In the world of finance and investing, there are various strategies that traders and investors employ to make profits. One such strategy that often garners attention is short selling of stocks. Short selling is a unique and somewhat complex approach that allows traders to profit from the decline in the price of a stock. In this article, we will delve into the concept of short selling, how it works, its advantages and disadvantages, and the ethical considerations surrounding it.
What is Short Selling?
Short selling, also known as shorting a stock, is a trading strategy where an investor borrows shares of a stock from a broker and sells them on the market with the expectation that the stock’s price will decrease. The goal is to buy back the shares at a lower price, return them to the broker, and pocket the difference as profit. This might sound counterintuitive since traditional investing involves buying low and selling high, but short sellers essentially do the opposite.
The Mechanics of Short Selling
Borrowing the Stock: To initiate a short sale, an investor must borrow the shares from their broker. The broker lends these shares from their own inventory or from other clients who hold the stock.
Selling the Shares: Once the shares are borrowed, the investor sells them on the open market. This is where they enter a short position.
Monitoring the Stock: The investor closely monitors the stock’s price. They aim to buy it back at a lower price.
Closing the Position: When the stock’s price has fallen as desired, the investor buys back the shares from the market and returns them to the broker. The difference between the selling and buying prices represents their profit.
Advantages of Short Selling
Short selling offers several advantages for traders and investors:
1. Diversification
Short selling allows investors to profit in both rising and falling markets, providing diversification to their portfolios.
2. Hedging
Investors can use short selling as a hedging strategy to protect their long positions from potential losses during market downturns.
3. Price Discovery
Short selling contributes to price discovery by reflecting market sentiment and providing liquidity.
Risks and Challenges
Short selling comes with its fair share of risks and challenges:
1. Unlimited Losses
Unlike buying a stock, where the maximum loss is the initial investment, short selling has unlimited loss potential if the stock’s price rises significantly.
2. Borrowing Costs
Borrowing shares from a broker incurs borrowing costs, including interest and fees.
3. Short Squeezes
A short squeeze occurs when a heavily shorted stock experiences a sudden price increase, forcing short sellers to cover their positions at a loss.
Ethical Considerations
Short selling has faced ethical scrutiny over the years. Critics argue that it can lead to market manipulation and unfairly profiting from a company’s decline. Regulators have implemented rules to mitigate potential abuses, but the ethical debate continues.
Conclusion
Short selling is a unique and powerful trading strategy that offers both opportunities and risks to investors. Understanding its mechanics, advantages, disadvantages, and ethical considerations is crucial for anyone considering this approach in the world of finance.
In the dynamic landscape of investing, defense stocks have emerged as a resilient and attractive option for investors in India. With the nation’s increasing focus on bolstering its security and defense capabilities, these stocks offer an opportunity for growth and stability. This article delves into the realm of defense stocks, highlighting the key players and factors to consider when investing in this sector. Below explained are the few popular defence stocks in India.
1. Hindustan Aeronautics Ltd
Hindustan Aeronautics Ltd
The Company which had its origin as Hindustan Aircraft Limited was incorporated on 23 Dec 1940 at Bangalore by Shri Walchand Hirachand, a farsighted visionary, in association with the then Government of Mysore, with the aim of manufacturing aircraft in India. In March 1941, the Government of India became one of the shareholders in the Company and subsequently took over its management in 1942.
Market Cap ₹ 1,29,401 Cr.
Debt ₹ 1.96 Cr.
ROE 27.2 %
Sales growth 9.37 %
ROCE 30.6 %
Promoter holding 71.6 %
Stock P/E 22.3
Industry PE 32.4
Pledged percentage 0.00 %
2. Bharat Electronics Ltd
Bharat Electronics Limited (BEL) is an Indian Government-owned aerospace and defence electronics company. It primarily manufactures advanced electronic products for ground and aerospace applications. BEL is one of nine PSUs under the Ministry of Defence of India. It has been granted Navratna status by the Government of India.
Market Cap ₹ 93,090 Cr.
Debt ₹ 0.00 Cr.
ROE 22.8 %
Sales growth 7.51 %
ROCE 30.1 %
Promoter holding 51.1 %
EPS ₹ 4.32
Industry PE 57.8
Stock P/E 30.7
Pledged percentage 0.00 %
3. Shivalik Bimetal Controls Ltd
Shivalik Bimetal Controls Ltd. is a company specialized in the joining of material through various methods such as Diffusion Bonding / Cladding, Electron Beam Welding, Solder Reflow and Resistance Welding.
Market Cap ₹ 3,157 Cr.
Debt ₹52.6 Cr.
ROE 33.0 %
Sales growth 24.0 %
Promoter holding 60.6 %
Stock P/E 41.5
ROCE 37.7 %
EPS ₹ 13.2
Industry PE 57.8
Pledged percentage 0.00 %
“The ratio of the volume of put options traded to the volume of call options traded, which is used as an indicator sentiment (bullish or bearish).”
Put-call ratio (PCR) is an indicator that forecast the trend of the INDEX/STOCKS.
A “Put” or put option is a right to sell an asset at a predetermined price. A “Call” or call option is right to buy an asset at a predetermined price. Many traders use options for directional beta; buying call when market bullish & buying put when market bearish.
PCR is a popular derivative indicator, specifically designed to help traders gauges the overall sentiment of the market. The ratio is calculated either on the basis of options trading volumes or on the basis of the open interest for a particular period.
This indicator will show you which gang is dominating the market; the bearish gang (short masters), or the bullish gang (long masters).
The put call ratio can be calculated for any individual stock, as well as for any INDEX, or can be aggregated.
HOW TO ANALYSES PCR:
The put call ratio is calculated by the dividing the number of OPEN INEREST of put option by the number of OPEN INEREST of call option.
PCR (OI) = PUT OPEN INTEREST ON GIVEN DAY/ CALL OPEN INTEREST ON SAME DAY:
PCR for marker wide position can be also be calculated by taking total number of OI for all OI call options & for all OI options in a given series.The PCR can be calculated for indices, indivu
Eg.
PUT (OI)CALL (OI)
CURRENT MONTH CURRENT MONTH
NEXT MONTH NEXT MONTH
FAR MONTH FAR MONTH
PCR = PUT (OI)/ CALL (OI)
PCR = ?
A rising put-call ratio, or a ratio greater than .7 or exceeding 1, means that equity traders are buying more puts than calls. It suggests that bearish sentiment is building in the market. Investors are either speculating that the market will move lower or are hedging their portfolios in case there is a sell-off.
A falling put-call ratio, or below .7 and approaching .5, is considered a bullish indicator. It means more calls are being bought versus puts.
A trading account can be any investment account containing securities, cash or other holdings. Most commonly, trading account refers to a day trader’s primary account. These investors tend to buy and sell assets frequently, often within the same trading session, and their accounts are subject to special regulation as a result. The assets held in a trading account are separated from others that may be part of a long-term buy and hold strategy.
DEFINITION
The account which is prepared to determine the gross profit or gross loss of a business concern is called trading account.
DEMAT A/C
Demat account or dematerialised account is an account that holds the shares and securities of an individual in an electronic form. When an individual indulges in trading or investing in shares or securities all the transactions are done through the DA. To put it another way, just like the banks hold the money of the individuals. Similarly, the DA holds the shares and securities of the individual in the account.
https://www.youtube.com/watch?v=uwWbBq4mL4o
DIFFERENCE BETWEEN TRADIN A/C & DEMAT A/C
1. The functionality of a Demat Vs a Trading Account
One major difference between the two accounts pertains to the functions each performs. A trading account is used for the buying and selling of the securities by means of it getting debited from your demat account and sold in the market.
A demat account, on the other hand, allows investors to keep their financial instruments in an electronic format. This also works in a way where you can change your electronic format securities into physical form as well.
2. BENEFITS of using DEMAT A/C & TRADING A/C
DEMAT A/C-
In the demat account, all the shares and securities are held in electronic form. There is no paper work at all. Thus, it reduces the risk of theft, wrong delivery of shares, etc. In addition, any company related activity like a stock split, bonus etc. are credited to the demat account.
Before demat account, trading of shares was done in lots. However, after demat account, this problem no more exists. Now the shares can be transacted in any numbers. All the transactions in the DA are automatically updated. The DA holds all the details of the account holders like address, name, time of the transaction, etc. So the companies always have details of all the transactions. The biggest benefit of demat account is that it acts like a bank and holds not only shares in the account. In fact debt instruments like bonds, etc. can be held in a single account.
TRADING A/C –
The moment you open a trading account, you get access to different kinds of stock exchanges that are there in the country. This will help you to make your investments better and stronger and of course you will have more options to explore. You can personalize your account, like set alerts and notifications as per your requirement with an online trading account. You will also enjoy the benefit of accessing your account from any media and any device.
HOW TO OPEN DEMAT A/C & TRADING A/C
OPENING DEMAT A/C
Step 1: To open a demat account; you have to approach a depository participant (DP), an agent of depository, and fill up an account opening form. The list of DPs is available in the websites of depositories: CDSL (Central Depository Services (India) Ltd) and NSDL (National Securities Depository Ltd).
Step 2: Along with the account opening form, you must enclose photocopies of some documents for proof of identity and proof of address.
Step 3: You will have to sign an agreement with DP in the depository prescribed standard format, which gives details of rights and duties of investor and DP. You are entitled to receive a copy of the agreement and schedule of charges for future reference.
Step 4: The DP will then open an account and give you the demat account number. This is also called beneficial owner identification number (BO ID). All your purchases / investments in securities will be credited to this account. If you sell your securities, your demat account will be debited.
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:
You can trade to any style – strategies can be built on five minute charts, hourly charts, daily charts, or even weekly charts.
There is massive amount of information – charts, real – time news top level research – all available for free.
All key information is public & disseminated instantly.
You can collect interest on trades on a daily or even hourly basis.
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.
Customizable leverage allows you to be a conservative or as aggressive as you like (cash on cash or 100:1 margin).
No commission means that every win or loss is clearly accounted for in the P & L.
You can trade 24 hours a day with ample liquidity ($20 million up).
There is no discrimination between going short or long (no upstroke rules).
You can’t lose more capital than you put (automatic margin call).
“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
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).
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.
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:
Underlying value (means equity price)
Strike price
Time for expiry
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
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).
“ 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:-
The commission charges for future trading are relatively small as compared to other type of investment.
Futures contracts are highly leveraged financial instruments which permit achieving greater gains using a limited amount of invested funds.
It is possible to open short as well as long positions. Position can be reversed easily.
Lead to high liquidity.
DISADVANTAGES:-
Leverage can make trading in futures contracts highly risky for a particular strategy.
Futures contract is standardized product & written for fixed amounts & terms.
Lower commission costs can encourage to trader to take additional trades & lead to over trading.
It offers only a partial hedge.
It is subject to basis risk which is associated with imperfect hedging using future.
THERE ARE TWO KINDS OF PARTICIPANTS IN FUTURE MARKETS:
HEDGERS
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.
The primary market is also known as new issues market. Here, the transaction is conducted between the issuer & buyer. The primary market is the part of the capital market that deals with issuing of new securities. Primary market creat long term instruments through which corporate entities raise funds from the capital market. In short, the primary market creates new securities & offers them to the public. It is a public issue, if anybody & everybody can subscribe, for it. If the issue is made to select group of people then it is termed as private placement.
Capital & Equity can be raised in the primary market by any of the following four ways:
1. Public Issue
As the name suggests, public issue means selling securities to the public at large, such as IPO. It is the most vital method to sell financial securities.
2. Rights Issue
Whenever a company needs to raise supplementary equity capital, the shares have to be offered to present shareholders on a pro-rata basis, which is known as the Rights Issue.
3. Private Placement
This is about selling securities to a restricted number of classy investors like frequent investors, venture capital funds, mutual funds, and banks comes under Private Placement.
4. Preferential Allotment
When a listed company issues equity shares to a selected number of investors at a price that may or may not be pertaining to the market price is known as Preferential Allotment.
B. SECONDARY MARKET:
The secondary market also called the after market & follow on public offering is the financial market in which previously issued financial instruments such as bonds, stock options, & futures are bought & sold.
THE SECONDARY MARKET IS FURTHER DIVIDED INTO 2 KINDS OF MARKET:
An auction market is a place where buyers & sellers convene at a place & announce the rate at which they are willing to sell or buy securities. They offer either the ‘BID’ or ‘ ASK’ prices, publicly. Everything is announced publicly & interested investors can make their choice easily. Where trading & settlement is done through the stock exchange & the buyers & sellers don’t know each other.
2. OTC
OVER THE COUNTER/ OFF EXCHANGE TRADING is done directly between two parties, without the supervision of on exchange. Is based in Mumbai, Maharashtra.It does not take place, however, on the stock exchanges.OTC MARKETS are the informal types of market where trades are negotiated.
DIFFERENCE BETWEEN PRIMARY MARKET & SECONDARY MARKET