressman.

    Warren Buffett known as “Oracle of Omaha”. When he was 11-year-old, Buffett already bought stock & by 16 he had amassed more than $53000 from various business ventures & investment. From a young age, Buffett was bound for success. Buffett purchased shares of CITISES SERVICES preferred for $38 apiece.

    After graduating, Buffett applied to HARVAD BUSINESS SCHOOL. But he was rejected by HARVAD BUSINESS SCHOOL. In 1951 he received his master’s degree in economics at Columbia university, where he studied under economist Benjamin Graham (the father of value) & furthered his education at the New York Institute of finance.

    He was appointed at a starting salary of 12000 a year at Benjamin Graham’s partnership in 1954. His boss was a difficult man to work with & expected strict adherence to conventional rules of investing which Buffett’s young mind questioned.

    Benjamin Graham retired & closed his partnership in 1956. By this time Buffett had a large amount of personal savings with which he opened Buffett partnership Ltd, an investment partnership in Omaha.

    He become the richest person in the world in 2008 with a total net worth estimated at $62 billion by Forbes, overtaking Bill Gates who had been the no.1 on Forbes list for the past 13 years. The very next year Gates regained the first position & Warren Buffett moved to second place.

    When asked the key to his success, Warren Buffett pointed to a stock of books & said, read 500 pages like this every day. That’s how knowledge works. It’s build’s up, like compound interest.

    On February 16,2011, Warren Buffett was awarded the highest civilian honor, “the presidential medal of freedom,” by former president Barack Obama.

    WARREN BUFFETT TIP’S

    • Never depend on single income. Make investment to create a second source.
    • Saving first, spending last.
    • Don’t buy things you don’t need.
    • Create more earning source.
    • Think long – term & be patient.
    • Do not put all eggs in one basket.
    • If the business does well, the stock eventually follows.
    • Invest yourself.
    • Our favorite holding period forever.
    • It’s far to buy a wonderful company at a fair price than a fair company at a wonderful price.

    WARREN BUFFETT QUOTES

    1. “Without passion, you don’t have energy. Without energy, you have nothing.”
    2. “The stock market is a device for transferring money from the impatient to the patient.”
    3. “Someone is setting in the shade today because someone planted a tree a long time ago.”
    4. “The difference between successful people is that really successful people say no to almost everything.”
    5. “Focus on your customer & lead your people as though their lives depended on your success.”
    6. “If you don’t find a way to make money while you sleep, you will work until you die.”
    7. “If you cannot control your emotions, you cannot control your money.”
    8. “I look for 3 things in hiring people: integrity, intelligence & a high energy level. But if you don’t have the first, the other two will kill you.”
    9. “You are your best ASSET.”
    10. “We have long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie & I continue to believe that short-term market forecast is poison & should be kept locked up in a safe place, away from children & also from grown ups who behave in the market like children.”
    11. “Risk comes from not knowing what you’re doing.”
    12. “No matter how great the talent or efforts, some things just take time. You can’t produce a baby in one month by getting nine women pregnant.”
    13. “Read 500 pages every day. That’s how knowledge works. It builds up like compound interest.”
    14. “Price is what you pay. Value is what you get.”
    15. “I never invest in anything that I don’t understand.”
    16. “Failure comes from ego, greed, envy, fear, imitation. I have success not because I am smart, but because I am rational.”
    17. “The more you lean the more you earn.”
    18. “The best investment you can make, is an investment in yourself…The more you learn, the more you’ll earn.”
    19. “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
    20. “I always knew I was going to be rich. I don’t think I ever doubted it for a minute.”
    21. “Time is on your side when you own shares of superior companies.”
    22. “Don’t save what is left after spending, but spend what is a left after savings.”
    23. “Investors making purchases in an overheated market need to recognize that it may often take an extended period for the value of even an outstanding company to catch up with the price they paid.”
    24. “Unless you can watch your stock, holding decline by 50% without becoming panic stricken, you should not be in the stock market.”
    25. “Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that causes the stock to be mis appraised.”
    26. “The stock market is a no called strike game. You don’t have to swing at everything you can wait for your pitch.”
    27. “If you are not thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes.”
    28. “Its good to learn from your mistakes. It’s better to learn from people’s mistakes.”
    29. “Wall street makes it’s money on ACTIVITY… you make your money on INACTIVITY.”
    30. “People who know the edge of their own competency are safe, and those who don’t, aren’t.”
    31. “First, many in wall street- a community in which quality control is not prized- will sell investors anything they will buy.”
    32. “I don’t try to jump over seven- foot bars; I look around for one-foot bars that I can step over.”
    33. “Never feel guilty for starting again.”
    34. “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.”
    35. “I mean, I can buy anything I want, basically, but I can’t buy time.”
    36. “An idiot with a plan can beat a genius without a plan.”
    37. “If you are happy every day, I think you are going to live longer.”
    38. “Don’t pass something that attractive today because you will find something way more attractive tomorrow.”
    39. “Stay away from credit cards & invest in yourself.”
    40. “In insurance, as elsewhere, the reaction of weak management to weak operations is often weak accounting.”
    41. “Don’t put all your eggs in one basket.”
    42. “I go out & do what I believe I should be doing. And I’m not influenced by what other people think.”
    43. “If you think being entrepreneur is risky, try working for someone else for 40 years & living off social security.”
    44. “I learned very early in my life that my favorite employer was myself.”
    45. “Never count on making a good sale. Have purchase price be so attractive even a mediocre sale gives good results.”
    46. “There comes a time when you ought to start doing what you want. Take a job that you love.”
    47. “I try to invest in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.”
    48. “Remember, money doesn’t create man, its man who creates the money.”
    49. “Predicting rain doesn’t count; building arks does.”
    50. “Success is walking from failure to failure with no loss of enthusiasm.”
    51. “Never test the depth of river with both feet.”
    52. “Successful investing takes time, discipline & patience.”
    53. “It takes twenty years to builds a reputation & five minutes to ruin it.”
    54. “Smart doesn’t always equal rational.”
    55. “What we learn from history is that people don’t learn from history.”
    56. “What the wise do in the beginning, fools do in the end.”
    57. “Charlie & I would follow a buy & hold policy even if we ran a tax-exempt institution.”
    58. “If each of us hires people who are smaller than we are, we shall become a company of dwarfs. But , if each of us hires people who are bigger than we are, we shall become a company of gaints.”
    59. “The best thing that happens to us is when a great company gets into temporary trouble……. We want o buy them when they are on the operating table.”
    60. “The most important thing to do if you find yourself in a hole is to stop digging.”
    61. “You only find out who is swimming naked when the tide goes out.”
    62. “It is not necessary to do extraordinary things to get extraordinary results.”
    63. “Its better to hang out with people better than you.”
    64. “Without passion, you don’t have energy. Without energy, you have nothing.”
    65. “You can’t make a good deal with a bad person.”
    66. “Honesty is a very expensive gift. Don’t expect it from cheap people.”
    67. “Having money makes you rich, having time makes you wealthy.”
    68. “To change your life, you have to change your mindset.”
    69. “Forget managing the situation. Manage your mind.”

     

    GOLDEN RULES OF WARREN BUFFETT:

    RULE NUMBER 1

    Never Lose Money

    RULE NUMBER 2

    Never Forget Rule Number 1…..

  • CURRENCY MARKET

    CURRENCY MARKET

    currency-market

    The currency market includes the Foreign Currency Market & the Euro Currency Market. Various countries’ currencies are traded in Currency Market. The Foreign Currency Market is virtual. There is no one Central physical location that is the Foreign Currency Market. The Foreign Exchange Market (forex, fx or currency market) is a global decentralized or over the counter (OTC) market for the trading of currencies. This market determines the Foreign exchange rate.

    It includes all aspects of buying, selling & exchanging currencies at current or determined prices. In terms of trading volume, it is by for the largest market in the world, followed by the credit market.

    Trading on Foreign Exchange Market establishes rates of exchange for currency exchange rates are constantly fluctuating on the forex market. As demand rises & falls for particular currencies, their exchange rate adjust accordingly. A rate of exchange for currencies is the ratio at which one currency is exchanged for another.

    Future trading happens in currency market. Currency options have been started in USDINR. Currency market trading is conducted on two exchanges viz MCX-SX (multi commodity exchange) & NSE (National Stock Exchange). We an do trading in four important pairs in India USDINR, EURINR, GBPINR & JPYINR. Daily turnover of currency market is more than 10,000/-cr. Market timing for this segment is Monday to Friday from 9am to 5pm.

     

    Symbol Rate Lot Size Margin

    3% (0.03)
    USDINR 65 1000 1950Rs.
    EURINR 75 1000 2250Rs.
    GBPINR 80 1000 2400Rs.
    JPYINR 65 1000 1950Rs.

     

    USDINR is known as pair currency, in pair currency first factor is known as base currency & the second is known as term currency. We pay term currency & buy or sell base currency. We require very less margin in this & if we get 10ps movement also we get Rs.100 profit & if it raises by Rs.1 then the profit is 1000/-. In India USDINR has major volume.

    ADVANTAGES OF CURRENCY MARKET 

    1.  24 HOUR OPEN MARKET:

                                                 The foreign market is worldwide. There is no waiting for the everyday opening bell. Trading starts when the markets open in Australia (Sudney session) on Sunday evening & ends after markets close in NEW YORK on Friday.

    This is fabulous for those who would like to trade on a part- time basis because you can choose your own time for trading: morning, afternoon, night, during breakfast, lunch, dinner or in your sleep. An individual can view the current market trend & get updated anytime.

    2.  TRANSACTION COSTS ARE LOW:

                                           The cost of a transaction is typically built into the price in forex. It’s called the spread. The spread is the difference between the buying & selling price. The retail transaction cost (the bid/ask spread) is typically less than 0.1% under normal market condition. For larger transaction, the spread would be is low as 0.7%. Of course this depends on your leverage.

    3.  PROFIT POTENTIAL FROM BOTH RISING & FALLING MARKET:

    The foreign market has no restrictions on trading direction. That means, if you think a currency pair is going to increase in value, then you can buy it or go long. In the same way if you think it could decrease in values, then you can sell it or go short.

    In either case, if your trade goes right then you make profit.

    4.  VERY HIGH LIQUIDITY:

    Because the size of the foreign market is so large, it is extremely liquid in nature. It means that under the normal market condition you can insanely buy & sell currencies as always there will be someone in the market willing to accept the other side of your trade.

    Liquidity is the ability of an asset to be converted into cash quickly & without any price discount. In forex, this means we can move large amounts of money into & out of foreign currency with minimal price movement.

    5.  NO COMMISSION:

    No clearing fees, no exchange fees, no government fees, no brokerage fees. Most retail broker are compensated for their services through something called the “Bid / Ask Spread”.

    6.  INDIVIDUAL CONTROL:

    One of the main & fundamental advantages of having a career in foreign trading would be that the individual himself has complete control with respect to making a trade.

    The individual who is involved in the foreign trading business always has the final decision in their hand whether they would like to enter in making trade & how much risk the trader is willing to take with respect to earning his money.

    DISADVANTAGES OF CURRENCY MARKET

    1.  HIGH VOLATILITY:

                                    The high volatility characteristic of the forex trading can either be an advantages or disadvantages.

    The changes in the global politics & economy drastically changes the forecast & diagram about the forex market thus it makes risk & invest money.

    It can cause a huge loss to the investors if the market goes down hill & when a loss is incurred a huge amount of money will go as a loss.

    2.  LOW TRANSPARENCY:

    This is one of the biggest disadvantages of foreign exchange market. Due to the decentralized & de- regularized nature of the foreign exchange market, it is dominated by brokers. And you actually have to trade against professionals.

    A trader might not have any control over how his trade order gets fulfilled, but you may not get the best price or may get limited views on trading quotes as furnished be your selected broker.

    3.  NO CENTRALIZED EXCHANGE:

    Unlike stocks or futures the spot forex market does not have any centralized exchange or clearinghouse. Alternatively, each broker acts as its own exchange & the broker effectively becomes the market maker.

    When dealing reputed brokers in well regulated countries these differences will be small but you need to be well aware of this fact especially if your charting data provider is not the same as your broker, as this may lead to inconsistencies between the planned & actual execution of trader.

    4.  RISK FACTOR:

    There is a risk factor involved in forex trading market. There is a high leverage which results in higher risk involved.

    There is uncertainty of the price & the rate of the currency which ultimately give higher profit or a huge loss so one has to be very focused & knowledgeable about the foreign exchange market where future forecasting can be accurate & profitable.

    There are 10 major reason why the currency market is a great place to trade:

    1. You can trade to any style – strategies can be built on five minute charts, hourly charts, daily charts, or even weekly charts.
    2. There is massive amount of information – charts, real – time news top level research – all available for free.
    3. All key information is public & disseminated instantly.
    4. You can collect interest on trades on a daily or even hourly basis.
    5. Lot size can be customized, meaning that you can trade with as little as $500 dollars at nearly the some execution costs as account that trade $500 million.
    6. Customizable leverage allows you to be a conservative or as aggressive as you like (cash on cash or 100:1 margin).
    7. No commission means that every win or loss is clearly accounted for in the P & L.
    8. You can trade 24 hours a day with ample liquidity ($20 million up).
    9. There is no discrimination between going short or long (no upstroke rules).
    10. You can’t lose more capital than you put (automatic margin call).

     

    Also Read | Risk Reward Ratio in Stock Market

     

  • Option Market

    Option Market

    DEFINITON:

    “A stock option is a contract between two parties in which the stock option buyer (Holder) purchase the right (but not the obligation) to buy/sell 100 shares of an understanding stock at a predetermind price from /to the option seller (writer) within a fixed period of time.”

    Nowdays, many investors portfolios include investments such as mutual funds, stocks & bonds. But the variety of securities you have at your disposal does not end there. Another type of security, known as option.

    Option based on equities, more commonly known as ‘stock option’. Stock options are listed on exchange like  the NYSE in the form of a quote. It is important to understand the details of a stock option quote before you make a move like the cost & expiration date.

    Options are types of Derivatives security. They are derivative because the price of an option is instrinsically limited to the price of something else. Options are contracts that grant the right, but not the obligation to buy or sell an underlying asset at a set price on or before a certain date. The right to buy is called CALL OPTION & the right to sell is a PUT OPTION.

    Option traders are self- directed investors, meaning they don’t work directly with a financial advisor to help manage their option trading portfolio. As a Do It Yourself (DIY) investor, you are in full control of your trading decisions & transactions. But that doesn’t mean you are alone.

    There are plenty of communities that bring traders together to discuss things like current market outlook & option trading strategies.

    ADVANTAGES OF OPTION TRADING

    1. LEVERAGE

    The main advantages of trading stock options than simple stock is the leverage involved. Options allow you to employ considerable leverage. Option enable you to control the shares of a specific stock without trying a large amount of capital in your trading account. The amount of capital (premium) that you are paying is a relatively small amount comparing to the cost of buying the same amount of stocks.

    The capability to invest a smaller amount of capital & control the stock give the option trader the flexibility to:

    • Trade higher priced stocks, the big moves, that are normally out of reach to the smaller account trader.
    • Magnify profit when the stock moves in your favor.
    • Make money based on a relatively small movement in the stock.

    This is an advantage to disciplined traders who know how to use leverage.

    2. PROFIT FROM BULL, BEAR & SIDE WAY MARKET

    There are various options strategies that give the options trader the ability to make money from all market directions (up, down or side way market) with limited risk exposure & potentially unlimited profit.

    A few examples are, buying call options when the market is bullish, buying put options when the market is bearish & entering into various credit spread strategies to earn profit when the market is range bound.

    3. HEDGING AGAINST RISK

    Stocks options can be used as an instrument to hedge against various risk exposure of stock holder. For example, If you are a holder of 1000 shares of IBM & suspect that the stock price might drop, instead of selling the shares to stay away from the uncertain future, you can simply buy 10 put options to protect your current position. It can be an inexpensive insurance to protect your stock portfolio from any adverse move in the market.

    Disadvantages of Option

    Trading

    1. Taxes. Except in very rare circumstances, all gains are taxed as short-term capital gains.  This is essentially the same as ordinary income.  The rates are as high as your individual personal income tax rates. Because of this tax situation, we encourage subscribers to carry out option strategies in an IRA or other tax-deferred account, but this is not possible for everyone.  (Maybe you have some capital loss carry-forwards that you can use to offset the short-term capital gains made in your option trading).
    2. Commissions. Compared to stock investing, commission rates for options, particularly for the Weekly options, are horrendously high.  It is not uncommon for commissions for a year to exceed 30% of the amount you have invested.   Be wary of any newsletter that does not include commissions in their results – they are misleading you big time.
    3. Wide Fluctuations in Portfolio Value.  Options are leveraged instruments.  Portfolio values typically experience wide swings in value in both directions.

    The most popular portfolio at Terry’s Tips (they call it the Weekly Mesa) gained over 100% (after commissions) in the last 4 months of 2010.  The underlying stock for the Weekly Mesa is the S&P 500 tracking stock, SPY, one of the most stable of all indexes.  Yet their weekly results included a loss of 31.3% in the last week of November (they have added an insurance tactic to make that kind of loss highly unlikely in the future, by the way).  Three times, their weekly gains were above 20%.

    Many people do not have the stomach for such volatility, just as some people are more concerned with the commissions they pay than they are with the bottom line results (both groups of people probably should not be trading options).

    Option market are modified advance version of future contracts. In this lot size, margin & expiry are same as future. In option contract strike price is the is the price which we need to select while buying & selling. Premium – in option contract premium is the actual rate which we need to pay while buying or selling of option. Different strike price has different premium. Option market is difficult to understand in starting but as we trade practically lot of things get clear.

    THERE ARE TWO MAIN CLASSES OF OPTION MARKET:

     1. CALL OPTION

     DEFINITION:

     “Call options are an agreement that give the option buyer the right, but not the obligation, to buy a stock, bond, commodity or other instrument at a specified price within a specific time period. The stock, bond or commodity is called the underlying asset.”

    When we think that original price of a particular stock is going to go up & we are bulling on the particular stock then we buy Call Option.

    Eg: SBIN EQ price = 250 and * is its premium.

    If we buy 250 strike price option at X rate then will be its premium. And as and when the original price of the stock goes up the premium rate also goes up & we come in profit.

    But if we have bought call option & original price of the stock comes down then the premium also comes down & we are in loss. Call option buyers is known as Option Holder & call option seller is known as Option Writer.

    Eg: In rent agreement or sale deed buyer is known as option buyer & seller is known as option seller.

    Call option buyer is Bullish or Positive on the market & call option writer is Bearish or Negative on the market.

    Buyer & seller have to decide strike price. Buyer pays premium to seller & premium is non-refundable. Call option buyer buys premium from seller at the strike price which he has selected & he can ask delivery of shares from the seller. Taking delivery is purely depended on buyer, it is not compulsion. If call option buyer ask delivery to call option seller then it is compulsion to give shares to call option buyer.

    Now let’s look at a example of call option buyer & call option seller.

    SBI Equity cmp (current market price) = 250

    Buy SBI 260 call   Exp 24nov2016 @5 (Buyer A)

    Sell SBI 260 Call   Exp 24Nov2016 @5 (Seller B)

    In above example Buyer A & seller B have a trade of call option, 260 is the strike price & Rs.5 is its premium.

    BUYER A:

    Buyer A feels that before expiry rate of SBI will go above Rs.260 in which he intends to earn profit & he pays a premium of Rs.5. And if till expiry if SBI rate is 3000 then following is the profit to buyer.

    Buyers got a profit of Rs.35 & the lot size of SBI is 3000 so 1,05,000/-

    Total profit = 35 * 3000 = 105000 Rupees

    And at expiry if SBI is below 260 then he will have a loss of Rs.5

    Total loss = 5 * 3000 = 15000

    Total loss of Rs.15000/- will happen.

    SELLER B:

    If seller B thinks that SBI will be below 260 & he should be in profit he will buy the premium paid buys the buyer of Rs.5. So seller B is in profit as follows.

    Therefore call option buyer as limited loss & unlimited profit & option seller has limited profit & unlimited loss.

    MEANS CALL OPTION BUYER OF LOSS LIMITED & PROFIT UNLIMITED THEREFOF OPTION SELLER OF PROFIT LIMITED & LOSS UNLIMITED CAN BE DONE.

    Value of an option (premium)

    Premium = Intrinsic value + time value/ (Intrinsic price)

    For call option intrinsic value = equity price – strike price

    For example 250 this equity price is & we 240 that strike price takes then

    Call option intrinsic value = 250 – 240 = 10

    Put option intrinsic value = strike price – equity price

    Strike Price For Call Option:

    Time value:

    More the expiry more time value is there & as expiry comes to near time value decreases. At expiry time value become 00.

    Premium Depends Upon:

    1. Underlying value (means equity price)
    2. Strike price
    3. Time for expiry
    4. Volatility (possibility)
    • Higher the price, Higher the premium.
    • Higher the strike price, Lower the premium.
    • Greater the time for expiry, Higher the premium.
    • Higher the volatility, Higher the premium.

    TIPS:

    • Premium is already defined; we don’t need to calculate the same. So please don’t sit & calculate the premium.
    • All option contracts are executed automatically on expiry.
    • Option buyer has to pay premium so his maximum loss is his premium. Similarly option sell has to pay 10-20% margin so his loss is his margin paid to broker.
    Call option buyer (Holder) Call option seller (writer)
    Bullish   Bearish
    Pay premium    Receives premium
    Max profit unlimited Max profit is premium received
    Max loss is premium paid Max loss is unlimited
    Margin not required Margin required for sell call option

     

    1. PUT OPTION

    Definition:

    “A put option is an option contract giving the owner the right, but not the obligation to sell a specified amount of an underlying security at a specified price within a specified time frame. This is the opposite of a call option, which gives the holder the right to buy an underlying security at specified price, before the option expires.”

    All things of PUT options are all opposite of call option. when we think that the price of a particular share is going to go down then we buy PUT.

    For Eg SBIN Eq (Equity) price= 250 &* is the premium for it

    As and when the price of share starts declining more & more we start making profit. And as and when the price of the share starts increasing more & more we start making losses.

    Put option buyer gets benefits when market falls & put option seller gets benefits when market goes up.

    For Example – L&T EQ. price 1500 (CMP)

    And consider that price of L&T comes to 1300 at expiry then

    Value

     

    • Put option buyer has has limited risk= premium paid &

    Unlimited profit

    • Potential as price decreases, Put Option Seller has limited profit i.e.
    • Premium received & bears unlimited losses if price decreases, so 10 to 20% margin required to sell put option.
    • Option premium for in the money is more & option premium for out of the money is less.
    Put option buyer (Holder). Put option seller (Writer).
    Bearish. Bullish.
    Pays premium. Received Premium.
    Max profit unlimited. Max profit is premium received.
    Max loss is premium paid. Max loss unlimited.
    Margin not required to buy (only premium). Margin required to short put option (premium not required).

     

  • FUTURE MARKET

    FUTURE MARKET

    DEFINITION:-

    “ Market in which participants can buy & sell commodities & their future delivery contracts. A future market provides a medium for the complementary activities of hedging & speculation, necessary for damping wild fluctuations in the prices caused by gluts & shortages.”

    Future markets are places (exchange) to buy & sell futures contract. There are several futures exchanges. Common ones include The New York Mercantile Exchange, The Chicago board of trade, The Chicago Mercantile Exchange, The Chicago Board of Options Exchange, The Chicago climate Future Exchange, The Kansas city Board of trade & The Minneapolis Grain Exchange.

    A future contract is a financial contract giving the buyer an obligation to purchase an asset (and the seller an obligation to sell an asset) at a set price at a future point in time. The assets often underlying futures include commodities, stocks & bonds. Grain, precious metals, electricity, oil, orange juice & natural gas are traditional examples of commodities, but foreign currencies, emissions credits, bondwidth & certain financial instruments are also part of to day’s commodity markets.

    Futures exchanges do not set the prices of futures contracts or their underlying traded commodities. Rather, supply & demand determines the prices. But two things in particular ensure the stability & efficiency of futures markets: Standardized contract & the presence of clearing members.

    Standardized contracts mean that every futures contract specifies the underlying commodity quality, quantity & delivery so that the prices mean the same thing to everyone in the market.

    Clearing members manage the payments between buyers & seller. They are usually large banks & financial services companies. Clearing member guarantee each trade & thus require traders to make good- faith deposits (called margins) in order to ensure that the trader has sufficient funds to handle potential losses & will not default on the trade. The risk borne by clearing members lends further support to the stability of further markets.

    ADVANTAGES:-

    1. The commission charges for future trading are relatively small as compared to other type of investment.
    2. Futures contracts are highly leveraged financial instruments which permit achieving greater gains using a limited amount of invested funds.
    3. It is possible to open short as well as long positions. Position can be reversed easily.
    4. Lead to high liquidity.

    DISADVANTAGES:-

    1. Leverage can make trading in futures contracts highly risky for a particular strategy.
    2. Futures contract is standardized product & written for fixed amounts & terms.
    3. Lower commission costs can encourage to trader to take additional trades & lead to over trading.
    4. It offers only a partial hedge.
    5. It is subject to basis risk which is associated with imperfect hedging using future.

    THERE ARE TWO KINDS OF PARTICIPANTS IN FUTURE MARKETS:

    1. HEDGERS
    2. SPECULATORS

    1.HEDGERS

    Farmers, manufactures, importers & exporters can all be hedgers. Hedging is done to manage price risk. Hedgers wish to protect themselves from unfavorable price movement by for going a profit if the prices moves in their favor. There are different reasons why hedging might be undertaken. A wheat farmer can hedge against a possible price decline in the future & on the other hand cookie maker can hedge against an increase in the price of wheat in the future. A lender can hedge against a possible decline in the interest rate, whereas a borrower can hedge against a possible increase in the interest rate. To hedge, you either have the underlying commodity or you require the underlying commodity at some point in the future.

    Eg.

     

    2) SPECULATORS

    The other part of futures market is made of speculators. They provide liquidity to the market. If a farmer wants to short sell a contract for 5,000 bushels of wheat expiring in 3 months it is highly unlikely that he will immediately find another consumer who wants to long buy a similar amount of wheat at the same time. The speculators, although they do not have any interest in the underlying asset or commodity, still buy the contract looking to profit through ideal market timings. This helps the entire system by bringing in much needed liquidity.

    Future markets are standardized contracts between buyer & sellers. In this all terms & conditions are same for a buyer & seller. In this contract, margin & lot size have been already decided. We only have to decide how much lot (quantity) & at what rate (price) we have to buy. In this there are 3 contracts available to trade. Last Thursday of the month is the expiry of that month of contract.

     

                 Contract               Expiry
    Near month contract Last Thursday ex.24Nov.2016
    Middle month contract Last Thursday ex.29Nov.2016
    Far month contract Last Thursday ex.25Nov.2017

     

    Eg:

    To trade in future market you need 10 to 20% margin of the contract value.

    Contract value = CMP * Lot Size

    SBIN CMP = 250

    Lot size = 3000

    Contract value = 250*3000

    10% margin      = 75000/-

    If we buy SBIN @250

    Sell SBIN @255

    Profit per share = 5Rs.

    Lot size            = 3000

    Total profit     = 15000/-

    Means we pay a margin of 75000 & do a turnover of 75000 & we get benefited of Rs.15000/-. We earned 20% profit on the margin used.

     

WhatsApp chat