Hey All,
I hope you would enjoyed and understand the previous blogs. You would have noticed the change in the title. Yeah!!! It says that we are going bit deeper in to the topic.
As of now we have seen (I hope) almost all basics of the equity market from the beginners perspective. Whatever we have seen till last post all were related to the Equity cash market. Today we are going to see about the segment called "Derivative" in equity market.
Derivative Market:
Values for Derivatives is decided based on the price of a stock. Derivative market have two important things to understand, they are Futures and Options.
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Futures:
Value of Future is derived based on the price of the stock. Some times there might be a difference between a stock price and Future price, it depends on many factor.
Futures are available only for a contract, we can't hold it for a long term or beyond contract. Futures will be available only in lots.
For example:
One lot IndusIndBank future has 400 quantities, if we want to buy IndusIndBank future, we need to pay 400*price of IndusIndBank future.
Display name (Based on my broker):
IndusIndBK - For Equity (where we can buy even 1 to N shares)
IndusIndBK May Fut (where we are allowed to buy only in multiples)
We can trade in Future similar to equity only difference is margin. Margin value might be different from broker to broker.
Example:
--> Indusindbank and its future is trading at 400rs
--> You decided to perform BTST on this stock
--> Instead of taking 400 quantities of Induindbank stock i.e 400*400 = 1,60,000 rs
--> You can buy a one lot future, we may get it with the lesser price instead of paying 1,60,000 rs. Sometimes, you can get the Future only at 60% of its total cost (it is purely depends on the margin provided by your broker) but I am sure we will Fut for lesser price.
In the above example, we have discussed only about BTST, STBT can also be performed in a similar way. I would like to conclude this with a warning note. Whenever, we perform trade in Fut profit and loss will also be in multiples of same numbers.Take trade based on your risk.
Benefits of trading in Future:
If we wanted to buy 400 shares of IndusIndBK at a specific price in equity market, there is a very big chance that we might not get all shares in single order.
Let us assume if we get all 400 shares in 3 different orders
--> We end up in paying more brokerage for buy orders
--> More transaction charges (tax and others)
--> We will not have an advantage of margin in equity market than future.
--> Same applies for sell order in equity too.
Options:
As we know, value of the options are derived from price of the stock. As futures, options will also be available only in contract, lot (multiple quantities as same as futures) and have expiry date on it.
Types of Options:
1. Call Option
2. Put Option
Call Option:
We can buy the call option, if we know the price of stock can raise. This options will be available at way lesser premium than futures and equity.
We are going to consider the same stock for example
For example:
--> Indusindbk, equity is trading at 400
--> Indusindbk 400 CE (Call Option) is trading around 50.
--> You can buy this 400 CE, if you know price of this shares will increase from here.
--> When the price starts to move above 400, value of CE will also increase.
--> Difference of 1 ruppee in call option can bring 400 rs of profit or loss.
Put Option:
We can buy put option, if we know the price of stock can fall below CMP. It is a opposite to Call option.
For example:
--> Indusindbk, equity is trading at 400
--> Indusindbk 400 PE (Put Option) is trading around 50.
--> You can buy this 400 PE, if you know price of this shares will fall from here.
--> When the price starts to move below 400, value of PE will also increase.
--> Difference of 1 ruppee in put option can bring 400 rs of profit or loss.
Note: Options and Futures, will trade in lot and both shares same quantities per lot.
Equity Cash Market:
To make it simple, we can't use the margin option in this equity positional order. We have pay full cash for the quantities that we are planning to buy. Also here we don't have contract or expiry time and we can hold it for 1 day to N years.
Example:
--> You have a cash of 4,000 in your account.
--> You can buy 10 quantities of IndusIndBK share.
I think we need some additional time to digest and understand these things, so I will stop here for now.
You can find the over all glossary for trading related terms in the below link
https://divaakaruguptha.blogspot.com/2020/05/glossary-for-trading.html
I hope you would enjoyed and understand the previous blogs. You would have noticed the change in the title. Yeah!!! It says that we are going bit deeper in to the topic.
As of now we have seen (I hope) almost all basics of the equity market from the beginners perspective. Whatever we have seen till last post all were related to the Equity cash market. Today we are going to see about the segment called "Derivative" in equity market.
Derivative Market:
Values for Derivatives is decided based on the price of a stock. Derivative market have two important things to understand, they are Futures and Options.
Futures:
Value of Future is derived based on the price of the stock. Some times there might be a difference between a stock price and Future price, it depends on many factor.
Futures are available only for a contract, we can't hold it for a long term or beyond contract. Futures will be available only in lots.
For example:
One lot IndusIndBank future has 400 quantities, if we want to buy IndusIndBank future, we need to pay 400*price of IndusIndBank future.
Display name (Based on my broker):
IndusIndBK - For Equity (where we can buy even 1 to N shares)
IndusIndBK May Fut (where we are allowed to buy only in multiples)
We can trade in Future similar to equity only difference is margin. Margin value might be different from broker to broker.
Example:
--> Indusindbank and its future is trading at 400rs
--> You decided to perform BTST on this stock
--> Instead of taking 400 quantities of Induindbank stock i.e 400*400 = 1,60,000 rs
--> You can buy a one lot future, we may get it with the lesser price instead of paying 1,60,000 rs. Sometimes, you can get the Future only at 60% of its total cost (it is purely depends on the margin provided by your broker) but I am sure we will Fut for lesser price.
In the above example, we have discussed only about BTST, STBT can also be performed in a similar way. I would like to conclude this with a warning note. Whenever, we perform trade in Fut profit and loss will also be in multiples of same numbers.Take trade based on your risk.
Benefits of trading in Future:
If we wanted to buy 400 shares of IndusIndBK at a specific price in equity market, there is a very big chance that we might not get all shares in single order.
Let us assume if we get all 400 shares in 3 different orders
--> We end up in paying more brokerage for buy orders
--> More transaction charges (tax and others)
--> We will not have an advantage of margin in equity market than future.
--> Same applies for sell order in equity too.
Options:
As we know, value of the options are derived from price of the stock. As futures, options will also be available only in contract, lot (multiple quantities as same as futures) and have expiry date on it.
Types of Options:
1. Call Option
2. Put Option
Call Option:
We can buy the call option, if we know the price of stock can raise. This options will be available at way lesser premium than futures and equity.
We are going to consider the same stock for example
For example:
--> Indusindbk, equity is trading at 400
--> Indusindbk 400 CE (Call Option) is trading around 50.
--> You can buy this 400 CE, if you know price of this shares will increase from here.
--> When the price starts to move above 400, value of CE will also increase.
--> Difference of 1 ruppee in call option can bring 400 rs of profit or loss.
Put Option:
We can buy put option, if we know the price of stock can fall below CMP. It is a opposite to Call option.
For example:
--> Indusindbk, equity is trading at 400
--> Indusindbk 400 PE (Put Option) is trading around 50.
--> You can buy this 400 PE, if you know price of this shares will fall from here.
--> When the price starts to move below 400, value of PE will also increase.
--> Difference of 1 ruppee in put option can bring 400 rs of profit or loss.
Note: Options and Futures, will trade in lot and both shares same quantities per lot.
Equity Cash Market:
To make it simple, we can't use the margin option in this equity positional order. We have pay full cash for the quantities that we are planning to buy. Also here we don't have contract or expiry time and we can hold it for 1 day to N years.
Example:
--> You have a cash of 4,000 in your account.
--> You can buy 10 quantities of IndusIndBK share.
I think we need some additional time to digest and understand these things, so I will stop here for now.
You can find the over all glossary for trading related terms in the below link
https://divaakaruguptha.blogspot.com/2020/05/glossary-for-trading.html
Fast Forward: We will see about Nifty and Bank nifty in our next article.
Interested People can follow this Telegram channel: https://t.me/NiftyChamps
Guys, it is a process of learning. Please feel to add your questions, I will try to answer them at the earliest.
V Divaakar Guptha.
Well written
ReplyDeleteThank you dude😁
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