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Showing posts with label stocks. Show all posts
Showing posts with label stocks. Show all posts

Saturday, 13 January 2018

"Options" instrument in Stock Market

Options are another part of F&O instrument in Equity Market along with Futures. The biggest difference between a Future contract and an Option contract is that in case of Future Contract it is mandatory to abide by the contract for both Future contract buyer and seller but in case of Options (as name also suggests) it is mandatory for seller to abide by the contract but buyer can opt out of contract.

Options are like health insurance where buyers pay premium to protect themselves if things go wrong and seller receives premium thinking that things won’t go wrong. An option buyer is like a common person who takes health insurance from a company by paying some premium and option seller is like an insurance provider that takes premium to help you out in future if things go wrong with your health. In terms of market, option buyer wants to protect himself from volatile movement of either market going up or going down in big way and option seller is ready to take that risk for some money called premium.

Put Option:

In Put option, buyers try to protect themselves from price of a stocks going down and sellers take that risk just by taking some money as premium.

Let’s assume that you are thinking that Infosys stock is likely to go down in coming days due to some USA news or some negative result. Infosys is currently at 900 Rs and you think it might go down by 10-11% to 800.  Now as per human tendency there is someone else who thinks that no Infosys won’t go down much in this scenario. In this case Option buyer buys a PUT option of INFY 900 by paying some money to seller, say 10 Rs. As F&O happens in lot sizes only, in this case buyer has paid 10 Rs/Share to seller as premium.

Case 1: INFY goes down to 800 Rs after news, in this case put option buyer will make big money. The buyer’s profit will be:

Put option price (900) – Premium Paid to seller (10) - Current Price (800) = 90 Rs per share

Seller’s loss will be:

Current Price (800) + Premium received from Buyer (10) - Put option price (900) = 90 Rs per share

Case 2: INFY goes down to 890 Rs after news, this will be a breakeven case for both buyer and seller.

Case 3: INFY stays at 900 Rs after news, in this case buyer will lose the 
premium he paid that is 10 Rs/ Share as INFY didn’t go down from his contract buy price of 900 and hence seller will make 10 Rs/Share profit.

Case 4: INFY goes up to 920 Rs after news, in this case buyer will lose the premium he paid that is 10 Rs/ Share as INFY didn’t go down from his contract buy price of 900 and hence seller will make 10 Rs/Share profit.


Call Option:

In Call option, buyers assume that price of stock will go up in coming days and sellers think that it won’t go up too much so sellers take that risk of upward movement just by taking some premium.

Let’s assume that you are thinking that Infosys stock is likely to go up in coming days due to some USA news or some positive result. Infosys is currently at 900 Rs and you think it might go up by 10-11% to 1000 Rs. Now as per human tendency there is someone else who thinks that no, Infosys won’t go up much in this scenario. In this case Option buyer buys a CALL option of INFY 900 by paying some money to seller, say 10 Rs. As F&O happens in lot sizes only, in this case buyer has paid 10 Rs/Share to seller as premium.

Case 1: INFY goes up to 990 Rs after news, in this case buyer will make big money. The buyer’s profit will be:

Current Price (1000) - Premium Paid (10) - Call option price (900)   = 90 Rs per share

Seller’s loss will be:

Call Option Price (900) + Premium received from Buyer (10) – Current Price (1000) = 90 Rs per share

Case 2: INFY goes up to 910 Rs after news, this will be a breakeven case for both buyer and seller.

Case 3: INFY stays at 900 Rs after news, in this case buyer will lose the premium he paid that is 10 Rs/ Share as INFY didn’t go up from his contract buy price of 900 and hence seller will make 10 Rs/Share profit.

Case 4: INFY goes down from 900 Rs after news, in this case buyer will lose the premium he paid that is 10 Rs/ Share as INFY didn’t go up from contract buy price of 900 and hence seller will make 10 Rs/Share profit.

As we can see in both cases Seller is making maximum profit of 10 Rs/share that is the premium paid by buyer whereas buyer can make any money with risk of just losing 10 Rs/ share at max. Now this does sound a good less risky deal, no? But as per market studies in many countries Option sellers make much more money than buyers just because occurrence of their successful trade is much higher as compare to them going wrong. One of the most important factor for this is the time decay. As all these Contracts are bound by timelines, buyers need to be right on time factor as well as Price movement whereas sellers just need to be right on Price movement. In the examples discussed above in Case 1 buyer won’t make that profit if INFY’s price goes down to 800 or up to 1000 after contract end date which is usually the last Thursday of every month for Indian market.

All big funds and investment banks use Put Option mostly to hedge their stock holdings to avoid big losses in case stock prices goes down due to any negative sentiment. In Indian capital market Options are highly traded for Index NIFTY and BANK NIFTY.

Wednesday, 1 November 2017

What is "Future and Options" in Stock Market

Many of the people who get into Equity market aka Stock Market directly only deal with one part of it called “Cash Market”, a market where one can buy and sell shares from quantity 1 to many depending on money one has. There is another part of Equity market called “Future and Options” abbreviated as F&O.

What is F&O :

F&O is Contract based trading instrument which has validity from 7 days to 90 days depending on whether it is for INDEX like NIFTY / BANK NIFTY or individual stocks. In this there is no transaction of shares until the last day of contract and there is just agreement made between Buyers and Seller to abide by contract price and date. The Price in Cash market and Price and various data points in F&O market affect each other.

Future:

Future instrument is a contract between buyer and seller about Future price of a stock or Index. In Indian market Future Contracts are of one month expiring on last Thursday of every month and the new contract starting just a day after that. One can buy individual contract of next 3 months as only 3 Contracts can be active at one time for any stock or Index. Basic component of Contract are Stock name, Future agreed Price and expiry date. So INFY 26 OCT17 FUT means Future contract of Infosys for October month expiring on 26th October 2017.

If one buys Future contract of INFY for October month, buyer is agreeing to buy INFY at price mentioned in future market, at max by last day of contract expiry which is 26th October. Suppose Current Market price of INFY is 900, and October’s Future Price is 920 (because market sentiment is positive), so buyer is agreeing to buy INFY at 920 Rs maximum by 26th October, no matter whether stock price goes down or up.  If stock prices goes to 950 Rs in that month, buyer will make profit because buyer has right to buy same stock at 920 Rs as per contract. If stock price goes down to 880, buyer will lose money because as per the agreement buyer promised to buy INFY at 920 Rs. and vice versa the contract seller will make profit and loss. There can be one more case when INFY stays around 900-905 Rs for whole month and closes at 900 on last day, in this case also buyer will lose money because buyer needs to buy INFY at 920 Rs whereas the market price is 900 Rs and hence contract seller will make profit. 

Now to summarize profit and loss cases for Futures:

Buyer will make money only when stock price moves up from price of future agreement in the Contract month

Seller will make money when stock prices goes down in the Contract Month

Seller will make money when stock prices stays same in the Contract Month

Seller will make money even if stock price goes up by any percentage but after contract expiry date.

As one can see that timing also is one big factor in Future market unlike in Cash market and Buyer and Seller need to be precise enough to make full use of this instrument of stock market. Unlike in Cash market, these Contracts are done in lots and one lot contains many shares, so to be able to use these contracts one needs to have enough capital and margin in their account. The Advantage of it is that brokerage firms let their clients use Margin money to buy or sell Future Contracts and no need to have full money in your account. To give an idea of this, to buy 500 Shares of INFY in Cash Market one needs to have 4,50,000 Rs (500 x 900) in account but to buy same in Future one needs 10% to 50% of total money in account depending on Brokers they are taking service from.

As Options are too big to explain in this post and has two part as “Call” and “Put”, I will be posting it soon as new post :) 

Tuesday, 30 May 2017

How to lose money in trading in stock market

There are many ways to lose money in market, mostly in trades and in that mostly in intraday trades and in that mostly in short selling. Yes you read it perfectly right and trust me it works really well and if you want to lose money as quickly as it takes to cook Maggie, try what i am going to tell. With this approach even if you have picked right and good scrip, you will lose money in day trade.  

There are many principles that works behind to make you lose money in trades in market, let me mention just few.

Using Intraday Margin to go long in Intraday Trades: 

Intraday trading runs mostly on momentum and news and if you are late to catch momentum and getting scrip at higher price of day, you will start expecting that demand is too much so it will go even higher but it doesn’t and ironically falls below your buy price. Then you start expecting market to do things running in your mind which tells that once it comes bit down, buy more to average out your buy price, then it falls further and you add more to lessen your buy price, it comes more down and you add more using Intraday margin (almost 10 times of actual balance in your account) given by your broker. You keep hoping it will go to at least day’s high but it doesn’t as momentum has fizzled out. That’s it, you are trapped now, especially if you trade in big volumes. As you have used Margin money, you have no option but to square off your position with loss even if the scrip is good and has great chance of moving up in next few days or weeks. If you carry forward the position to next day, your broker would expect you to pay entire amount in T+2 days ( and no, you can’t use credit card to pay for stock broker companies 😊). So to make it simple if you want to lose money in trade, use Intraday Margin provided by your broker.

Short selling in Cash Market: 

Another good way to lose money is by going for Short selling option in Cash market. Google short selling if you don’t know how it works 😊. You see a stock has risen to level of first resistance and expected to come down and you short it, it still goes bit up and you again start running script in your mind that it’s just a minor upward moment and might come down, but it doesn’t. It goes further up though with less volumes and you short sell bit more to average out your sell price, It sustains at higher price despite very less volume and oh dear!! trade time for day is about to close. You are still having loss and though every chart pattern and fundamental data shows that this up move won’t sustain and price will come down in next few days, you have no option but to buy back the scrip by booking loss, this is because you can’t carry forward short selling position to next day. So if you want to lose money, try short selling in Cash market.

Thinking like Bollywood movies: 

This is easiest way to lose money in day trades, hoping against hope that at last all will be good 😊. Scrip price goes down of your buying price and you hope that it will come up as you are a good person and you have done no wrong to any one :P, but scrip is a villain and it ditches your faith as always. Scrip that you have short sold goes up and the one you have longed, goes down. You keep waiting for things to turn good by 3 PM, 3:10 PM, then by 3:20 PM and boom…. It doesn’t turn out the way it happens in movies. You can cry like SRK or be angry like Big B, market doesn’t give a F. So if you want to lose money, start trading while thinking like Bollywood movies.

Courting on Number of Buyers and sellers in trade window: 

The simple rule is if demand is more than supply, price will move up and vice versa. The question is are you sure about demand or supply you are seeing in trade window is actual value? Many times those are not as brokerage companies give you option to hide your order size by 90%, which means if you are buying 1000 shares, you can just show it as 100 in trade window and many people do it to make sure their order is executed completely rather than partially. So if you want to lose money in trade, rely on Demand and supply shown in trade window.

Well there are many more ways to lose money in trades but I guess these are more systemic ones and as I have followed all these (of course not voluntarily), I can vouch for it that it works really well 😎

Sunday, 2 April 2017

Dividend Mutual Funds Or Growth Mutual Funds ??

In my previous post related to mutual funds, I have given details about Mutual funds options like Growth, Dividend and Dividend Re-investment. Just to summarize those details here:

Growth funds keep investing the profits made on investment, so if your investment makes 10 Rs Profit on 100 Rs in certain time, that 10 Rs will be invested in same fund so here your unit NAV value increases and not the count of units.

Dividend Funds share partial profit with investors and invest remaining profit, so if your investment makes 10 Rs Profit on 100 Rs in certain time, that 3-5 Rs will returned to as dividend and remaining will be invested in same fund.

If we see Growth option, expert say it gives compounding return because your profits are getting Re-invested. Note that it is not compounding interest that banks give, it is compounding return which might be uncertain. If we think bit pessimistically, what if there is a crisis in market or mid-term negativity at a time when you are already sitting on ‘supposed to be good’ profit? The profits accrued in that amount of time might get wiped out or get reduced. Assume if you keep making 10% annual return for 3 years on your investment that you did at start of 1st year, as per rule of compounding return, fund will be at 33% return at end of 3rd year. Now what if market goes down due to some issue and fund gives 15% negative return for 4th year? In this case after 4 years return will be around 13% as profit.

If we take Dividend option of same fund with exactly same scenario viz. what if there is a crisis in market or mid-term negativity at a time when you are already sitting on ‘supposed to be good’ profit? The profits accrued in that amount of time might get wiped out but you must have already got good part of that profit in form of Dividend in previous 3 years. Say on 100 Rs investment, fund gave 10% return in 1st year and you got 50% of profit as dividend, so on 10 Rs Profit you would get 5 Rs as dividend and 5 Rs will be Re-Invested. If this process is continued for 3 years, after end of 3rd year, you would have got around 16% as dividend back and 15% profit in portfolio. Now what if market goes down due to some issue and fund gives 15% negative CAGR for 4th year? after 4 years you will still have had 16% profit in pocket as dividends (as there will normally be no dividend in 4th year because of negative return) and your existing portfolio would have had 1% loss,so over and all 15% as profit.

So to summarize the case above, in exactly same scenario, Growth option will give 13% profit while Dividend option will give 15% profit, most importantly with less risk in long term.

Now things that I have mentioned might sound hypothetical but that’s how market runs. I think it is better to have Growth option when you have no worry about uncertainty of market, can wait for really really long time and have less worry of money you are putting in, but if you have little bit worry about uncertainty, go for Dividend option. With Dividend you will not only get money back on regular intervals, your risk will always be in balance. Remember that if you want great corpus after 15-20 years then always go for Growth option as you won’t be taking out any money from fund until 15-20 years in any case.  

Pessimist way:
If fund is giving consistently negative returns, Dividend and Growth option both will give same negative return.  

Optimist way:
If fund is giving consistently positive returns with very rare negative return in any year, Growth option will give better return than Dividend option.

Balanced way:
If fund is giving fluctuating returns with few years of positive return followed by negative return in any year, Dividend option will give better value than Growth option.

Keep in mind that all afore mentioned scenarios are for Equity Mutual funds as for Equity mutual funds there is no long term capital gain tax, no tax on Dividend received and also no Dividend Distribution tax ( unlike for Shares). Relevance of these options change for Debt Mutual funds as for those funds even dividends gets taxed. 

Wednesday, 15 March 2017

Dividend Mutual Funds and Growth Mutual Funds

To choose Growth or Dividend option while putting money in Equity mutual funds? Though many of us just like to invest money and don’t think much about what are the options that are there in Mutual funds, some of us do think about it in detail before taking a decision. There is enough material available to understand these options and this post can be just one of those many but in my words.  

I just want to make one thing clear that Dividend and Growth options are exactly same funds with exactly same investments, only difference is how these funds manage the Profit accrued in certain amount of time.  

Growth funds keep investing the Profits made on investment, so if your investment makes 10 Rs Profit on 100 Rs in certain time, that 10 Rs will be invested in same fund so here your unit's NAV value increases and not the count of units.

Returns in Growth Funds:

This option gives compounding return because your profits are getting Re-invested. Note that it is not compounding interest that banks give, it is compounding return which might be uncertain when mutual fund’s performance goes down after some good profitable years. Say if you invest 100 Rs on X-date and Mutual funds gives 10% return every year for 3 years, so as per rule of compounding return, after 3 years your return will be 33% .

Dividend Funds share partial profit with investors and invest remaining profit, so if your investment makes 10 Rs Profit on 100 Rs in certain time, then 3-5 Rs will returned to as dividend and remaining will be invested in same fund hence it will increase unit's NAV value but not as much as in Growth option. 

Returns in Dividend Funds:

This option gives assured (of-course only in case of profitable performance of funds) + compounding return because part of your profit is getting back to you as dividend and part is getting Re-invested. Say if you invest 100 Rs on X-date and mutual funds gives 10% return in 1st year and then gives back 50% of profit made as dividend, so on 10 Rs Profit you would get 5 Rs as dividend and 5 Rs will be Re-Invested. If this process is continued for 3 years, after end of 3rd year, you would have got around 16% as dividend back and 15% profit in portfolio which when added becomes 31% that is little bit less from Growth option. 

Apart from this there is one more scheme available related to Dividends called “Dividend Re-Investment”, I personally feel that this scheme is one of the worst options available in funds. Here Mutual fund will show that 10 Rs is dividend and then Invest that 10 Rs in same fund, just like growth fund but here difference comes in case of Debt funds for taxation. In such Equity funds count of your units will increase in portfolio. One more negative with this option is that capital gain is incremental, so if funds buy new units through dividend money, the new units need to be held for next 1 year to avoid capital gain tax and such calculation can be really messy for normal investor.

There is no tax on Long Term Capital gains in Equity mutual funds , no tax on Dividends received and also no Dividend distribution tax on Equity mutual funds ( unlike in stocks where company before giving dividend to shareholders cuts dividend distribution tax and pays to government) . For Debt funds apart from no Long term gain tax, dividend distribution and dividend received tax both are there.


*MutualFundInvestmentsAreSubjectToMarketRiskPleaseReadTheOfferDocumentCarefullyBeforeInvesting

Saturday, 23 July 2016

Patience and Common sense : Must for Non-experts in Stock Market

[Disclaimer] : I am no expert in market, neither in technical nor in fundamentals so I am not going to give any tips or for that matter you don’t have to blindly believe what I am sharing here. All of this is my experience and mistakes I made in last 1-2 years of me actively being engaged in equity market.

If you are neither a fundamental expert nor a technical expert like me, you can still make some good returns in share market and all you need for this is Patience and Common Sense. There are always lots of opportunities and all you need is to grab very few of those and hold on and on for long time until you feel that all juice of the particular stock or sector as whole has been sucked up. For this you no need to be an expert as there are multiple credible sources like Mutual Fund owners, Credit rating agencies and individual experienced experts from where you can update yourself regularly and to be more confident try to understand the balance sheet and quarterly results of companies and what are future prospect of that sector and that specific company whose stock you own.


There are certain things I learned and experienced in last 1-2 years and I am sure it must be common to many of people who are regularly involved in equity market. Let me share few of those:

1. Do not invest money in market that you are definitely going to need in may be next less than 1-2 year. It simply means try to avoid short term investment as much as possible in market. If you are going to need that money in next less than 1 year then surely that is not long term. I had put lot of money when nifty was around 8500-8600 during mid of 2015, it went upto 9000 and then the great crash happed when market felt down to 6900. It resulted in my portfolio going down by almost 18-20% with around 4 lakh of investment. As I needed that money by start of 2016, I had to book losses despite knowing that markets would recover surely. Only if I didn’t need that money in less than 1 year of investment I would have made some handsome profit by now. 

I had many stocks at less than 20-30% of current market price. For example L&T at 1250 , SBI at 180, Axis at 390, Pidilite at 580 ,SREI Infra at 45.Tata Motor DVR at 230, Yes Bank at 700 and many many more. I sold main portion of all these by booking losses or minimal profits only as I needed that money.   

2. Do not just sell off after making some gains. This was second lesson for me and it comes from being not experienced in this field I guess. Once we get 8-9% gain we start assuming that it is much better than return on fixed deposit and try to book the profit and then ultimately see the stock going up and up every single week. In investment terms it’s called “being Greedy”. I did it many times myself and probably still doing it :). I guess we mature on these things as time goes by and especially when we have a specific goal set related to your financial future. One solution I can think of is may be to have 2 different accounts, one for long term investment and one for short terms or for trading. It might be bit costly but can work out well. 

Well these are just few and I am sure many more experiences are yet to come, hopefully of cracking some jackpots aka as Multi-Baggers :)

Saturday, 1 August 2015

My tryst with stock market - V 1.1

Before I start writing this post on “My tryst with stock market”, here is the Link to my previous and only post on the same and this post is continuation of that post. In last post I simply tried to explain just 1 minor part of investing in stock market and what are the benefits of that with an example of TCS scrip. Now let me explain some more things pertaining to those points and go through the basic logic of investing in stock market. As many of you have heard through many people that that one guy became bankrupt because of stock market or one guy had to sell his property because of loss in stock market, why these things happen and why these negative things dominate the positive side of investing in stock market? The reason is simple and that is because many people who benefit from stock market in long run don’t glorify it much as compare to people who crib about negativity of stock market. So negativity dominates positivity when it comes to stock market’s perception.

Now let me explain some well documented, well explained and well researched facts about Stock market and also let me clarify before you judge me that I am not that expert in stock market but I have been reading it for last few years and also investing for last one year.

Who loses or will lose money in stock market? People who are either too pessimistic or too fearful.

Who doesn’t or won’t make money in stock market? People who are either too ambitious or too greedy.

So, who makes money in stock market? People who are able to balance all 4 adjectives mentioned above that is being “Ambitious”, “Greedy”, “pessimistic” and “fearful”. All these points come either together or alone in different ways can make or break your future in stock market.

  • If you are too ambitious, you might want to hold a scrip for uselessly long time and wait for its price to go rocket high at a time when it has already reached at stretched valuation, so you need to balance “Being ambitious”.
  • If you are too greedy, you might sell a scrip after getting mere 10-12% profit despite knowing that it still can get higher valuation. So you need to balance it.
  • If you are less pessimistic, you might not believe in some scrip which will go up in valuation, hence you won’t buy those scrips and won’t make any money either, so you need to balance it.
  • If you are too fearful, you might book loss by selling a scrip as soon as it goes down 10-12% after some knee jerk reaction due to some bad news or relatively less performance in a quarter without doing much research on company’s balance sheet and overall performance , so you need to balance it.


I hope I was able to pen down some more basic set of information about investing in stock market and how to approach it. You will not lose all your capital in stock market (as negative people spread perception about stock market) if you are careful enough and you are able to balance the 4 aforementioned things.

Next detailed information with one more aspect of investing in stock market will be followed in upcoming stock market posts. 

Saturday, 18 July 2015

My tryst with stock market - V 1.0

Stock market or share market, words that give nightmares to many people and at same time lighten eyes and face of many others. Many people who have never been even close to anything related with Stock market have formed such a negative opinion about it that the same negativity has perpetuated among most of the Indians. I can’t question or justify such massive wrong perception but can surely put forward my point of view in coming posts along with this one and can share my fairly long learning experience and also little working experience in stock market.

There is a saying that “one bad fish spoils whole pond” and to be honest we have many such bad fish in stock market. If you discuss share market and its goodness with anyone who is not part of it, they will cite example of Satyam scam and Harshad Mehta. Yes Satyam scandal was massive jolt to Indian stock market in 2009 but we have moved on a long way from that. The regulations, the watch list, the checkpoints we have now are much tougher than those days. We have BSE, NSE, SEBI and Government agencies to monitor that everything is fine and all laws are being followed. There has been no big controversy with stock market since 2009 and we are growing stronger and bigger. India is one of the fastest growing economy and so is Indian stock market. If you believe in India growth story then you must believe in Indian stock market story.




For me simple funda of stock market is “If you can’t buy a company, buy few % of that company through shares”, yes that % will look really minuscule but that % will grow with same speed as the company. Imagine you buying .00000000000005% of a good worthy company with 10,000 Rs and after 15 years company grows 20 times, your percentage will still be same but value of that percentage share will grow by almost 20 times, means your 10,000 will become almost 200,000. These calculation can vary here and there but the basic growth logic will be the same, faster the company grows, faster your share value will grow. It is as simple as that, where is the risk here that might give you nightmare?  Now the question comes how to believe in company and how to identify such companies. Here comes the role of research and understanding the business module of a company. If you believe in a company that it will grow, it might not, but if lakhs of people believe in a company that it will grow, it will never fail.  If you don’t believe in private companies, go for government companies you believe in.

Before I stop here to write remaining in next post, here is an example of how investing in a good company for long time can give more value to your money than any other investment

TCS : Tata Consultancy Services

Year
Share Price in INR  (On average)
Comments
2002
300

2005
1500

2008
670
Stock split in 2006 2:1
2010
1067

2014
2643

2015
2560


So if you had 10 shares of TCS in 2002, you would have invested 3,000 Rs , now you would own 20 shares of TCS and that money would have become 51,200 in lump sum and it would be totally tax free. This is just a basic detail, apart from this, good companies keep giving dividends to shareholders based on company’s performance every year and TCS has given 150 Rs dividend per share till now.

Share market is not bad, some companies are, So Don’t avoid share market, avoid bad companies.

Contd.............