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AN INTRODUCTION OF SHARE MARKET
Introduction: A stock market is a market for the trading of company stock, and derivatives of same; both of these are securities listed on a stock exchange as well as those only traded private. The term 'the stock market' is a concept for the mechanism that enables the trading of company stocks (collective shares), other securities, and derivatives. Bonds are still traditionally traded in an informal, over-the-counter market known as the bond market. Commodities are traded in commodities markets, and derivatives are traded in a variety of markets. The stocks are listed and traded on stock exchanges which are entities (a corporation or mutual organization) specialized in the business of bringing buyers and sellers of stocks and securities together. The stock market in the India includes the trading of all securities listed on the BSE and NSE, as well as on the many regional exchanges. Market Phases • OPENING 8:45 a.m. to 9:54 am (includes Opening Session & Login Session) • OPEN PHASE- 9:55 a.m. to 3:30 pm (Trading Takes Place also called as continues secession) • MARKET CLOSE 3:30 p.m. to 4:00 (includes Closing & Post Closing Session)
• SURCON-Surveillance & Control 4:00. to 6:00 p.m. (also called as Member Query Session)
Importance of stock market Functions and Purpose: • The stock market is one of the most important sources for companies to raise money.
• This allows businesses to go public, or raise additional capital for expansion.
investors the ability to quickly and easily sell securities. This is an attractive feature of investing in stocks, compared to other less liquid investments such as real estate, gold, etc.
• Exchanges also act as the clearing house for each transaction, meaning that they collect and deliver the shares, and guarantee payment to the seller of a security. This eliminates the risk to an individual buyer or seller that the counterparty could default on the transaction.
• The smooth functioning of all these activities facilitates economic growth in that lower costs and enterprise risks promote the production of goods and services as well as employment. In this way the financial system contributes to increased prosperity.
• Market Segments:
1. Primary Market 2. Secondary Market 3. Derivative Market 1. Primary Market The primary is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. Features of Primary Market are:1. This is the market for new long term capital. The primary market is the market where the securities are sold for the first time. Therefore it is also called New Issue Market (NIM).
2. In a primary issue, the securities are issued by the company directly to investors. 3 The company receives the money and issue new security certificates to the investors. 4 Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business.
The primary market performs the crucial function of facilitating capital formation in the economy.
6 The new issue market does not include certain other sources of new long term external finance, such as loans from financial institutions. Borrowers in the new issue market may be raising capital for converting private capital into public capital; this is known as ‘going public’.
Methods of issuing securities in the Primary Market 1. Initial Public Offer 2. Rights Issue (For existing Companies) 3. Preferential Issue. 2. Secondary Market The secondary market is the financial market for trading of securities that have already been issued in an initial private or public offering. The market that exists in a new security just after the new issue is often referred to as the aftermarket. Once a newly issued stock is listed on a stock exchange, investors and speculators can easily trade on the exchange, as market makers provide bids and offers in the new stock Features of Secondary Market:1. Securities are sold by and transferred from one investor or speculator to another. 2. The secondary market be highly liquid and transparent. 3. Secondary market is vital to an efficient and modern capital market. 4. Secondary markets mesh the investor's preference for liquid with the capital 5. User’s preference to be able to use the capital for an extended period of time.
3 Derivatives Markets
The derivatives markets are the financial markets for derivatives. The market can be divided into two that for exchange traded derivatives and that for over-the-counter derivatives. Derivative trading in India takes can place either on a separate and independent Derivative Exchange or on a separate segment of an existing Stock Exchange. Derivative Exchange/Segment function as a Self-Regulatory Organization (SRO) and SEBI acts as the oversight regulator. The clearing & settlement of all trades on the Derivative Exchange/Segment would have to be through a Clearing Corporation/House, which is independent in governance and membership from the Derivative Exchange/Segment Stock –Brokers: A Stock broker sells or buys stock on behalf of them selves. The stock broker works as an agent matching up stock buyers and sellers. A transaction on a stock exchange must be made between two members of the exchange — a typical person may not walk into the National Stock Exchange (for example), and ask to trade stock. Such an exchange must be done through a broker. In addition to actually trading stocks for their clients, stock brokers may also offer advice to their clients on which stocks, mutual funds, etc. to buy. Some people prefer to use and pay for the services of a broker because they feel more comfortable making decisions about their finances with the interactive guidance of a licensed
professional. A stock broker usually offers both commission and fee-based services depending on the client’s best interests. According to Rule 2 (e) of SEBI Rules, 1992, a stockbroker means a member of recognized stock exchange. Sub-Brokers A sub- Broker is a person who intermediates between investors and stockbrokers. He acts on behalf of a stock-brokers as an agent or otherwise for assisting the investors as an agent or otherwise for assisting the investors for buying selling or dealing in securities through such stock brokers. No stock broker is allowed to buy, sell deal in securities, unless he or she holds a certificate of registration granted by SEBI.
body. The validity of the bond will provide you interest payments. Mostly, bonds have a permanent rate of interest. Putting money in saving account will also offer options investing. You will interest for your money, but the money will not score high. For options investing, you can go for mutual funds because it is being empowered in the stock market. Mutual funds offers low level of risk and handsome results. These are some of the most unique options investing, but there are also other procedures. If you want to know more then you can simply browse the Internet. The Internet will provide you right method on
options investing and all about stock market. Remember, though, that if you want to break the investment & get all your money back, you may need to pay some amount back to your bank. Bonds are reliable choice for accruing interest and bonds are a kind of CDs, except that you give money to government, or other entity, which is giving bonds for sale. Also, you put the money in entity, as well as get I.O.U., and bond, in return. Thus it is very important for you to know everything about the bonds and other option. How should you invest your money? How should you invest your money? There is not fast way to answer this neither question, nor shortage of advice when it comes to make money in the stock market. Most of the time, however, such opinions and advice are based on a selective presentation of the facts by investment firms and derived by secondary gains from the adviser which is affected by the day to day news and analysis. You will encounter in your stock trading career one trader telling you to invest your money in stocks. Another will insist that mutual funds give you the most for your money. A third will tell you to bet on bonds. Others will go for ETFs, options, or futures. Growing your money and investing it is not just a theoretical exercise. You have, or will have, money that you want to invest. As a matter of fact, you need to invest the money that you have earned, saved, and/or inherited so that you can meet with your retirement goals, buying a new home, paying for college, etc. Before you start investing your money you need to understand as much as possible about how the stock market works, how to do proper stock market research and analysis. So, how should you invest your money? Before you answer that question, you need to understand and have a clear picture of what constitute an
investment and what investment choices you have available in the stock market today. Stock Welcome to the holy grail of the stock market. Investing your money in stocks is different from investing your money in good stocks. So, What is a good stock? Some stock brokers will say larger companies. At Best Growth Stock LLC, we argue that the best stocks to invest your money are fast growing companies, Growth Stocks. Mutual Funds Wall Street pundits will argue that mutual funds offer great value to the average investor. When you invest your money in a mutual fund, the mutual fund company is investing it in stock, bonds and other investment vehicles to growth its value. The bad about investing in mutual funds is that instead of YOU being your own portfolio manager and investor, you relay on other people to growth your own money and sometimes it comes back with high management fees.
Bonds During the bear market of 2001 investing in bonds became very famous. Keeping part of your money in bonds is a good way to diversify a stock portfolio. Another advantage of bond investment are the tax advantages of bonds, especially municipal bonds. But keep in consideration that bonds do not offer a good return relative to stocks and that they have their own risk, including
default risk, sensitivity to interest rates, currency exchange rates, and the business cycle. Options Investing in options remain one of the less well understood trading to new investors and we encourage new investors to stay out of options until they can understand the level of speculation that it carries. Most options are short-term investments and must be monitored closely. Options carry the big potential for spectacular returns through financial leverage, though sometimes they are marketed as a way of “insuring” your portfolio against a market downturn. The cost of trading options is frequently very high for individual investors and that most individuals who use options to speculate lose money. Futures The last investment vehicles we will discuss are futures. Like the options, futures trading have many of the same uses as options. The degree of return compare to its leverage is very high for the individual investor but with added risk of margin calls. New investor should stay away from futures at all cost since you have How to diversification your stock: Investing is a threatening venture whether you're an experienced professional or a rank beginner. If this is your first turn round the dance floor you need to realize firstly that all investing is a likelihood of some type. There's not any such thing as hassle-free investing though categorical sorts of investments really involve more risks than others. This is the actual reason that it is so critical to have a stock portfolio that is diversified enough to offer some insulation from devastation due to one stock, bond, or fund
performing poorly while also making a conspicuous difference when one performs strangely well. Put simply, dilating your portfolio tempers the dangers you are taking by investing to some level. You've heard the old chestnut "never put your eggs in one basket".
Dilating your portfolio moves your eggs around so that your nestegg has more than one layer or protection from the evils of the planet and the variable minds of men and the NY Stock Exchange. You want to diversify your portfolio so that one sector or one stock does not have the power to sink your financial future in one slipped swoop. Mutual Funds & Penny Stocks You want to feel safe that your investments are secure to some level without reference to the many risks you will face. In fact you need that sense of security to keep on investing and building your financial future. You can find that it is nearly impossible to work on a financial future you do not believe in. If that isn't acceptable however you need to diversify so you've got the opportunity to spread the wealth a bit too. You would like to have some opportunities to take the hazards which make the real cash in the market game. You can not actually do this if all your money are tied up in ventures that are built to take no probabilities and run the marathon. It's nice, often to feel the wind in your hair as you run towards your cash goals rather than going at the snails pace for security. To paraphrase, variety brings a sense of balance to your portfolio too. There are all kinds of investments. You will find many alternative firms, many varied sectors, differing types of stocks, bonds, funds, and all demeanor of investment opportunities that each bring to the table a different kind of risk
and a different kind of security on which you can feast while organizing your stock portfolio in a meal that should is intended to last a whole life and keep your family fed, dressed, and content for a couple of years to come. To do all of these things your finance situation must be as well-rounded as you are as a person and your stock portfolio wishes that liberal humanities education that incorporates a hardly any of everything. If you can do this with your portfolio then your economic outlook should be much brighter and bolder than it may be if you left your efforts in one basket and dined on one plate for the rest of your life. Make more of an effort to check out your finance holdings and if you don't have a little bit of variety on your plate it's time to add a little sprinkling of risk or conservation accordingly.
THE FIVE BASIC METHODS OF MARKET RESEARCH
While there are many ways to perform market research, most businesses use one or more of five basic methods: surveys, focus groups, personal interviews, observation, and field trials. The type of data you need and how much money you’re willing to spend will determine which techniques you:
1. Surveys. With concise and straightforward questionnaires, you can analyze a sample group that represents your target market. The larger the sample, the more reliable your results will be.
In-person conducted They allow packaging,
surveys are one-on-one interviews typically in high-traffic locations such as shopping malls. you to present people with samples of products, or advertising and gather immediate feedback. In-
person surveys can generate response rates of more than 90 percent, but they are costly. With the time and labor involved, the tab for an in-person survey can run as high as $100 per interview.
Telephone surveys are less expensive than in-person surveys, but costlier than mail. However, due to consumer resistance to relentless telemarketing, convincing people to participate in phone surveys has grown increasingly difficult. Telephone surveys generally yield response rates of 50 to 60 percent. Mail surveys are a relatively inexpensive way to reach a broad audience. They're much cheaper than in-person and phone surveys, but they only generate response rates of 3 percent to 15 percent. Despite the low return, mail surveys remain a costeffective choice for small businesses. Online surveys usually generate unpredictable response rates and unreliable data, because you have no control over the pool of respondents. But an online survey is a simple, inexpensive way to collect anecdotal evidence and gather customer opinions and preferences.
2. Focus groups. In focus groups, a moderator uses a scripted series of questions or topics to Focus groups. In focus groups, a moderator uses a scripted series of questions or topics to lead a discussion among a group of people. These sessions take place at neutral locations, usually at facilities with videotaping equipment and an observation room with one-way mirrors. A focus group usually lasts one to two hours, and it takes at least three groups to get balanced results. 3. Personal interviews. Like focus groups, personal interviews include unstructured, open-ended questions. They usually last for about an hour and are typically recorded.
Focus groups and personal interviews provide more subjective data than surveys. The results are not statistically reliable, which means that they usually don't represent a large enough segment of the population. Nevertheless, focus groups and interviews yield valuable insights into customer attitudes and are excellent ways to uncover issues related to new products or service development. 4. Observation. Individual responses to surveys and focus groups are sometimes at odds with people's actual behavior. When you observe consumers in action by videotaping them in stores, at work, or at home, you can observe how they buy or use a product. This gives you a more accurate picture of customers' usage habits and shopping patterns. 5. Field trials. Placing a new product in selected stores to test customer response under real-life selling conditions can help you make product modifications, adjust prices, or improve packaging. Small business owners should try to establish rapport with local store owners and Web sites that can help them test their products. 6. Telephone surveys. Hire summer students or part-time people for a few days every six months to do telephone surveys.
CHAPTER – IV
DATA COLLECTION AND DATA ANALYSIS
DATA COLLECTION AND INTERPRETATION
1. Participated Gender in stock market investment according my survey. Particulars Male Female Total No. of Respondents 24 06 30 Percentage 80% 20% 100%
Above Data reveals that most of the respondents were male whereas female have participated only 20% of the total number of the respondents due to male oriented organizational framework.
In which securities would you like to Invest? Particulars Share Mutual Fund Commodity Others Total No. of Respondents 19 4 1 6 30 Percentage 64% 13% 3% 20% 100%
Above data reveals that most of the respondents from share investment. Most of people would like to invest in share and those people don’t want to take risk they are invested in mutual fund and other securities. Only three per cent people they want to take risk for getting more money.
1. Are you satisfied in Ventura Securities Limited? Particulars Yes No Total No. of Respondents 23 07 30 Percentage 77% 23% 100%
Interpretation: Above table and Graphs is the evident for investment satisfaction into the organization and I came to know that 77% investors are satisfied with service and rests are unsatisfied with service i.e.23%.
2. Which of these factors do you keep in mind while purchasing stock? Particulars Dividend policy Company message Brand name Broker hints Total No. of Respondents 7 18 4 1 30 Percentage 13% 64% 3% 20% 100%
Interpretation: 13% of the respondents were having dividend policy and most of the respondents were having company massage. The other people are depend on broker hints and brand name of company.
3. In which trading would you like to invest? Particulars Online trading Offline trading Total No. of Respondents 21 09 30 Percentage 70% 30% 100%
Interpretation: The more number of people are invested in online on there own opinion or knowledge. 30% people are depend on broker hints because lack of knowledge in securities.
4. What do you think about the broking charged in a Ventura Securities? Particulars Reasonable Unreasonable Total No. of Respondents 24 06 30 Percentage 80% 20% 100%
Interpretation: Ventura Securities broking charges are affordable to the middle level and higher level investor. But lower level investors are not affordable broking charges.
5. Do you prefer to buy share on cash basis or credit basis? Particulars cash Credit Total No. of Respondents 24 06 30 Percentage 80% 20% 100%
Interpretation: People are interested buying securities on cash basis for reducing transaction charges. The few people would like to buying securities on credit basis. Because getting more risk and getting more profit .
With a shortlist of companies, an investor might analyze the resources and capabilities within each company to identify those companies that are capable of creating and maintaining a competitive advantage. The analysis could focus on selecting companies with a sensible business plan, solid management and sound financials. I) Business Plan
The business plan, model or concept forms the bedrock upon which all else is built for a new business, the questions may be these: Does its business make sense? Is it feasible? Is there a market? Can a profit be made? For an established business, the questions may be: Is the company's direction clearly defined? Is the company a leader in the market? Can the company maintain leadership? II) Management
In order to execute a business plan, a company requires topquality management. Investors might look at management to assess their capabilities, strengths and weaknesses. Some of the questions to ask might include: How talented is the management team? Do they have a track record? How long have they worked together? Can management deliver on its promises? If management is a problem, it is sometimes best to move on. III) Financial Analysis
The final step to this analysis process would be to take apart the financial statements and come up with a means of
valuation. Below is a list of potential inputs into a financial analysis.
What are Strategies? Strategies are specific game plans created by you based on your idea of how the market will move. Strategies are generally combinations of various products – futures, calls and puts and enable you to realize unlimited profits, limited profits, unlimited losses or limited losses depending on your profit appetite and risk appetite. How are Strategies formulated? The simplest starting point of a Strategy could be having a clear view about the market or a script. There could be strategies of an advanced nature that are independent of views, but it would be correct to say that most investors create strategies based on views. What views could be handled through Strategies? There could be four simple views: bullish view, bearish view, volatile view and neutral view. Bullish and bearish views are simple enough to comprehend. Volatile view is where you believe that the market or scrip could move rapidly, but you are not clear of the direction (whether up or down). You are however sure that the movement will be significant in one direction or the other. Neutral view is the reverse of the Volatile view where you believe that the market or scrip in question will not move much in any direction. 1. Bullish Strategies
2. Bearish Strategies 1. Various bullish strategies possible • Buy a Future • Buy a Call Option • Sell a Put Option • Create a Bull Spread using Calls • Create a Bull Spread using Puts Let us discuss each of these using some examples. Buy a Futures Contract If you buy a Futures Contract, you will need to invest a small margin (generally 15 to 30% of the Contract value). If the underlying index or scrip moves up, the associated Futures will also move up. You can then gain the entire upward movement at the investment of a small margin. For example, if you buy Nifty Futures at a price of Rs 1,100 that moves up to 1,150 in say 10 days time you gain 50 points. Now if you have invested only 20%, i.e. 220, your gain is over 22% in 10 days time, which works out an annualized return of over 700%. The danger of the Futures value falling is very important. You should have a clear stop loss strategy and if you’re Nifty Futures in the above example were to fall from 1,100 to say 1,080; you should sell out and book your losses before they mount. The graph of a Buy Futures Strategy appears below:
Buy a Call Option If you buy a Call Option, your Option Premium is your cost which you will pay on the day of entering into the transaction. This is also the maximum loss that you can ever incur. If you buy a Cipla May 260 Call Option for Rs 21, the maximum loss is Rs 21. If Cipla closes above Rs 260 on the expiry day, you will be paid the difference between the closing price and the strike price of Rs 260. For example, if Cipla closes at Rs 300, you will get Rs 40. After setting off the cost of Rs 21, your net profit is Rs 19. The Call buyer has a limited loss, unlimited profit profile. No margins are applicable on the buyer. The premium will be paid in
cash upfront. If the scrip moves nowhere, the buyer is adversely impacted. As time passes, the value of the Option will fall. Thus if Cipla is currently at around Rs 260 and remains around that price till the end of May, the value of the Option which is currently Rs 21 would have fallen to nearly zero by that time. Thus time affects the Call buyer adversely. The graph of a Buy Call position appears below: Sell a Put Option:
Another bullish strategy is to sell a Put Option. As a Put Seller, you will receive Premium. For example, if you sell a Reliance May 300 Put Option for Rs 18, you will earn an Income of Rs 18 on the day of the transaction. You will however face a risk that you might have to pay the difference between 300 and the closing price of Reliance scrip on the last Thursday of May. For example, if Reliance were to close on that day at Rs 275, you will be asked to pay Rs 25. After setting of the Premium received of Rs 18, the net loss will be Rs 7. If on the other hand, Reliance closes above Rs 300 (as per your bullish view), the entire income of Rs 18 would belong to you.
As a Put Seller, you are required to put up Margins. These margins are calculated by the exchange using a software program called Span. The margins are likely to be between 20 to 35% of the Contract Value. As a Put Seller, you have a limited profit, unlimited loss profile which is a high risk strategy. If time passes and Reliance remains wherever it is (say Rs 300), you will be very happy. Passage of time helps the Sellers as value of the Option declines over time. The profile of the Put Seller would appear as under:
Bull Spreads: First of all, Spreads are strategies, which combine two or more Calls (or alternatively two or more Puts). Another series of Strategies goes by the name Combinations where Calls and Puts are combined. Bull Spreads are those class of strategies that enable you benefit from a bullish phase on the index or scrip in question. Bull
spreads allow you to create a limited profit limited loss model of payoff, which you might be very comfortable with. Bull Spread using Calls/ Puts: Bull spreads can be created using Calls or using Puts. You need to buy one Call with a lower strike price and sell another Call with a higher strike price and a spread position is created. Interestingly, you can also buy a Put with a lower strike price and sell another with a higher strike price to achieve a similar payoff profile. 2. Bearish Strategies • Sell Scrip Futures • Sell Index Futures • Buy Put Option • Sell Call Option • Bear Spreads • Combinations of Options and Futures Let us discuss each one of them now.
2. Various bearish strategies possible
Sell Scrip Future or Index Futures: In the current Indian system, when you sell Scrip Futures, you are not required to deliver the underlying scrip. You will be required to deposit a certain margin with the exchange on sale of Scrip Futures. If the Scrip actually falls (as per your belief), you can buy back the Futures and make a profit. For example, Cipla Futures are quoting at Rs 250 and you sell them today as you are bearish. You could buy them back after 10 days at say Rs 230 (if they fall as per your expectations), generating a profit of Rs 20. Question of delivering Cipla does not arise in the present set up. You will be required to place a margin with the exchange which could be around 25% (an illustrative percentage). If you accordingly place a margin of Rs 62.50, a return of Rs 20 in 10 days time works out to a wonderful 30% plus return. Obviously, if Cipla Futures move up (instead of down) you face an unlimited risk of losses. You should therefore operate with a stop loss strategy and buy back Futures if they move in reverse gear. You could adopt the same strategy with Index Futures if you are bearish on the market as a whole. Similar returns and risks are attached to this strategy.
Buy Put Option The Put Option will rise in value as the scrip (or index) drops. If you buy a Put Option and the scrip falls (as you believe), you can sell it at a later date. The advantage of a Put Option (as against Futures) is that your losses are limited to the Premium you pay on purchase of the Put Option. For example, a Cipla 260 Put may quote at Rs 21 when Cipla is quoting at Rs 264. If Satyam falls to Rs 244 in 8 days, the Put will move up to say Rs 31. You can make a profit of Rs 10 in the process. No margins are applicable on you when you buy the Put. You need to pay the Premium in cash at the time of purchase. Sell Call Option If you are moderately bearish (or neutral or bearish), you can consider selling a Call. You will receive a Premium when you sell a Call. If the underlying Scrip (or Index) falls as you expect, the Call value will also fall at which point you should buy it back. For example, if Cipla is quoting at Rs 264 and the Cipla 260 Call is quoting at Rs 18, you might well find that in 8 days when Cipla falls to Rs 244, the Call might be quoting at Rs 7. When you buy it back at Rs 7, you will make a profit of Rs 11. However, if Cipla moves up instead of down, the Call will move up in value. You might be required to buy it back at a loss. You are exposed to an unlimited loss, but your profits are limited to the Premium you collect on sale of the Call. You will receive the
Premium on the date of sale of the Option. You will however be required to keep a margin with the exchange. This margin can change on a day to day basis depending on various factors, predominantly the price of the scrip itself. You should be very careful while selling a Call as you are exposed to unlimited losses. Bear Spreads In a bear spread, you buy a Call with a high strike price and sell a Call with a lower strike price. For example, you could buy a Cipla 300 Call at say Rs 5 and sell a Cipla 260 Call at Rs 26. You will receive a Premium of Rs 26 and pay a Premium of Rs 5, thus earning a Net Premium of Rs 21. If Cipla falls to Rs 260 or lower, you will keep the entire Premium of Rs 21. On the other hand if Cipla rises to Rs 300 (or above) you will have to pay Rs 40. After set off of the Income of Rs 21, your maximum loss will be Rs 19. Cipla Closing Price 250 255 260 270 281 290 300 310 Profit on 260 Strike Call (Gross) 0 0 0 -10 -21 -30 -40 -50 Profit on 300 Strike Call (Gross) 0 0 0 0 0 0 0 10 Premium Received on Day One 21 21 21 21 21 21 21 21 21 21 21 11 0 -9 -19 -19 Net Profit
The pay off profile appears as under:
In a bear spread, your profits and losses are both limited. Thus, you are safe from an unexpected rise in Cipla as compared to a clean Option sale. Combination of Futures and Options If you sell Futures in a bearish framework, you run the risk of unlimited losses in case the scrip (or index) rises. You can protect this unlimited loss position by buying a Call. This combination will result effectively in a payoff similar to that of buying a Put. You can decide the strike price of the Call depending on your comfort level. For example, Cipla is quoting at Rs 264 currently and you are bearish. You sell Cipla Futures at say Rs 265. If Cipla moves up, you will make losses. However, you do not want unlimited loss. You could buy a Cipla 300 Call by paying a small Premium of Rs 5. This will arrest your maximum loss to Rs 35. If Cipla moves up beyond the Rs 300 level, you will receive compensation from the Call, which will offset your loss on Futures. For example, if Cipla moves to Rs 312, you will make a loss of Rs
37 on Futures (312 – 265) but make a profit of Rs 12 on the Call (312 – 300). For this comfort, you shell out a small Premium of Rs 5 which is a cost. 5. Covered Call
A Covered Call is a strategy that could also incidentally fit into a bearish orientation. A Covered Call is a strategy where you have sold a Call. As a seller, you are exposed to unlimited losses. However, you hold the underlying security as a result of which, if the situation arises, you can always deliver the underlying and thus avoid such unlimited losses. For instance, you are holding Cipla, which is currently quoting at Rs 230. You are bearish on Cipla and you believe it might touch Rs 200 in the next 30 days. You therefore sell a Call with Strike Price 220 for Rs 15. You have earned this Income of Rs 25 as a Seller. Now if Cipla were to move up (rather than down as per your expectation) you will face losses. For example, if Cipla moves to Rs 270, you will, as a seller, pay Rs 50 (difference between the Cipla price and the strike price). However, you are not affected by this loss because, as a holder of Cipla itself, your holding has appreciated from the current level of Rs 230 to Rs 270 which has generated a profit of Rs 40.
Thus, the loss on the Call has been offset with the rise in the price of the underlying security. Your overall profit is Rs 15 computed as follows: • Rs 25 as Income from Sale of the Call • Rs 40 as appreciation in Cipla shares • Less Rs 50 payout on the exercise of the Call. There are several situations, which might make this product interesting. The classic one is where you hold a share which you like and would like to hold it in the medium to long term. You have no inclinations of selling it. However, you do believe that in the short term, there is no great potential for appreciation. In fact you believe that the share will either stay where it is (neutral view) or it might even fall in price. In this situation, you wonder how you can make money even when holding on to the share itself. For example, you hold Infosys which is currently quoting at Rs 3,400. You love Infosys and would like to keep it forever. However, in the short run, you believe Infosys will either fall or stay around the Rs 3,400 mark. Infosys 3,400 strike one month calls are currently quoting at Rs 150. If you sell these calls, you can generate an equivalent income. If your view is correct, you get to retain the entire Rs 150 with no costs. 2 Volatile Strategies Straddle
A Straddle is a strategy where you buy a Call Option as well as a Put Option on the same underlying scrip (or index) for the same expiry date for the same strike price. For example, if you buy a Cipla July Call Strike Price 240 and also buy a Cipla July Put Strike Price 240, you have bought a Straddle. As a buyer of both Call and Put, you will pay a Premium on both the transactions. If the Call costs Rs 12 and the Put Rs 9, your total cost will be Rs 21. You will buy a Straddle if you believe that Cipla will become volatile. Its current price is say Rs 240, but you think it will either rise or fall significantly. For example, you could believe that Cipla could rise right up to Rs 300 or fall up to Rs 200 in the next fortnight or so. There could be various situations, which might warrant heavy movement. For example, during Budget time, a favourable proposal might impact the price favorably and if nothing favorable is proposed, the price could fall significantly. An Indian company could be considering collaborations with a major foreign company. If the collaboration were to happen, the price could rise, and if it were not to happen, the price could fall. An Indian company might be expecting a huge order from a foreign company. The market might be awaiting news on this front. While a positive development might result in a price rise, a negative development might dampen the prices. Some companies might face huge lawsuits. The decision could significantly impact prices any which direction.
In all these cases, you are sure that the price will either move up or move down, but you are not clear which way. Let us continue the above example. You have bought the Call and the Put and spent Rs 21. The current price and the strike price are the same Rs 240. Your profile will be determined as under:
Cipla Closing Price 200 210 220 230 240 250 260 270 280
Profit on Call 0 0 0 0 0 10 20 30 40
Profit on Put Initial Cost 40 30 20 10 0 0 0 0 0 21 21 21 21 21 21 21 21 21
Net Profit 19 9 -1 -11 -21 -11 -1 9 19
Thus you make maximum profit if the price falls significantly to Rs 200 or rises significantly to Rs 280. You will make a maximum loss of Rs 21 (your initial cost) if the price remains wherever it currently is. As a buyer of the Straddle, you will pay initially for both the Call and the Put. You need not place any margins as you are a buyer of both Options. If time passes and the scrip remains at or around the same price (in this case Rs 240), you will find that the Option Premier of both the Call and the Put will decline (Time Value of Options decline with passage of time). Hence, you will suffer losses.
Sell a Straddle You bought a Straddle because you thought the scrip will become volatile. Conversely, the seller of the Straddle would believe that the scrip will act neutral. The seller will believe that the price of Cipla will stay around Rs 240 in the next fortnight or so. Accordingly, he will sell both the Call and the Put. If the price indeed remains around Rs 240, he will make a maximum gain of Rs 21. If the price were to move up or down, he will make a lower gain as he will have to pay either on the Call (if it moves up) or on the Put (if it moves down). As a seller, he will receive the Premier of Rs 21 on day one. He will have to place margins on both the Options and hence these requirements could be fairly high. If time passes and the scrip stays around Rs 240, the seller will be happy as the Option values will decline and he can buy back these Options at a lower level. On the other hand, if the scrip moves, he should be careful and think of closing out early. You will look up the Delta of the option, which happens to be 0.54. One contract of Cipla is 1,200 Units. You have a positive Delta which means that with Cipla going up the price of the Call will move up (Rs 0.54 for every upward movement of Re 1.00 in Cipla) and will move down correspondingly. You do not want to bet on this directional movement. You will therefore buy Cipla futures to the tune of 1,200 x 0.54 i.e. 648
Futures. This will neutralize the impact in such a manner that whether Cipla moves up or down, the changes in Futures price will offset the changes in the Option price. For example, if Cipla moves up to Rs 245 tomorrow, you will find that the Option price has moved up to Rs 14.54. In case you wonder why, the background is with a Delta of 0.54, the Option price should go up by Rs 2.70 (0.54 x Rs 5 upward movement in Cipla ). As one day has passed, the time factor will impact Option prices downward – say by Rs 0.16. Thus, the net Option price will tend to go up by Rs 14.54 (derived from the Black Scholes calculator). You will have lost Rs 3,048 on the Call. You will find that you have gained Rs 3,240 on the Futures, thus generating a net gain of Rs 152.
CHAPTER - V
FINDINGS AND SUGGESIONS
• During the Market Research business class people show positive attitude in Share Trading
• Those who have Interest in share trading most of them were aware of Ventura Securities.
Mostly Investors show their first preference for share trading in Ventura Securities Ltd.
• As per the survey results all Ventura Securities brokers and frenchancy in Pune area show positive attitude in share Trading
In some areas especially Ventura Securities in Pune, Mumbai, Chennai, Hyderabad etc. a big part of Investors were found to be Interested in Commodity Market
• In survey few clients expressed full satisfaction for the products of Ventura Securities Mostly for PVS. (Power Ventura Securities)
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