Learn share trade in India, share market trading basics
This web page is about how to learn share market trading in India. Before starting Share Trading, you must have an account with a registered Share Broker in the National Stock Exchange of India NSE or the Bombay Stock Exchange BSE. Online Commodity Trading in India, which includes trades in Gold, Silver and Currency derivatives, are possible on MCX, the only Commodity Exchange in India.
There are two types of Share trading. The first type of share trading is by Share Cash Trades. Cash share trading is straightforward, you pay money and buy a stock, or you get cash and sell a share. The second type of Share trading called ‘Futures Trading’ involves trading in Share Derivatives. A Derivative is just a numerical value which is derived from, or which is based on, the market value of the underlying share.
Futures & Options: F&O Trading Wiki
Futures & Options: F&O Share trading involves your paying a margin, say about 10 to 20% of the value of the shares you want to trade in. Shares in F&O are sold in Lots, and each lot of shares contain a number of shares. You can hold this ‘Lot’ of shares and sell at any time before the expiry of the settlement date, which usually falls on the last Thursday of every month. You can also ‘Short Sell’ which means that you ‘Sell first’ and ‘buy later’. Short Selling is usually resorted to when you feel that the price of that share is going to fall. Again the trading has to be in Lot sizes.
What are Derivatives in Share Market in India
When you are trading in F&O shares, you are not trading any physical shares or assets, but you are only trading in ‘Derivatives’. A Derivative in share market is just a numerical value derived from something else. In the case of Share Trading, it is called ‘Futures’, and it is a derivative, the value of which is based on the underlying stock (equity or share). In the case of an Index Option, its value is based on the underlying index. So in Share Trading, you are only trading Numerical Values, no physical shares or assets are involved.
What is Margin Trading in Share Market
Margin Trading in Share Market is the facility to buy and sell shares by paying a small margin as security to the share broker. You can purchase more shares with margin money because you only pay a small percentage of the cost of the full value of the share. You do this because you plan to sell the shares shortly and make money by the difference in the buying and selling price. Because you pay only a margin, say 20% as security to buy the shares temporarily, you can buy and sell shares worth 5 times more than the value of the margin money. You can make a lot of money or lose a lot of money in Margin Share Trading. Share Trading Strategy is a skill, an art and science all combined. It takes a lot of learning and experience to master it. Stock trading science is an advanced subject, here we only discuss the basic concepts and prepare you to take up advanced share trading practices.
To make profits you should look for shares that are somewhat volatile; this means the price of the stock keeps going up and down quite often. When you trade in such shares, you hope that you can buy it at the lower end of the price range and sell it when the price goes up.
Futures Trading in Indian Share Market
Futures Trading in the NSE is a contract between you and the NSE with a registered broker, to buy or sell a specified derivative of either the Share of a Company or the value of one of the NSE Indexes, at a specified value on or before a given date.
The NSE acts as a Futures Exchange and sets a premium or discount to the buying and selling prices of the derivatives. The premium depends on the supply and demand factors, that is, it depends on the difference between the quantity of buy and sell orders at that particular moment. The settlement date for all futures and options contracts on the NSE falls on the last Thursday of every month.
To give an example, say you buy on 4th of May 2017, a May 2017 Futures Contract of one lot of Reliance Industries (the lot size for Reliance is 250) at a price of Rs.1000-. You sold it before the expiry date, the last Thursday of every month, at a price of say Rs.1100-; then your profit will be (1100-1000)x250 = Rs.25,000-. If the buy price was 1100 and sold at 1000, then loss will be Rs.25,000-.
In Futures Trading, the risks depend on your buy-sell or sell-buy prices. Whatever this price difference, multiplied by the number of units, is your profit or loss. When the share prices increase or decrease substantially, then your profit or loss can also be substantial.
Setting Stop-Loss to Futures Trading
To limit the losses in Share Trading, traders and brokers, normally put a ‘Stop-loss’ order at preset values. Stop-loss is a software-based online, sell or buy order, set at pre-determined values. When the share or index value reaches this preset value, the software automatically sells or buys online to limit losses. Brokers may insist on these stop values, to ensure that their clients do not mount up losses more than the margin money kept with them. Normally ‘Futures Trading’ can be done by maintaining a margin. For ‘Options trading’, because of the lower values involved, there will be no margin monies, but you will have to pay full amount in advance
Margin Money for Futures Trading in India
In Futures trading, the broker usually allows you to trade with a margin, that is a certain percentage of the total value of the futures you are buying. Make sure you tell the broker to put stop-losses at pre-determined values in the online systems, to limit losses, in case things don’t go as you expect. The following site has information as to which shares can be traded in futures and what the margin money is with respect to each of this. The site is http://www.ventura1.com/pdf/Derivatives/SpanPdf.pdf
Options trading on NSE India
Options Trading is almost the same as Futures trading with one big difference. You are buying or selling an Option at a set price. You have the right, but not the obligation, to sell or exercise your Option before the expiry date. If you do not use the option, then your maximum loss is the amount you paid to purchase the option. Examples given below will explain this concept of Option trading.
You can take Options on any of the NSE indexes or the authorized shares of the NSE listed Companies. In options trading, the terms used are ‘Put’ and ‘Call’. When you expect the value of an option to go down you buy a ‘Put Option’ and when you expect the value of the option to go up, you buy a ‘Call Option’. The Put and Call Options are easier to explain by the use of the following examples.
Call Option in Share trading
Suppose the NIFTY index is at about 9000 on the 4th of May 2017, and you feel that it will go up to 9500 before the end of May 2017, then you buy a ‘May NIFTY 9500 Call Option’ expiring on the last Thursday of the month in May 2017. The price of this option depends on the NIFTY index at the moment of your purchase. The closer the NIFTY index gets to your NIFTY call of 9500, the more expensive it becomes. You can exercise your option on any working day, at any time during trading hours before the expiry date in May 2017.
For instance, the price for your NIFTY-9500 May call, when the NIFTY is at 9300 could be Rs.100-; and when the NIFTY is at 9250, it could be Rs.60-. The values are constantly changing every fraction of a second and is being calculated by the NSE computers on real time values and depending on the supply and demand situation.
NIFTY options are in lots , where one lot is 50 units. Thus in this example, you buy the NIFTY 9500 call option when NIFTY index is at 9200 at a price of Rs.30-. Thus the cost for one lot NIFTY 9500 call option will be (50×30)=Rs.1500-. If the NIFTY index reaches 9300, your Call Option has a value of Rs.100-, and if you decide to exercise your option, then you will be getting (50×100)=Rs.5000-. Your profit in this example is 5000-1500=3500 less brokerage of about Rs.300-. Thus your nett profit works out to Rs.3200-. These sort of gains are entirely possible intraday or in a ‘day-trade’ – in a single day, but remember, it can also go the opposite way when your loss is 3200+300=3500.
In the above example, if the NIFTY Index goes above your call of 8500, then the value of your call increases with every increase of the NIFTY index. At 8550 it could be Rs.150-, and your profit increases dramatically.
Put Option in Share Trading in India
Put option is the opposite of a Call option. As in the above example, the NIFTY index is at about 9200 on the 4th of May 2017, and you feel that it will go down to 9000 before the end of May, then you buy a ‘May NIFTY 9000 Put Option’ expiring on the last Thursday of the month. The price of this option depends on the NIFTY index at the moment of your purchase. The closer the NIFTY index gets to your NIFTY call of 9000, the more expensive it becomes.
For instance, the price could be Rs.70- for your NIFTY-9000 Put, when the NIFTY is at 9120 and it could be Rs.15- when the NIFTY is at 9080. The values are constantly changing every fraction of a second and is being calculated by the NSE computers in real-time values and depending on the supply and demand situation. NIFTY options are in lots, where one lot is 50 units. Thus in this example, you buy the NIFTY 9000 put option when NIFTY index is at 9080 at a price of Rs.15-, thus the cost for one lot NIFTY 9000 put option will be (50×15)=Rs.750-. If the NIFTY index reaches 9020, your Put Option has a value of Rs.70-, and if you decide to exercise your option, then you will be getting (50×70)=Rs.3500-. Your profit in this example is 3500-750=2750- less brokerage of about Rs.300-. Thus your nett profit works out to Rs.2450-. These sort of gains can be achieved by intraday trading, that is in a single day trade. The opposite is also quite possible when your loss will be 2750+300=3050. When the NIFTY keeps on going below your Put call, the value of your earnings keeps going up.
Going Long and Short in Share Trading in India
If you think the value of a share or index will go up and you buy a derivative in the hope of selling it at a profit at a later date, then it is known as ‘Going Long’.
In case you think the value of a share or Index is going to go down below its present value, then you can sell the derivative first. When the value goes down, you hope to buy the same derivative at a later date and a lower price, then it is known as ‘Going Short’ or ‘Short Selling’. ‘Going Short’ or ‘Short Selling’ is the process of selling first and then buying later.
Always remember the famous saying “Don’t put all your eggs in one basket”. So never enter the stock market trading with all your capital. Start with a minimum amount and then graduate up to higher levels. When you have more experience you can go with higher values. Always remember that it is quite possible to lose all the money you invest in share trading.
One Strategy is to trade in higher volumes and take low margins of profit. This high volume low margin trading strategy will require more of your capital input. With such a strategy you do the trading activity more frequently, sometimes more than once in a single day and sometimes multiple trades of the same share on the same day. These sort of traders are known as ‘Day Traders’ and such trading is known as ‘Day trades’ or ‘Day Trading’.
Hedging in Indian share market
Hedging is the strategy you adopt to protect against losses, in the event the prices of the shares you bought moves in the opposite direction. For example you buy shares of a Company ‘A’ hoping to sell it at a higher price. You hedge your risk by short selling the shares of another Company ‘B’ whose share you know will lose much more, in the event the market goes down. In case of an upwards trend, the value of ‘B’ does not move as much as that of ‘A’. You are taking opposing positions, and if your prediction on ‘A’ gaining in price proves correct, you make money here, but you will lose in ‘B’. If your prediction of ‘A’ going up in price is wrong, then you will lose money on ‘A’ but will make a profit on your short sell of ‘B’. In these situations, you have to fine tune the quantities of shares of ‘A’ and ‘B’ to make a profit or limit your losses in either eventuality.
Some traders do ‘call and put hedging’ in Options trading by taking a ‘Call’ and ‘Put’ position in the same share at the same time. Others follow a hedging strategy of taking a long position in Futures and taking put options of the same share or index at the same time.
Hedging is a high-end skill and science, and it will take some time to master this art.
The Golden Rule of Share Trading
The golden rule in share trading is to always keep a watch on what your total risk exposure is. That is, if you are doing margin trading, calculate your total risk exposure in case of a sudden market crash. Suppose the Share Market crashes and all shares drop 50% in value, due to some calamity, natural or man made. In this case, you will become liable for an amount of more than the margin you have kept, unless you had entered stop-losses in the online systems. Also, beware!! Stop-Loss on online systems sometimes fails to work, when there is a mad rush on the online systems, especially when markets are crashing in a downward spiral.
Crashes in the Markets do happen – say for example, China makes an incursion into India and there is a threat of war. Other situations can also cause share of a company to crash. For example, if the CEO of the Company you have invested into dies in a car accident. In such cases, the value of your investments will drop dramatically, and you may be liable for more than the margins you have kept as a guarantee with your broker. You should not become broke in such an eventuality – You should be careful and not be exposed at any time while trading, to a total risk exposure of more than 20% of your nett assets.
The Scenario we are talking about here is Share trading on margin money and with set expiry dates. Such dealings have a time limit to settle your dealings, like the last Thursday of every month. It is a different scenario if you are purchasing the shares for cash and getting them transferred to your Demat account as long term investments. In this case, a market crash will dent the value of your holdings during the crisis, but share prices have its intrinsic value, and the price of the shares always bounce back when the crisis goes away.
Trend of Indian Share Market
Share Market trend is about the mood of the Market. Whether the mood is positive or ‘Bullish’ or a ‘bull market’, meaning that the prices of the Shares are moving up. If the mood is negative, it is a ‘bear market’ or ‘Bearish’, and the prices are going down.
If you can predict the movement of the market correctly, it can help you to time your buy and sell orders and make money in the process. There are very many formulas and methods by which some experts try to forecast the Market trends. They publish values like ‘Support and Resistance levels’. These values are relevant guidelines and are correct most of the times, but unfortunately, not always.
The easiest way to get an idea of the market sentiment is to watch one of the TV channels dedicated to news and reviews about the Indian Stock Market. TV channels like ‘UTV Bloomberg’, ‘NDTV Profit’ or ‘CNBC TV18’ or ‘ET Now’ have almost 24×7 broadcast of stock markets news. These channels have a lot of experts telling you about the markets and individual companies. After watching any of these channels for some time, you get a better understanding of the Stock market and also an idea of the current market trends.