Share Market

A basic question which arises in one’s mind when deliberating over these two terms is “what is the difference between the both?”. Well from a layman’s point of view both the terms may have the same meaning but let us examine them both really closely. Investing is a common term familiar to all as investing your money to gain significant profits. Investing is done mainly by the common people who have limited knowledge and long term objectives of gaining profit. Trading on the other hand is a complicated venture of the people who are acclimatized with the nuances of the market. Traders are the people whose main objective is to make profit by continuous buying and selling of market assets.

These people make huge profits as well as incur huge losses following the policy of high risk and high return. Let us take some examples to elucidate our point further. Consider a man who buys fixed income bond of a company for suppose 5 years and gets a fixed rate of return on his investment. This is investing with a low risk factor. Now consider a man who buys stock (or share or equity) of a company during initial public offer(IPO) and flips the stocks as soon as there is a slight jump in the price. Trader’s sole purpose was to gain by studying market conditions. Now to summarize the discussion we can say that there are pros and cons associated with both investing and trading.

Investing

Pros:

• Low risk strategy to make money in a long term.
• Guarantees fixed returns.
• No need to pay huge brokerage.
• Need to have less knowledge about the market conditions.

Cons:

• Low risk is accompanied by the low returns as compared to trading.
• Easy to lose interest due to lack of involvement required. Usually leading to poor portfolio performance.

Trading

Pros:

• High risk strategy with gains available if risk is taken is a calculated one.
• Better returns in short term.
• Builds even more discipline than investing does (assuming you are successful)

Cons:

• Have to pay huge brokerage and risk is associated with it.
• Time consuming and more stressful.
• Requires thorough knowledge of the market which is time consuming and mind boggling.

The primary difference between Savings and Investment is the association of a risk factor with the latter which is completely absent in the former. Money saved in deposit accounts such as Fixed Deposits or Savings Accounts is safe from risk as the money is merely stored in order to back the Financial Institution’s loan Operations. However money invested is inevitably used for some sort of transaction. The money thus exchanges hands to buy a commodity/stock and then sell them when the price is higher.

There is of course a level of abstraction in the process so the customer can easily see what his investment was and what he got back, and not be aware of how the returns(if any) happened. The bank takes care of procuring the source of stock/commodity, buying it and selling it when the customer demands. The customer only knows what category of commodities/stocks were purchased e.g.: Gold, Silver, Electronics and not know which actual companies they were purchased from. The total value of all companies or dealers is then calculated and after procuring its own share, the company then avails this to the customers.

The important question is when to save and when to invest? As stated, Investments have no guarantees of returns. It may yield high returns, moderate returns comparable to Savings Accounts or actually have a loss. However safe an investment might sound, it is nevertheless impossible to determine in prospection the success of an investment since it is governed by various market forces and non-deterministic events. As a rule of thumb it is a bad idea to invest money if it is positively needed in the future, for repayment of debt on a house, for medical purposes, etc. Only extra money should be used for investments: Money that won’t be missed. In other cases it is better to save it in a deposit account.
Is it better to save all the money, instead of investing in the first place? To answer this question we must analyze the ROI rate of both. Savings Accounts offer a constant 8% rate of Interest. Investments can offer up to 18% over long term. 8% Risk free on Savings sounds good until you adjust for inflation.

The truth is a fixed amount of money will buy you less and less of a good over the years as the price of goods increases. In retrospect, Sugar was available for Rs. 10 a kilo 5 years back. Now it costs over Rs. 30. The average rate of inflation in India is 5%. So the net ROI on deposits is: 8-5 i.e. 3%. If the ambition is to augment one’s wealth, one has to seriously consider investing; otherwise Savings will merely provide enough to survive.

Buying and selling of the shares is what the share market is all about. The core motive is profit. There are many elements at play here but the fundamentals remain the same i.e. how to extract gain from the bargain? To buy or sell a share, an order is given to do that action.

Following are the orders for buying or selling stocks:

Market Order: when the buy or sell order is placed in accordance to the market rate i.e. the execution of the order is at the present market price, the order is said to be market order. In this, mentioning the price is not necessary; the share will get executed at current price. This is used more for immediate transaction. This is used when fast execution of the order at an available price is needed. In this the shares will get executed at the best current available price.

Limit Order: the price to buy or sell has to be mentioned when the share price reaches that price the order will then be executed. But it is uncertain that the price will come to the limit order. This is frisky because after the share-market close at 3:30 the order remains open if the price doesn’t reach the limit price. If this happens, the trader has to pay heavy penalties. It is similar to stop loss trigger.

You can use a pivot calculator for simple stop loss calculation for delivery based trading and intraday stop loss depends on how much you are ready to lose – the maximum amount you are ready to lose- it also depends on the price movements of the scrip for that particular day.

Offline share trading: the share trading over a telephone via a broker is called offline share trading.

Different types of share trading:

· Day trading: buying and selling of the shares on a daily basis is called day trading.

· Delivery trading: In this a trader should have the delivery of the shares only then he could start selling them.

Basically the trading decisions are taken by the following tools:

Fundamental analysis: (used for long term investment)

• EPS (earning per share) ratio
• Book value
• Working capital ratio
• Return on equity ratio
• Debt equity ratio

Technical analysis: (short term investments)

· Open price of the share

· High price of the share

· Low price of the share

· Closing price of the share

These factors drive buying and selling of shares. If you want to be successful you have to know the underlying basics.

A stock option is a type of a financial derivative representing a contract between two parties. The buyer has the right but not the obligation to buy or sell a security or other asset at an acknowledged price during a certain period.

Certain terms associated with options are:

1) Option class: call and put

2) Strike price: price at which the underlying asset is bought or sold when the option is exercised.

3) Expiration date: date till which the option is valid

4) Option style: American or European

5) Underlying Asset: the security for the option

6) Contract multiplier: quantity of the underlying asset that needs to be delivered.

Option market players:

1) Buyers of calls

2) Sellers of calls

3) Buyers of puts

4) Sellers of puts

Call: A call is the right to buy a specified quantity of an asset at a certain specified price within a period of time. People who buy options are called holders and those who sell options are called writers; furthermore, buyers are said to have long positions, and sellers are said to have short positions. A call gives the holder the right to buy an asset at a certain price within a specific period of time.
Buying call option: Call buyers are not obligated to buy or sell. They have the choice to exercise their rights if they choose. This strategy of trading call options is known as the long call strategy.

Seller of call option: provides the seller an obligation to sell the security at the strike price if the option is exercised. The writer is paid a premium for the risk he has taken with the obligation. They hope that the option expire worthless so that they may profit from the premium. Selling calls is very risky but very rewarding as well.

· Covered calls: if the call option writer owns the obligated quantity of the underlying security

· Naked calls: When the option trader write calls without owning the obligated holding of the underlying security

Put: a put option gives you the right but not the obligation to sell the company’s stocks at a specific price from the date of purchase until the expiration date. The buyer of the put option would want the price of the stock to decrease as put gives the option to sell at a certain price. People buy puts and hope to profit by selling the puts at a higher price, or by exercising their option.

Buying put options: the put option buyer buys put options in the hope that the price of the underlying asset would significantly decrease before the option expires. Put buyers are not obligated to buy or sell. They have the choice to exercise their rights if they choose.

Selling put options: Put option writers, also known as sellers, sell put options with the hope that they expire worthless so that they can pocket the premiums. Selling puts, or put writing, involves more risk but can be profitable if done properly.

· Covered puts: if the put option writer is also short the obligated quantity of the underlying security.

· Naked puts: if the put option writer did not short the obligated quantity of the underlying security when the put option is sold.

Options that have more than six months until expiration are called Leaps.

Purchase or sale of options with different strike prices or dates but with same security and class is called a spread.

Success in Stock Market comes to those who are patient and follow a strategy for investments instead of haphazardly buying and selling stocks and hoping one will hit the jackpot. It is important that before investing in Stocks, one clears the most common misconception about stock trading: that Stock trading is like gambling. Buying and selling stocks of random companies is not the way to succeed in stock market. It requires observation and research more than luck.

Have a long term vision and plan your investments accordingly. It can take a while for stock prices to rise up appreciably. However if a company does moderately well, its stocks will always rise over the long run

A company’s stock prices are determined by its profits and not its brand or name. So it is important to keep a track of the company’s activities before deciding to sell the stock. As an example, if a reputed company’s stock prices drop from Rs. 400 to Rs. 300, whereas another small company’s stocks rise from Rs. 50 to Rs. 80, which one would you buy? Some might consider the big a company a better choice, since what goes down comes up again. While this may be true for some people, however the stocks may take a long time to return to its original value since whatever caused the stocks to fall will have to be countered before the company can return. Sometimes, the process can even take 10-15 years.

Choosing the right time to buy and sell stocks is also essential. Every stock has an optimum price for a given time frame. If that stock has already attained the level, it is not advisable to invest in that stock as the price will not go further up during that time.

It is also important to diversify your portfolio and invest in multiple sectors. What affects the agriculture sector badly may in fact not have any effect on the consumer Electronics Sector. So ensure that your investments are not limited to a narrow range of stocks.

At the end of the day, you cannot completely determine how the stock market will behave. It is important to have a stop loss mechanism since even a good stock can show reverse trend at any point of time. Stock market trading is less like gambling and more like a game of bridge. Chance does play a role, but having learnt the game well, you can minimize your losses when you see them inevitable, and maximize your profits when you get a windfall.

India has the largest volume in stock trading. It is very difficult to make money in India by investing in stock markets. With a total of more than 5000 companies listed in NSE and BSE, the most important choice of choosing the company whose shares are to be bought becomes increasingly difficult. Once decided on the stock, one need to time the market as or long term investment are done to get a good profit on the investment. A trader should always have the eye for the investment. He has to follow the valuations at which to buy or sell. When we talk about the Indian share market, we talk about two exchange points:

1) Bombay Stock Exchange (BSE): The BSE was set up in the year 1875 and is the oldest stock exchange in Asia. It is located on Dalal Street, Mumbai. It has around 3500 companies and has the most number of trading volume.

There are over 5,085 listed Indian companies on the stock exchange as per the June data and the Bombay Stock Exchange has the most significant trading volume. The BSE SENSEX, also called “BSE 30”, is a widely used market index in India and Asia.

2) National stock exchange (NSE): It is India’s leading stock exchange covering various cities and towns. It was set up on 1956. It is operating on the wholesale debt market, the capital market segment and the derivative market. Following are the capital market segments NSE has undertaken:

· Equity

· Futures and Options

· Retail Debt Market

· Wholesale Debt Market

· Currency futures

· Mutual Fund

· Stocks lending and borrowing

The NSE’s key index is the S&P CNX Nifty, known as the NSE NIFTY (National Stock Exchange Fifty), an index of fifty major stocks weighted by market capitalization.

NSE is mutually-owned by a set of leading financial institutions, banks, insurance companies and other financial intermediaries in India but its ownership and management operate as separate entities

Recent developments in Indian Stock Market:

1) New measures of risk management system:

a) Reduction of price volatility: To reduce this, the derivatives products, index options, futures were introduced.

b) Placement of circuit breakers

c) Intraday trading limit

d) Mark to market margin

2) Investigations in case a company violate any law.

3) Investor awareness campaign

4) Ban on insider trading

Trading in Indian stock exchanges is limited to listed securities of public limited companies. They are forward list and cash list.

A member broker in an Indian stock exchange can act as an agent, buy and sell securities for his clients on a commission basis and also can act as a trader or dealer as a principal, buy and sell securities on his own account and risk.

The nature of trading on Indian Stock Exchanges are that of age old conventional style of face-to-face trading with bids and offers being made by open outcry. However, there is a great amount of effort to modernize the Indian stock exchanges in the very recent times.

To understand the stock market one has to understand what a stock is? Simply put, a stock is a share in the overall ownership of the company. If you have a stock of a company, you have that much claim on the company’s assets and earnings. Shares, stocks, equity’s they all mean the same.

Earlier, a stock was represented by a stock certificate which gave you the proof of your ownership. So to trade these stocks one had to go to the place himself and trade these which were very troublesome.

In present day scenario, everything is kept electronically, so no physical certificate is issued. But, instead of knocking at every door to search for a mutual stock trade interest, the stock market came into being where all the trading is done at one location.

A stock market is network of transactions to facilitate the exchange of a company stocks or derivatives at an agreed price. It is a centralized platform where all the buyers and sellers of a stock come together and trade on the basis of some agreement. When a company needs certain surplus amount of money, it sells a part of its ownership in the form of a stock. This helps the companies to expand financially by selling shares of ownership of the company. The money got in exchange is used by the company owners to expand. The stock market is one of the major indicators to know the growth of an economy. If the stock market rises, the economy is said to be growing and vice-versa. Value stock investing is a method that involves purchasing stocks that are going at prices below their worth. Value investors search out stocks the market has under priced and selling them when they are at a higher price.

There are certain fields that influence the stock market prices. These factors are change in economical fundamentals, sector changes and market swings. The other major factor could be the demand and supply balance. There are many theories formulated for the behavioral trend of the stock market but till this date it is highly irrational.

To fully understand the stock market, you have to know the economical and financial trends of the companies and many other factors. But in the end it all depends on the how well an individual understands this.

All those who have an interest in the share market must have heard the term quadruple times. Mutual funds are considered to be one of the best means of investing money. Retirement plans or brokerage account plans, all of them could be in the form of mutual funds. In the US, Investment Company Institute came up with a statistic which said that more than 92 million individuals in the US, like about 45% households owned mutual funds in the year 2008.

Having heard so much about mutual funds, these are an investment that allows a group of investors to pool their money and hire a portfolio manager. The respective manager then invests this money which is fund’s assets in the form of stock, bonds or investment securities. Mutual funds could also be a combination of three. The fund manager thereon continues to buy and sell stocks and securities according to the style that has been dictated by the fund’s prospectus.

Mutual funds have a compulsion in charging fees. This is needed to operate and manage the fund that has been collected and made. Management fees pay the fund companies or the managers to manage the funds. Some funds also charge investors an up-front sales charge/load when you make your first purchase in the form of shares in the fund. This happens while other funds charge a back-end load that is solely occurring upon sale of the fund shares so collected. There are funds of a nature that have no sales charge attached to them and are called no-load funds.

Mutual funds are open-end funds that are included in one of the four basic type of an investment company. The three other types of the company are exchange-traded funds and unit investment trusts.

Mutual funds need regular regulation when compared to other pooled investment options. They must comply with a strict set of rules that are monitored by the Securities and Exchange Commission. The SEC monitors the fund’s compliance with the Investment Company Act of 1940 and looks into the fact that it well adheres to other federal rules and regulations.

Mutual funds are good as an investment option as it can be invested with a few thousand dollars in one fund with which we could obtain instant access to a diversified portfolio. Added risk and instability gets diffused as it’s easy to diversify the portfolio without having to build individual securities. They also adhere to a basic principal of investing, that is, not to put all eggs in one basket. One can make many different types of investments in one portfolio and decrease the risk of loss from any one of those investments.

Derivatives are related with future performance and speculation of a certain market. Examples of derivatives would be futures, contracts, swaps, forwards and more. Derivative is a mere contract between two or more parties. The value of this derivative is determined by the market fluctuations in respect to underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.

Derivatives are used as an instrument to hedge risk, but can also be used for speculative purposes. To hedge this risk, the investor usually would purchase currency futures to lock in a specified exchange rate for the future stock sale and currency conversion back into the currency he had. They are contracts that one needs to buy or sell the underlying asset at a future time, with the price, quantity and other specifications defined at real time. The contract may be binding on either the parties or just one party with the other party reserving the option to exercise or not.

In usual case, the underlying asset either has to be traded or some kind of cash settlement has to exist. Derivatives are traded either in organized exchanges or over the counter. They are important in the world of finance because they allow for hedging and managing risk. They are one of the fastest growing segments in the financial market.

Since derivatives have no value themselves and are dependent on the value of another asset, there is a larger risk associated with them. They do lead to quick profits but they just cannot be trusted. Derivatives can best be taken up by those who understand thoroughly the relationships between product volume, price trends and consumer interest.

There is a very interesting example to understand the significance of derivatives. If we take up the case of Japanese rice farmers and the rice warehouse merchants then we’d know exactly how it all works. A rice farmer could sign a contract with a merchant in the spring that would allow the merchant to pay the farmer a certain set amount of cash. In exchange for the immediate cash, the rice farmer would deliver a certain amount of rice after the harvest. In this case, the rice farmer has lowered the business risk because he has received a certain price for the rice, while the merchant has locked in the price for a certain amount. Shortage or overabundance of rice would decide the wisdom in the exchange.

An exchange-traded fund or ETF is an investment fund that is traded on stock exchanges. They hold a similar funda to stocks. An ETF holds assets like stocks, commodities, bonds and trades which are close to its net asset value over the course of the trading day. ETFs can be as attractive as investments because of their characteristics like low costs, tax efficiency, and stock-like features. They are the most popular type of exchange-traded product

ETFs generally provide very easy diversification, low expense ratios, and tax efficiency of index funds. All this, while maintaining all the features of ordinary stock, such as limit orders, short selling and options. Some investors invest only in ETF shares for a long term basis as they can be economically acquired, held and disposed of. This is done by investors for asset allocation purposes. There are also times when investors trade ETF shares frequently to implement market timing investment strategies.

ETFs come along with many advantages like low costs, buying and selling flexibility, tax efficiency, market exposure and diversification, transparency and more. Lower costs: ETFs generally have lower costs than other investment products because they are mostly not actively managed and are insulated from the costs of having to buy and sell securities to accommodate shareholder purchases and redemptions. These funds typically have lower marketing, distribution and accounting expenses.

Buying and selling flexibility: ETFs can be bought and sold at current market prices at any time during the trading day. It is not like other investment options like mutual funds and unit investment trusts, which can only be traded at the end of the trading day. The shares of these funds can be purchased on margin and can be sold short being a publicly traded security. This enables the use of hedging strategies and using stop orders and limit orders for trading. This further allows investors to specify the price points at which they are willing to trade.

Tax efficiency: ETFs generate relatively low capital gains because they have low turnover of their portfolio securities. They share this advantage with other index funds. It counts as an advantage because tax efficiency gets enhanced by not having to sell securities to meet investor redemptions.

Market exposure and diversification: ETFs provide an economical way to rebalance portfolio allocations and to equalize cash by investing it quickly. It provides Transparency in the sense that whether an index fund or an actively managed fund, it has transparent portfolios that are priced at frequent intervals throughout the trading day. These advantages stem from the fact that these funds are index funds.