Share Market

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.