Here is my formula for investment consultancy:
1. Say your age is 30.
2. Deduct 30 from 100, 100-30=70
3. You should invest 70% of your savings in the Share Market. 30% savings should be invested in Gold or Government Bonds.
4. This is a simple technique not considering person to person differential risk taking ability.This is a general tip, considering the age of an investor,his risk taking ability and the risk involved in the investment.
Now as you have hinted that you have no idea about stock market. So please do not think of investment in stock market at this point of time. Learn about the basics of stock market, its working, various financial products. Spend at least 6 months on gaining knowledge about this field. Till then, you can invest in Gold and Silver.
To invest in stock market, with no knowledge is the recipe of disaster.
Useful Websites for gaining knowledge and updates on economy, stock market :
1. Stock Market News and Analysis: https://www.moneycontrol.com
2. News : https://economictimes.indiatimes.com/markets/stocks
3. Financial News : https://topics.bloomberg.com/india
4.Definitions, Concepts, Terms : https://www.investopedia.com
5.Virtual Trading Game : Investment/Trading Simulation : https://moneybhai.moneycontrol.com
To generate wealth in stock market :
It all depends on your desire,ability,expertise,courage and timeliness.
It depends on the stability and sustainability of the market.
You should always invest in the reputed company or upcoming sectors.Before investing in the share market, you should look in to their past and present profile and volatility.
You should be well updated all the time for the market scenario.
If you want to invest for a long time, then you should invest in reputed organization.
And if you want a short time gain,you should invest in reputed companies with high fluctuation.
You will have to find the most under valued companies, which have strong fundamentals.
You can make money even in falling markets. For that, one need to understand the derivative market.If market will fall, share prices falls and profit can be made through Short selling.
The secret to make to make a fortune in the stock market : INFORMATION AT THE RIGHT TIME.
The CA under whom I did my articleship had the information from the Ministry of Corporate Affairs that, Satyam will be not dissolved. Government will facilitate a take over. He got this information when the price had fallen to Rs 30.He waited till the price of share came to Rs 10. He purchased a big block. He made huge profits later on, when a swap was made by the Mahindra, where 10 shares were alloted for 17 shares held in Satyam post takeover.
So, the more information you have, more money you make.
Whether the information is Legal or Unethical or Illegal, is a different story altogether.
But for the record, CA's do have THE INFORMATION. LOL
Vijay Ramani
(M.Com)
(31 Points)
Replied 07 March 2015
Sandeep
(student)
(216 Points)
Replied 07 March 2015
Derivatives are popular given their flexibility, returns and their potential to provide market watchers with indicators of market sentiments. As Indian markets experience one of their cyclical volatile phases, derivatives, may to some of us, seem a lucrative option. But like every other investment decision, we need to understand them clearly and discover how best to use them to our advantage.
Imagine a market where people like you and me have conflicting views regarding the future of stock prices- some of us expect it to rise in the future, while the rest are still sceptical and expect the prices to fall. We trade in a market that allows us complete flow of information and freedom to trade according to our instincts. Given shared knowledge, we would all know how the markets are expected to behave in the coming days and we take our positions- bullish or bearish regards the future price of stocks. This is what forms a typical Derivative Market.
Derivatives are financial instruments that derive their value from other existing asset classes. The term "Derivative" indicates the instrument derives its values entirely from the asset it represents be it equity, bullion, currency, commodity, realty, rate of interest or even livestock. A feature that is common to all underlying assets is that they carry the risk of change in value.
As the value of a stock may rise or fall, an exchange rate may swing in favour of one currency or the other, the price of a commodity may increase or decrease, and so on; it means speculating on forward, future prices, placing an option on possible fluctuations or any other such contract made for the possible realisation of those pre determined values of financial assets or any index of securities. Derivative contracts seek to transfer these risks from an individual who is not comfortable with the risk to the one who is.
Simply put, when you invest in derivatives, you actually place a bet on whether the value of the asset represented will increase or decrease by a certain percentage and within a set period of time. Therefore, derivatives are merely contracts or bets that get their value from existing or future prices of underlying securities. When you deal in derivatives, you are essentially buying a promise from the original owner of the asset to transfer ownership of the asset rather than the asset itself. This promise gives you tremendous flexibility and is by far the most important trait that appeals to investors.
Derivatives however, are different from equity shares that we hold. Shares are assets while derivatives get their values from the shares being held. The most common types of derivatives that you are likely to come across are futures, options, warrants and convertible bonds.
An options contract gives you the right to buy or sell an asset at a set price on or before a given date. On the other hand, in a futures contract, you are obligated to buy or sell the asset at the end of the contract date.
A futures contract means a legally binding agreement to buy or sell the underlying security at a future date and is an organized contract in terms of quantity, quality, delivery time and place for settlement at a future date. The contract expires on a pre-specified date or on an expiry date and on expiry, futures can be settled by delivery of the underlying asset or cash.
The options contract allows you the right but not the obligation to buy or sell the concerned asset at a predetermined price within or at end of a specified period. The buyer / holder of the option would then purchase the right from the seller / writer for a consideration known as a premium. The seller is then obligated to settle the option as per the terms of the contract or when the buyer exercises his right to buy.
An option to buy is called as a call option and option to sell is called put option. Further, an option that is exercisable on or before the expiry date is called American option and one that is exercisable only on expiry date is called European option. This was introduced to increase liquidity volumes in certain segment of options. Currently all the options traded on NSE Exchange are European in nature. The price at which the option is to be exercised is called Strike price or Exercise price.
As in the case of futures contracts, option contracts can also be settled by delivery of the underlying asset or cash. However, unlike futures, cash settlement in option contract includes the difference between the strike price and the price of the underlying asset either at the time of contract expiry or at the time of exercising the option.
As the derivative markets deal in speculation, there is a large amount of risk involved. The Exchanges, however, have a stringent framework for risk control and minimizing loss. But a word of caution to retail investors, invest in derivatives only after taking care of your financial needs and as an avenue of diversifying your portfolio. Derivatives are merely profits that you should earn and not returns that you should bank on.
Derivatives are used to hedge risks and for speculative trades; and active markets need the equal participation of both such investors. By rule of thumb, if you are a cautious investor with limited funds, learn to hedge your bets while if you are ready to take some risk and have ample funds to play the markets, not to mention also possess acumen and understanding of the Indian market trends, play the markets to your advantage.
However, unless you totally understand the vagaries of this market, proceed with caution to make profits and not losses. There are three types of participants in a derivatives market: Speculators, Hedgers and Arbitrageurs. Speculators are the high risk takers. They contemplate and bet on the future movement of prices based on their skill and knowledge levels with a higher-than-average risk in return for a higher-than-average profit potential. They take risk to earn profit by buying low and selling high, or by first selling high and later buying low. Hedgers are cautious players who protect themselves from risk by closely watching price movements and sell as soon as they reaches their optimum price, thus getting an assured price for the stocks. In general, hedgers use futures for protection against adverse future price thereby looking to reduce risk for their holdings and interest. They are extremely important to a derivative market and are primarily responsible for setting future prices. The person who attempts to profit from inefficiencies in price by making transactions that offset each other is an Arbitrageur. He typically makes his profit by buying low in one market and selling high in another. Arbitrageurs keep market prices stable and reducing possible exploitation of prices. They are typically the most experienced market players who make fast decisions.
My Experience:
1. Never Invest in derivative markets by borrowing funds. Remember, one does not gamble with the borrowed funds.
2. Arbitrage is more of theoritical concept. The Free market phenomenon and Lack of market inefficiency due to various regulations now days have resulted in no arbitrage positions. I have seen arbitrage opportunities for like 0.005%. Thus, to make money in arbitrage is very difficult. Financial Con : Charles Ponzi made 400% returns with an arbitrage opportunity after world war2.Turned out, he was making money through a fraudulent scheme, the Ponzi Scheme. He spent his lifetime in jail.So no realistic money in Arb.
3. Hedging is done by Industrialists and Traders for covering the risks of price fluctuation of raw materials.
4. Retail investors only do speculations. And without THE INFORMATION, its just a gamble.
GOLD FUTURES:
The price of gold depends on a host of factors, which makes it very difficult to predict. In a fashion similar to shares, gold is an asset class by itself. In fact, in many villages and small towns of India, gold is preferred to bank deposits as a savings and investment instrument.
But with the commodity futures market operating in full swing, one has the option of not physically stocking gold to gain from its price movements.
How trading in futures is better than the option of hoarding gold: Firstly, there are several costs associated with the process of physically stocking gold. The costs include the cost of the gold itself, the cost of carrying, cost of physical storage, finance cost and last, but not the least, the safety element.
While futures might have some advantages, there is also a danger of losing big as your risks are also magnified and hence, one must tread carefully in this area.
In this context, if the going cost of gold is Rs 6000 per 10 grams, with an investment of Rs 6 lakh, one can buy 1kg of gold. Now, suppose, three months hence, when the going price of gold is Rs 6,500 per 10 grams, the person decides to sell the gold. The gross profit made by the person is Rs 500 for every 10 grams and hence, for 1 kg, it stands at Rs 50,000. To arrive at the net profit, one would have to deduct the cost of financing; the cost of storage in a bank and transaction costs, including sales taxes.
Now, let’s see what the same Rs 6 lakh can achieve in a futures market, assuming the same sequence of prices. In Indian exchanges, currently, futures contracts up to four months are available. Let’s assume that three-month gold futures are trading at a little over the spot price, with the market expecting gold prices to remain stable over the next three-month period. Let this price be Rs 6050.
Since a futures contract is an obligation to buy or sell a specific quantity of the commodity, one does not have to pay for the entire value of the commodity. Buying futures obligates one to take delivery of the underlying commodity at a particular date in the future. This is also known as taking a long position.
To trade in gold futures, one has to go to a brokerage house and open a trading account. A trading account involves keeping an initial deposit of Rs 50,000 to Rs 1 lakh. Part of the money accounts for the margin money, which is required by the exchange when one enters trading.
For a high amount, however, the deposit amount is usually waived by the brokerage house. The whole investment is then generally treated as margin money. For commodity futures, there is usually a lot size or the minimum volume of the commodity of which one has to buy a futures contract.
Let’s assume, for our case, the minimum lot size is 1 kg (lot sizes are usually 100gm or 1 kg). Thus, if the going futures rate is Rs 6,050 per 10 grams, the minimum value of a contract is Rs 6,05,000. The beauty of a futures contract is that to trade in them, one has to only invest the margin money. If we assume a flat 5% margin rate for the contract (margin rates vary from 5-10%), the margin money for a single lot is Rs 30,250. Add to that, a brokerage amount, which is usually .1% to .25% and some start-up charges. Applying these rates, which are prevalent in the market currently, a single lot of gold futures contract should come at around Rs 32,000.
Thus, with Rs 6 lakh, one can buy 19 lots of gold futures. One can , however, expect ‘margin calls’ from brokerage houses if the margin money falls short of the margin money required for trading in the exchange, determined at the end of the trading session each day.
Now, suppose that at the end of 3 months, the spot price of gold actually reaches Rs 6,500 per 10 grams.
The novelty of the futures market is that as long as there is sufficient liquidity in the markets, the futures price always converges to the price of the under lying. Such is the leverage of futures, that with the same investment of Rs 6 lakh, one is actually commanding 19 lots of gold futures or in effect, 19 kgs of gold.
Thus, at the end of three months, assuming the above-mentioned course of events, on an investment of Rs 6 lakh, one can make a gross profit that is almost 17 times the profit made by physically stocking gold.
At the same time, the downside risk is also multiplied. To avoid the hassles of delivery, one must offset the futures contract just before the maturity date is reached. Delivery would entail gold certification and accreditation by an exchange-appointed assayer and increased transaction costs in general, as various taxes come into the reckoning.
The above example is about a case of taking a bullish view on the price of gold and hence, gaining from the price rise by buying futures. One can gain from a futures market even by having a bearish view on the price of gold. This aspect of gain is absent in the physical market for gold. If one believes that the spot price of gold is going to fall in the near future, all he needs to do is to sell gold futures.
While all this seems pretty rosy, there are some things to be kept in mind. Firstly, any transaction in the futures market is possible only if a counter-party to the buy or sell order that is placed, exists. For unusually large investments, the exchange may find it difficult to find a counter-party and so it may take some time to match it. Also, with any futures, there may be a problem in exiting from a position by buying or selling when one would like to.
STOCK INDEX FUTURES AND OPTIONS:
A futures or options contract based on a set of underlying securities is called a `Stock Index Futures or Options Contract'. When trading takes place in stock index futures, it means that the participants are taking a view on the way the index will move. By trading in index-based futures and options, you buy or sell the 'entire stock market' as a single entity.
S&P CNX Nifty is a scientifically developed index of which top 50 bluechip companies form a part. The index covers more than 25 industry sectors and is professionally managed by India Index and Services Ltd. IISL has a licensing and co-branding arrangement with Standard & Poor's (S&P), the world's leading provider of investible equity indices, for co-branding IISL's equity indices. Daily derivatives trading based on S&P 500 index is over $50 billions. S&P CNX Nifty can be used for the purpose of speculation, hedging as well as an arbitrage tool.
Have you bought a share hoping it will go up? Have you ever felt that a stock was intrinsically undervalued? That the profits and the quality of the company made it worth a lot more as compared with what the market thinks? Have you ever been a `stockpicker' and carefully purchased a stock based on a sense that it was worth more than the market price?
When doing this, you face two kinds of risks:
Your understanding can be wrong, and the company is really not worth more than the market price, or
The entire market moves against you and generates losses even though the underlying idea was correct.
The second outcome happens all the time. A person may buy Infosys thinking that it will announce good results and the stock price would rise. A few days later, S&P CNX Nifty drops, so he makes losses, even if his intrinsic understanding of Infosys was correct. There is a peculiar problem here.
Every buy position on a stock is simultaneously a buy position on S&P CNX Nifty. This is because a buy Infosys position generally gains if S&P CNX Nifty rises and generally loses if S&P CNX Nifty drops. It is useful to ask: does the person feel bullish about Infosys or about the index?
Those who are bullish about the index should just buy S&P CNX Nifty futures; they need not trade individual stocks.
Those who are bullish about the Infosys do wrong by carrying along a long position on S&P CNX Nifty as well.
There is a simple way out. Every time you adopt a long position on a stock, you should sell some amount of S&P CNX Nifty futures. When this is done, the stockpicker has `hedged away' his index exposure. How do you do this?
Size of counter position
We need to know the `beta' of the stock, that is, the average impact of a one per cent move in S&P CNX Nifty, upon the stock. If betas are not known, it is generally safe to assume the beta is 1. Suppose we take Lupin Labs, where the beta is 1.2, and suppose we have a long Lupin Lab position of Rs. 200,000.
The size of the position that we need on the index futures market, to completely remove the hidden S&P CNX Nifty exposure, is 1.2 * 200,000, that is, Rs. 240,000.
Suppose S&P CNX Nifty is at 1200, and the market lot on the futures market is 100. Hence, each market lot of S&P CNX Nifty is Rs. 120,000. To sell Rs. 240,000 of S&P CNX Nifty we need to sell two market lots.
We sell two market lots of S&P CNX Nifty (200 Nifties) to get the position:
Long Lupin Lab Rs. 200,000
Short S&P CNX Nifty Rs. 240,000
Long Infy, short Nifty example
April 1, 2015: You buy Infosys for Rs. 10 lakhs.
The expiry date of Nifty June futures is April 29, 2015.
Nifty spot is at Rs. 1,403.20 and Nifty futures is at Rs. 1,420.
The beta of Infosys is 1.2.
You need to sell 1.2*10 lakhs = 12 lakhs on the index futures, that is, 12 market lots.
April 29,2015: Nifty fell 5.5 per cent.
April 29, 2015: Nifty spot at Rs. 1.325.45 and settlement price of Nifty April futures is also Rs. 1,325.45.
You close both positions earning Rs. 9,640, that is, your position in Infosys drops by Rs. 66,000 and your short position on Nifty gains Rs. 75,640.
Have you sold a share hoping it will go down? Have you ever felt that a stock was intrinsically overvalued? That the profits and the quality of the company made it worth a lot less as compared with what the market thinks? Have you ever been a `stockpicker' and carefully sold a stock based on a sense that it was worthy less than the market price?
His understanding can be wrong, and the company is really worth more than the market price, or,
The entire market moves against him and generates losses though the underlying idea was correct.
The second outcome happens all the time. A person may sell Infosys, expecting that it would announce poor results and the stock price would fall. A few days later, S&P CNX Nifty rises, so you make losses, even if your intrinsic understanding was correct.
There is a peculiar problem here. Every sell position on a stock is simultaneously a sell position on S&P CNX Nifty. This is because a short Infy position generally gains if S&P CNX Nifty falls and generally loses if S&P CNX Nifty rises. It is useful to ask: Does the person fell bearish about Infy or about the index?
Those bearish about the index should just sell S&P CNX Nifty futures; they need not trade individual stocks.
Those bearish about Infy do wrong by carrying along a sell position on S&P CNX Nifty as well.
There is a simple way out. Every time you adopt a short position on a stock, you should buy some amount of S&P CNX Nifty futures. When this is done, the stockpicker has `hedged away' his index exposure. The basic point of this hedging strategy is that the stockpicker proceeds with his core skill, that is, picking stocks, at the cost of lower risk.
Example
July 1, 2015: You sell Infosys of Rs. 10 lakhs.
The expiry date of Nifty July futures is July 30, 2015.
Nifty spot is at Rs. 1,183.20 and Nifty futures are trading at Rs. 1,200.
The beta of Infosys is 1.2.
Hence, you need a long position of 1.2*10 lakhs = 12 lakhs on the index futures, that is, 12 market lots.
July 30, 2015: Nifty rises by 10.7 per cent due to stable political outlook.
On July 30, 2015 Nifty spot/Nifty June futures closed at Rs. 1,310.15.
You unwound both positions losing Rs. 18,250. That is, your position on Infosys loses Rs. 128,400 and your buy position on Nifty gains Rs. 1,10,150.
How to protect your portfolio from nuclear bomb?
Have you ever experienced the feeling of owning an equity portfolio, and then, one-day, becoming uncomfortable about the overall stock market? Sometimes, you may have a view that stock prices will fall in the near future. At other times, you may see that the market is in for a few days or weeks of massive volatility, and you do not have any appetite for this kind of volatility. The Union Budget is a common and reliable source of such volatility: Market volatility is always enhanced for one week before and two weeks after a budget. Many investors simply do not want the fluctuations of these three weeks.
This is particularly a problem if you expect to sell shares in the near future for example, in order to finance a purchase of a house. This planning can go wrong if by the time you do sell shares, S&P CNX Nifty drops sharply. When you have such anxieties, two alternatives have always been available:
Sell shares immediately. This sentiment generates `panic selling' which is rarely optimal for the investor.
Do nothing, that is, suffer the pain of the volatility. This leads to political pressures for government to `do something' when stock prices fall.
In addition, with the index futures market, a third and remarkable alternative becomes available:
Remove your exposure to index fluctuations temporarily using index futures. This allows rapid response to market conditions, without `panic selling' of shares. It allows an investor to be in control of his risk, instead of doing nothing and suffering the risk.
The idea here is quite simple. Every portfolio contains a hidden index exposure. This statement is true for all portfolios, whether one is composed of index stocks or not. In the case of portfolios, most of the portfolio risk is accounted for by index fluctuations (unlike individual stocks, where only 30-60 per cent of the stock risk is accounted for by index fluctuations). How do we actually do this?
Example
May 25, 2015: You have a portfolio of 5 securities of Rs. 1,87,085.
The expiry date of Nifty June futures is June 26, 2015.
Nifty spot is at 1122.95 and Nifty futures are trading at 1141.
The beta of the portfolio is 0.95.
Hence, he needs to sell 0.95*187085 = Rs. 177,731 on the index futures, that is, 2 market lots [187085/(1141*100)]
June 10, 2015 Nifty crashes to 962.90, and Nifty June futures at 970.63
Portfolio value reduced to 154095.
You unwound both positions making a profit of Rs. 1096, that is, the portfolio dropped by Rs. 32990 and your sell position on Nifty gained by Rs. 34,086
Tackling the ups and downs
YOU think the market will go up? Do you think that the market index is going to rise? That you could make a profit by adopting a position on the index? After a good Budget, or good corporate results, or the onset of a stable government, many people feel that the index would go up. How does one implement a trading strategy to benefit from an upward movement in the index?
Today, you have two choices:
Buy select liquid securities, which move with the index, and sell them at a later date, or
Buy the entire index portfolio and them sell it at a later date.
The first alternative is widely used -- a lot of the trading volume on stocks such as Hindustan Lever is based on using it as an index proxy. However, these positions run the risk of making losses owing to Hind Lever-specific news; they are not purely focussed upon the index.
The second alternative is hard to implement. An investor needs to buy all the stocks in S&P CNX Nifty in their correct proportions. Most retail investors do not have such large portfolios. This strategy is also cumbersome and expensive in terms of transactions costs.
Taking a position on the index is effortless using the index futures market. Using index futures, an investor can `buy' or `sell' the entire index by trading on one single security. Once a person buys S&P CNX Nifty using the futures market, he gains if the index rises and loses if the index falls.
Example
January 5, 2016: You feel the market will rise.
Buy 100 S&P CNX Nifty January futures contract at Rs. 1450 costing Rs. 145,000 (100*1450)
Expiration date: January 28, 2016.
January 14, 2016 Nifty January futures rise to Rs. 1,470.
You sell your position at Rs. 1,470.
Make a profit of Rs. 2,000 (100* 20)
You think the market will go down? Do you sometimes think that the market index is going to fall? That you could make a profit by adopting a position on the index? After a bad budget, or bad corporate results, or the onset of a coalition government, many people feel that the index would go down. How does one implement a trading strategy to benefit from a downward movement in the index?
Today, you have two choices:
Sell select liquid securities which move with the index, and buy them at a later date, or
Sell the entire index portfolio and then buy it at a later date.
The first alternative is widely used -- a lot of the trading volume on stocks like ITC is based on using ITC as an index proxy (ITC has the highest correlation with S&P CNX Nifty amongst all the stocks in India). However, these position run the risk of making losses owing to ITC-specific news; they are not purely focussed upon the index.
The second alternative is hard to implement. This strategy is also cumbersome and expensive in terms of transaction costs.
Taking a position on the index is effortless using the index futures market. Using index futures, an investor can `buy' or `sell' the entire index by trading on one single security. Once a person sells S&P CNX Nifty using the futures market, he gains if the index falls and loses if the index rises.
Example
February 8, 2016: You feel the market will fall.
Sell 100 S&P CNX Nifty February expiry contract.
Expiration date February 25, 2016.
Nifty February contract is trading at Rs. 1,560.
Your position is worth Rs. 156,000.
February 15, 2016: Nifty February futures fall to Rs. 1,520.
You square off your position at Rs. 1,520.
Make a profit of Rs. 4,000 (100*40)
TIP: Please read this atleast 3-4 times to understand the details and the beauty of Index F&O.
Vishal Goel
(Chartered Accountant)
(1688 Points)
Replied 07 March 2015
Live class on PF & ESI Enrollment & Returns Filing(with recording)
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