investing

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Introductions to Capital Market Basics of
Options Trading



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Investor - The biggest risk of all is not
taking one
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• What is the difference between saving
  investment?
• Saving is that part of your income you set aside
  to spend at a future date. Investing however, is
  taking your savings and making your money work
  for you by putting it in financial instruments or
  products such as shares, bonds, units, property
  and even term deposits
• Financial security-Financial independence, Build
  your wealth, Attain your goals
• . Be aware of risks
• . Be aware of risks-Reinvest income

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Investment is necessary to support your financial
needs when you do not earn money
Why Do We Invest?

• By investing a portion of your income you allow
  money to grow and work for you.
• 3 parameters to assess suitability of any
  investment avenue are
• Return potential
• Safety
• Liquidity
• Various avenues where money can be invested, are
  broadly classified into some groups, known as
  Asset Class. Stocks or Equity shares are most
  popular class of assets.

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Benefits of Investing Early

• Starting investing early will not only make it
  easier to build wealth but also increase the
  probability of reaching financial stability at an
  early age.
• Power of compounding
• In simplest terms, compounding interest means
  interest on interest. Each time you earn interest
  on your principal, it is added to the original
  amount, which then becomes the principal for the
  next cycle.
• This allows exponential growth for your interest.

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Benefits of Investing Early
Early Investor Late Investor
Age 25 years 35 years
Amount Invested / Month ? 5,000 ? 5,000
Rate of Return 6 pa 6 pa
Total Investment ? 21 Lakh ? 15 Lakh
Amount at the age of 60 years ? 71.59 Lakh ? 34.82 Lakh
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• There are a lot reasons why starting early is a
  good idea.
• Basically, starting early can help you achieve
  financial independence, fulfil your dreams, and
  retire early, if you so wish.

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• Since investment tenure is longer, investment
  amount can be small
• .
• Starting investment early improves your spending
  habit.
• You enjoy the benefit of compounding.
• You can accumulate a larger corpus for staying
  invested longer.

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Three important considerations for any product
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Asset Class-

• Equity
• Mutual Funds
• Bonds or Debentures
• Bank Fixed Deposits (FDs)
• Public Provident Fund (PPF)
• National Pension System (NPS)
• Real Estate
• Gold

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What are Securities?

• Equity Shares
• Preference Shares
• Debentures / Bonds
• Mutual Fund Units
• Government Securities
• What are not Securities?
• Fixed deposit with banks or companies
• Insurance policies
• Provident Fund / Public Provident Fund

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Benefits of investing in stocks

• The potential to earn higher returns
• The ability to protect your wealth from inflation
• The ability to earn regular passive income
• Liquidity
• Diversification
• The ability to start small

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Capital market

• Capital market is the backbone of every country.
• Providing the allocation of funds and
  mobilization of resources.
•  Industrial and commercial development of the
  country.
•  The savings and investments are channelized
  between the persons who have capital and the
  person who needs capital.

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Capital Market
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Equity Vs. Debt

• Equity Market-
• One can be either an investor or a trader in the
  equity market. A company can issue shares to
  raise capital. If the company grows, the value of
  the shares rises. Many traders buy and
  sell shares within a very short period or one can
  choose to hold shares over a longer period too.
• -Stocks or shares - Long term - short term
  investments
• Equity trading swing delivery intraday

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Equity Vs. Debt

• The debt market acts as a regular source of
  income and capital preservation through which the
  returns from the debt market are generally lower
  than those from the equity market.
• Bonds Both the government and the company, can
  issue bonds. Investing in the bonds, you
  effectively loan money to the issuer of bonds.
  The issuer then repays this loan, along with
  interest, for a predetermined period.
• Government securities or G-secs
• Debentures These are issued solely by the
  companies and come with a fixed interest rate.
  You can invest in either convertible or
  non-convertible debentures.

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Equity Market -

• An equity share, normally known as ordinary share
  is a part ownership where each member is a
  fractional owner and initiates the maximum
  entrepreneurial liability related to a trading
  concern. These types of shareholders in any
  organization possess the right to vote.

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Classification of market

• The primary market- This is also known as the new
  issue market as the investors can buy securities
  directly from the company that issues.
•  Initial Public Offerings (IPO)-
• They can also be raised through the right issue.
• Fresh securities offered to the public to invest
  for the first time.
• The secondary market is for the buying and
  selling of securities that are already existing
  and issued by the companies. 

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Indian Capital Market - Overview
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Documents required for Opening Demat Account
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• Shares or stocks
• Exchange-traded funds or ETFs
• Equity shares
• Initial Public Offering (IPO)
• Mutual Funds
• Government Bonds
• Non-convertible Debentures (NCDs)

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Use of your Demat Account

• Apply for IPOs, NFOs and receive allotment
  directly in demat account by mentioning your DP
  ID and Client ID in application or subscription
  form.
• Receive corporate benefits (bonus, rights etc.).
• Cash benefits like dividend, interest or maturity
  amount payable on bonds etc. are credited
  directly in linked bank account. Keep your bank
  details updated in demat account.
• Ease in getting finance against your investments
  through Loan Against Shares / Digital LAS.

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Stockbroker

• The stockbroker is probably one of the most
  important financial intermediaries that you need
  to know. A stockbroker is a corporate entity,
  registered as a trading member with the stock
  exchange and holds a stockbroking license. They
  operate under the guidelines prescribed by SEBI.

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Depository and Depository Participants

• They are The National Securities Depository
  Limited (NSDL) and Central Depository Services
  (India) Limited. There is virtually no difference
  between the two, and both of them operate under
  strict SEBI regulations.
• The storage place for the digital share
  certificate is the DEMAT Account. A Depository
  is a financial intermediary which offers the
  service of the Demat account. 
•  Banks-  You cannot transfer money from a bank
  account that is not in your name.
•  National Security Clearing Corporation Ltd and
  Indian Clearing Corporation are wholly owned
  subsidiaries of National Stock Exchange and
  Bombay Stock Exchange- match the debit and
  credit process

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What Is Share?

• A share represents a unit of equity ownership in
  a company. Shareholders are entitled to any
  profits that the company may earn in the form of
  dividends. They are also the bearers of any
  losses that the company may face. In simple
  words, if you are a shareholder of a company, you
  hold a percentage of ownership of the issuing
  company in proportion to the shares you have
  bought.
• Equity shares
• Preference shares

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IPO

• When a private company first sells shares of
  stock to the public, this process is known as
  an initial public offering (IPO). In essence, an
  IPO means that a company's ownership is
  transitioning from private ownership to public
  ownership

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IPO-IPO Process Steps

•  Hiring Of An Underwriter Or Investment
  Bank-Details of the deal, Amount to be raised .
  Details of securities being issued
• Registration For IPO
• Verification by SEBI
• Making An Application To The Stock Exchange
•  Creating a add- News papers etc.
• Pricing of IPO- Fixed Price IPO or by Book
  Binding Offering
• Allotment of Shares

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IPO

• As of now, four types of investors can invest in
  an IPO - Qualified Institutional Buyer (QIB),
  Non-Institutional Buyer (NII), Retail Individual
  Investor, and Employees.
• Demat a/c- Pan card - Demat linked bank account
• Applications Supported by Blocked Amount (ASBA)
• Application Supported by Blocked Amount (ASBA) is
  an application made by an investor, containing an
  authorization to Self-Certified Bank to block
  funds available in applicant's Savings Bank
  Account or Current Account

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Cash Dividend

• Dividend refers to a reward, cash or otherwise,
  that a company gives to its shareholders.
  Dividends can be issued in various forms, such as
  cash payment, stocks or any other form. 
• Dividends-The dividend paid is also expressed as
  a percentage of the face value.
• Not mandatory to pay out dividends every year- t
  does hold a healthy cash reserve,-
• Annual General Meeting (AGM)-

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• Dividend Declaration Date - Approves the
  dividend issue (AGM)
• Record Date company decides to review the
  shareholders register to list down all the
  eligible shareholders for the dividend. ( 0-1
  month after declare )
• Ex-Date/Ex-Dividend date-two business days before
  the record date. Only shareholders who own the
  shares before the ex-dividend date are entitled
  to the dividend. 
• Dividend Payout Date This is when the dividends
  are paid out to shareholders
• final dividend.- Interim dividend

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• What is the right issue of shares?
• A rights issue is an invitation to existing
  shareholders to purchase additional new shares in
  the company. This type of issue gives existing
  shareholders securities called rights. With the
  rights, the shareholder can purchase new shares
  at a discount to the market price on a stated
  future date.
• Rights are traded in the market with a unique
  ISIN number on the exchanges. The basis for
  pricing the right is the value of the right which
  is Rs. 26.67 per share. As a shareholder, you
  have the right to either subscribe to the shares
  or even sell the rights in the market under their
  unique ISIN.

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• A bonus issue, also known as a scrip issue or a
  capitalization issue, is an offer of free
  additional shares to existing shareholders
• Bonus shares are additional shares given to the
  current shareholders without any additional cost,
  based upon the number of shares that a
  shareholder owns. These are company's accumulated
  earnings which are not given out in the form of
  dividends, but are converted into free shares.
•  For example when a company offers 15 bonus
  shares, it means a share holder will get 1 free
  share for 5 shares
• INFOSYS BPCL-ITC-WIPRO- . Samvardhana Motherson
  etc

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Buy Back

• A share repurchase is when a company buys back
  its own shares from the marketplace, which
  increases the demand for the shares and the
  price. An accelerated share repurchase (ASR) is a
  strategy a company uses to buy back its shares
  quickly by usinA company repurchases its
  shares when
• Lots of cash but few projects to invest in
• Buybacks are a more tax-effective means of
  rewarding shareholders
• Theoretically buybacks tend to improve valuations
  of companies
• Company can signal that the stock is undervalued

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Stock Split

• What Is a Stock Split? A stock split is a
  corporate action that companies take to increase
  the number of outstanding shares and decrease the
  value of each share. 
• a common stock split ratio is a forward 2-1 split
  (i.e., 2 for 1), where a stockholder would
  receive 2 shares for every 1 share owned. This
  results in an increase in the total number of
  shares outstanding for the company, though no
  change in a shareholder's proportional ownership

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Secondary Market Listing

•  Stock Exchanges NSE - BSE
• National Stock exchange - Nifty -50 - Index
• Bombay Stock Exchange - Sensex- Index

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Market regulation

• Ministry of Finance(MoF)-plays a very important
  role and their economic policies and manifestos
  help in market regulation and framework.
• Security Exchange Board of India (SEBI)- The
  stock exchanges work under the direct control of
  this body

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NSE VS BSE

• National Stock Exchange of India Limited (NSE) is
  the leading stock exchange under the ownership of
  various group of domestic and global financial
  institutions, public and privately owned entities
  and individuals. It is located in Mumbai,
  Maharashtra.
• NSE is the biggest stock exchanges in India,
  while BSE is Asia's oldest stock exchange. The
  volumes traded in NSE are way more than that
  traded in BSE.
• BSE Limited, also known as the Bombay Stock
  Exchange (BSE).

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The Index

• There are two main market indices in India.
  The SP BSE Sensex representing the Bombay stock
  exchange and CNX Nifty representing the National
  Stock exchange.
• Sensex The term Sensex refers to
  the benchmark index of the BSE in India. The
  Sensex is comprised of 30 of the largest and most
  actively traded stocks on the BSE and provides a
  gauge of India's economy. 
• Nifty - National stock exchange FIFTY. It is also
  recognized as Nifty 50, Nifty simple, or Nifty
  CNX. It is a benchmark index on the NSE (National
  Stock Exchange) in India for large firms. It
  includes fifty stock exchanges that cover 23
  economic sectors.

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• Information  About economy overall market
• Benchmarking -
• Trading -
• Portfolio Hedging-

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Market capitalization

• Market capitalization total number of
  outstanding shares multiplied by the market price
  of each share.
• Large cap
• Mid cap
• Small cap
•  Based On Price Trends - Defensive Stocks - ITC
  Is good example
• Cyclical Stocks - influenced by economic
  conditions and experience significant price
  variations as a result of market volatility. 

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• Based On Risk
• Beta Stocks-The beta, or risk measure, is
  calculated by calculating the stocks price
  volatility. Beta can be positive or negative,
  indicating whether it goes in lockstep with or
  against the market
• Blue Chip- Blue chip stocks are those that belong
  to corporations with limited liabilities,
  reliable earnings, and regular dividends. 
• These huge, well-known corporations with a long
  track record of strong financial performance are
  a good bet for investors looking for safer
  investments. 

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• Based On Fundamentals-
• Overvalued Shares -
• Undervalued Shares 
• Based On Dividend Payment- Growth Stocks vs
  Income Stocks 

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T day (trading Day )

• T day trading day
• T1 ( BTST )
• T2 settlement -

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Growth story of  Eicher Motors 

•  In October 2001, Royal Enfield bike cost was
  around ?60,000 and its producer company Eicher
  Motors share price was around ?2 per share
  levels.
• 300002 60000
• Today Eicher Motors share price on NSE is
  around ?3600
• 300003600 10,80,00,000
• The shares will be more ( bonus , stock split
  etc. )

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Approaches

• Stocks - Ownership , Dividend , bonus, voting
  rights , growth etc.
• Long term point of view of Investment ( growth )
• Short term point of view of buying ( profit)
• Swing -Delivery - Trades
• Intraday - weekly point of view of buying (
  profit )
• FO

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Analysis

• How to make a view
• Fundamental vs. Technical analysis

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• Step 1 Use the financial ratios for Initial
  Screening
• Step 2 Understand the company
• Step 3 Study the financial results of the
  company
• Step 4 Check the Debt and Red Flags
• Step 5. Find the companys competitors
• Step 6 Analyze future prospects

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•  Bull Market (Bullish) 
•  Bear market (Bearish ) 
• Trend 
• Face value of a stock-Face value (FV) or par
  value of a stock indicates a shares fixed
  denomination. 
• 52 week high/low
• All-time high/low
• Upper Circuit/Lower Circuit 

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•  Monetary Policy-
•  Inflation
• Index of Industrial Production (IIP)
•  Budget
•  Corporate Earnings Announcement
• Global Market

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Mutual fund

•  A mutual fund is a company that pools money from
  many investors and invests the money in
  securities such as stocks, bonds, and short-term
  debt. The combined holdings of the mutual fund
  are known as its portfolio.

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SIP

• Systematic Investment
• Mutual Funds offer a route called the
  "Systematic Investment Plan (SIP)" where
  investors can choose to put in a fixed amount of
  money every month in a scheme. SIPs are a very
  convenient way for investors as it's automated.
  Systematic investing offers many benefits such as
  rupee cost averaging, power of compounding, low
  investment amount, etc

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Contracts /agreements

• Forward contract - An agreement between parties
  to buy and sell the underlying asset at a certain
  price on a future date is a forward contract
• , To overcome the uncertainty
• Futures Contract a futures contract is a
  standardized version of a forward contract that
  is sold on a securities exchange. The terms that
  are standardized include price, date, quantity,
  trading procedures, and place of delivery (or
  terms for cash settlements).
• Futures are always traded on an exchange, whereas
  forwards always trade over-the-counter (OTC), or
  can simply be a signed contract between two
  parties.

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• Futures Contract mimics the underlying
• Standardized Contracts 
• Futures Contracts are tradable
• Futures Market is highly regulated 
• Futures Contracts are time-bound 
• Cash settled .

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Futures contract -

• Lot size -Lot size specifies the minimum quantity
  that you will have to transact in a futures
  contract.
• Contract Value-The contract value of a futures
  agreement can be generalized to Lot size x
  Price.
• Margin-TO enter into a futures agreement, a
  margin amount is required, which is a certain
  percentage of the contract value.
• Expiry - As we know, all futures contracts are
  time-bound. The expiry or the expiry date of the
  futures contract is the date upto which the
  agreement is valid.
• Open interest - OI information tells us how many
  contracts are open and live in the market.

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Derivatives contracts (FO)

• Derivatives Derivatives as the term suggests
  are contracts that derive value from underlying
  assets such as bonds, currency, commodity ,
  stocks etc.
• ( ???????? ?????????????? ???? , ??? ???????
  )
• Tata motors equity price Eg 420 cmp -
  Based on Tata motors Equity share price )
  contract value will change

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Derivatives as a tool

• Hedging Tool -, you can use derivative as a
  tool to hedge your investment
• Futures trading ( If you are expecting price
  is likely to go up , (long position in the
  futures contracts ) if you are expecting price
  is likely to go down ( short positions in the
  futures contracts )
• Options trading - Option buyers and option
  sellers . Naked positions , Options strategies
  ( premium is the key )

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Index futures

• Nifty -50 lot size
• Bank nifty -25

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Risk Profile Futures

• Unlimited profit
• Unlimited Risk

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• Options are leveraged securities, which means
  profits and losses are magnified.
• Options typically have less principle risk than
  stocks.
• Options can be combined to profit from any market
  direction, including markets that go nowhere.
• All options have a 1.) Strike Price 2.) Expiration
  Date and 3.) Contract Multiplier (typically
  1001)

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Example

• Anish - Buyer of the land
• Anil Seller of the land
• Agreement price is Rs 500000
• Anish is expecting that the price will go up in
  the near future (he got an information about
  that , A multi specialty hospital is going to
  construct near to that place )

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Buyer Benefited

• Possibility -1 (buyer of the agreement
  benefited )
• Hospital has come up ( started construction )
  What will happen to the land price ? Price
  will shoot up and the 5 lakh become 10 lakh
• Anish can buy the land at the cost of
  50000050000( already paid non refundable charge
  of the agreement )550000
• Current market price is 100000
• His profit is 100000-550000 450000

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Non refundable amount

• Possibility -2 - Negative news about the place
  ( eg
• Price of the land come down to 300000
• As per agreement , Suraj has to pay 500000 and
  already paid 500000 , so total cost will be
  550000 .
• 50000 is the loss ( non refundable fees)
• Loss is limited to the amount already paid as non
  refundable fees

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Non refundable amount

• Possibility 3
• Price is same 5000000
• Buyer cost 50000050000 550000
• Anish left the plan
• Why ? He is only interested because of the
  possibility of hospital .
• His loss is limited to 50000

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• Current Stock price is 75
• Expecting the price will go up to 85(strike
  price )
• Amount paid for the right Rs 5 ( premium )
• Price is 90 or above profitable for the buyer
  
• Price is 60 means cost will be (805) his loss
  is only the premium ( Rs-5)
• If the price is 75 same his cost will be 855
  ,Buyer loss is only the premium ( Rs-5)

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Options

• Contracts - Based on stocks or index
• Option premium is price of the contracts .
• Two types of options
• Call options
• Put options
• Two Parties of option -
• Option buyer Vs. Option seller

• Premium
• Option buying is different from selling

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Option Jargons

• Strike Price
• Underlying Price
• Exercising of an option contract
• Option Expiry
• Option Premium ( Intrinsic value and time value
  )
• Option Settlement ( cash settlement -

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• Call options -The right to buy the underlying at
  a fixed price at any time prior to the expiration
  date of the option.
• A put option -the right to sell the underlying
  asset at a fixed price at any time prior to the
  expiration date of the option.

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Basic , Simple Naked Strategies

• Long Position
• ??? ????? ???? ???????????
• ??? ?????? ???? ???????????
• Short positions
• ??? ??? ????? ??? ??????????? ??????? ????
  ???????????????
• ??? ??? ????? ???? ???????? ??????? ????
  ???????????????

• Call option buy ( long call )-
• Call option sell (Short call ) call writing
• Put option Buy ( long put )-
• Put option seller ( short put ) put writing

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Real Scenario Option Trading

• Premium is the key factor
• Buyer is paying the premium
• Seller receiving the premium
• Option contracts are available.
• Option chain

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• Contracts  Near-month, mid-month and far-month
  contracts. 
• Option contracts will expire on the last Thursday
  of the month. ( stock and Index)
•  Weekly /Monthly expiry index Options
•  When you an option, you have two choices in
  front of you. Either you can reverse an option
  (sell if you have bought it and buy if you have
  sold it) in the market or you can go to the
  exchange and exercise the call option

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Option premium

• Intrinsic Value of a Call option Spot Price
  Strike Price
• Always positive value
• Intrinsic Value of a Put option Strike Price
  Spot
• Intrinsic value is a non zero number, then the
  option strike is considered In the money.
• The strike which is closest to the Spot price is
  called At the money.

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• An option that can only be exercised on the
  settlement date is called a European option 
•  ITM and OTM call options
•  If market price of Infosys is Rs.1000, then 980
  Call Option will be ITM while 1020 Call Option
  will be OTM

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What are the main factors

•  Value of the option's underlying asset
•  Time Value of an Option
• Volatility
• Interest rates

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Implied volatility

• Volatility, also known as historical volatility,
  represents the past volatility of a stock, ETF,
  or index. Implied volatility represents the
  future potential volatility of a security, as
  measured by that securities option price
• Higher levels of IV (implied volatility) result
  in higher option premiums. Therefore, if you are
  selling options, a higher IV means a higher
  reward. Of course, higher reward potential comes
  with greater risk.
• Implied volatility represents the amount of
  extrinsic value that exists in a stocks
  options relative to the time until the expiration
  date. 

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Option seller and Margin

• Call option seller
• Expectation is that price will not go up or
  price will not go above certain levels
• Suppose in above example 10 is the premium
  amount his maximum profit , loss can be
  unlimited

• Receiver of the premium
• Profit is limited
• Risk is unlimited

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Risk profile Buyer

• How ?
• Tata motors Equity share price is 400
• Expecting 420 ( Our View )
• Call option Buying buyer
• Suppose premium is Rs 10
• Maximum loss is limited to 10 (Practically may be
  less than that )

• Buyer
• Buyer Risk is limited to the premium Paid
• Limited Risk and unlimited profit

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Stock option Vs. Index Option

• Stock option - Monthly expiry
• Stock option - Last Thursday of every
  month

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• Delta Measures the rate of change of options
  premium based on the directional movement of the
  underlying (0-1 ) _at_the money 0.5
• Delta will be useful for hedging
• 2. Gamma Rate of change of delta itself
• 3. Vega Rate of change of premium based on
  change in volatility
• 4. Theta Measures the impact on premium based
  on time left for expiry

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• Investment is not gambling.
• You need to put your effort for your money to
  work for you.
• You must know -
• what you are investing in?
• who you are dealing with?
• where to go for help?
• Do not believe in rumours / market tips. Dot take
  it. Dont give it.
• Market timing is impossible for small investor.