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CHAPTER - I
INTRODUCTION
1
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AN INTRODUCTION OF SHARE MARKET
Introduction:
A stock market is a market for the trading of company
stock, and derivatives of same; both of these are securities listed
on a stock exchange as well as those only traded private. The
term 'the stock market' is a concept for the mechanism that
enables the trading of company stocks (collective shares), other
securities, and derivatives. Bonds are still traditionally traded in
an informal, over-the-counter market known as the bond market.
Commodities are traded in commodities markets, and derivatives
are traded in a variety of markets. The stocks are listed and
traded on stock exchanges which are entities (a corporation or
mutual organization) specialized in the business of bringing
buyers and sellers of stocks and securities together. The stockmarket in the India includes the trading of all securities listed on
the BSE and NSE, as well as on the many regional exchanges.
Market Phases
OPENING 8:45 a.m. to 9:54 am (includes Opening Session &Login Session)
OPEN PHASE- 9:55 a.m. to 3:30 pm (Trading Takes Place alsocalled as continues secession)
MARKET CLOSE 3:30 p.m. to 4:00 (includes Closing & PostClosing Session)
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SURCON-Surveillance & Control 4:00. to 6:00 p.m. (alsocalled as Member Query Session)
Importance of stock market
Functions and Purpose:
The stock market is one of the most important sources
for companies to raise money.
This allows businesses to go public, or raise additional
capital for expansion.
The liquidity that an exchange provides affords
investors the ability to quickly and easily sell securities.
This is an attractive feature of investing in stocks,
compared to other less liquid investments such as real
estate, gold, etc.
Exchanges also act as the clearing house for each
transaction, meaning that they collect and deliver the
shares, and guarantee payment to the seller of a
security. This eliminates the risk to an individual buyer
or seller that the counterparty could default on the
transaction.
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The smooth functioning of all these activities facilitates
economic growth in that lower costs and enterprise
risks promote the production of goods and services as
well as employment. In this way the financial system
contributes to increased prosperity.
Market Segments:
1. Primary Market
2. Secondary Market
3. Derivative Market
1. Primary Market
The primary is that part of the capital markets that deals
with the issuance of new securities. Companies,
governments or public sector institutions can obtain funding
through the sale of a new stock or bond issue.
Features of Primary Market are:-
1. This is the market for new long term capital. The primary
market is the market where the securities are sold for the
first time. Therefore it is also called New Issue Market (NIM).
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2. In a primary issue, the securities are issued by the company
directly to investors.
3 The company receives the money and issue new security
certificates to the investors.4 Primary issues are used by companies for the purpose of
setting up new business or for expanding or modernizing the
existing business.
5 The primary market performs the crucial function of
facilitating capital formation in the economy.
6 The new issue market does not include certain other sources
of new long term external finance, such as loans fromfinancial institutions. Borrowers in the new issue market may
be raising capital for converting private capital into public
capital; this is known as going public.
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Methods of issuing securities in the Primary Market
1. Initial Public Offer2. Rights Issue (For existing Companies)3. Preferential Issue.
2. Secondary Market
The secondary market is the financial market for trading of
securities that have already been issued in an initial private or
public offering. The market that exists in a new security just after
the new issue is often referred to as the aftermarket. Once a
newly issued stock is listed on a stock exchange, investors and
speculators can easily trade on the exchange, as market makers
provide bids and offers in the new stock
Features of Secondary Market:-
1. Securities are sold by and transferred from one investor or
speculator to another.
2. The secondary market be highly liquid and transparent.
3. Secondary market is vital to an efficient and modern capital
market.
4. Secondary markets mesh the investor's preference for liquid
with the capital
5. Users preference to be able to use the capital for anextended period of time.
Derivatives Markets
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The derivatives markets are the financial markets for derivatives.
The market can be divided into two that for exchange traded
derivatives and that for over-the-counter derivatives. Derivative
trading in India takes can place either on a separate and
independent Derivative Exchange or on a separate segment of an
existing Stock Exchange. Derivative Exchange/Segment function
as a Self-Regulatory Organization (SRO) and SEBI acts as the
oversight regulator. The clearing & settlement of all trades on the
Derivative Exchange/Segment would have to be through a
Clearing Corporation/House, which is independent in governanceand membership from the Derivative Exchange/Segment
Stock Brokers:
A Stock broker sells or buys stock on behalf of them selves.
The stock broker works as an agent matching up stock buyers and
sellers. A transaction on a stock exchange must be made between
two members of the exchange a typical person may not walk
into the National Stock Exchange (for example), and ask to trade
stock. Such an exchange must be done through a broker. In
addition to actually trading stocks for their clients, stock brokers
may also offer advice to their clients on which stocks, mutual
funds, etc. to buy.
Some people prefer to use and pay for the services of a
broker because they feel more comfortable making decisions
about their finances with the interactive guidance of a licensed
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professional. A stock broker usually offers both commission and
fee-based services depending on the clients best interests.
According to Rule 2 (e) of SEBI Rules, 1992, a stockbroker
means a member of recognized stock exchange.
Sub-Brokers
A sub- Broker is a person who intermediates between
investors and stockbrokers. He acts on behalf of a stock-brokers
as an agent or otherwise for assisting the investors as an agent or
otherwise for assisting the investors for buying selling or dealingin securities through such stock brokers. No stock broker is
allowed to buy, sell deal in securities, unless he or she holds a
certificate of registration granted by SEBI.
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body. The validity of the bond will provide you interest payments.Mostly, bonds have a permanent rate of interest.
Putting money in saving account will also offer options investing.
You will interest for your money, but the money will not score
high. For options investing, you can go for mutual funds because
it is being empowered in the stock market.
Mutual funds offers low level of risk and handsome results. These
are some of the most unique options investing, but there are also
other procedures. If you want to know more then you can simply
browse the Internet. The Internet will provide you right method on
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options investing and all about stock market. Remember, though,
that if you want to break the investment & get all your money
back, you may need to pay some amount back to your bank.
Bonds are reliable choice for accruing interest and bonds are akind of CDs, except that you give money to government, or other
entity, which is giving bonds for sale. Also, you put the money in
entity, as well as get I.O.U., and bond, in return. Thus it is very
important for you to know everything about the bonds and other
option.
How should you invest your money?
How should you invest your money? There is not fast way to
answer this neither question, nor shortage of advice when it
comes to make money in the stock market. Most of the time,
however, such opinions and advice are based on a selective
presentation of the facts by investment firms and derived by
secondary gains from the adviser which is affected by the day to
day news and analysis. You will encounter in your stock trading
career one trader telling you to invest your money in stocks.
Another will insist that mutual funds give you the most for your
money. A third will tell you to bet on bonds. Others will go for
ETFs, options, or futures.
Growing your money and investing it is not just a theoretical
exercise. You have, or will have, money that you want to invest.
As a matter of fact, you need to invest the money that you have
earned, saved, and/or inherited so that you can meet with your
retirement goals, buying a new home, paying for college, etc.
Before you start investing your money you need to understand as
much as possible about how the stock market works, how to do
proper stock market research and analysis. So, how should you
invest your money? Before you answer that question, you need to
understand and have a clear picture of what constitute an
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investment and what investment choices you have available in
the stock market today.
Stock
Welcome to the holy grail of the stock market. Investing your
money in stocks is different from investing your money in good
stocks. So, What is a good stock? Some stock brokers will say
larger companies. At Best Growth Stock LLC, we argue that the
best stocks to invest your money are fast growing companies,
Growth Stocks.
Mutual Funds
Wall Street pundits will argue that mutual funds offer great value
to the average investor. When you invest your money in a mutual
fund, the mutual fund company is investing it in stock, bonds and
other investment vehicles to growth its value. The bad about
investing in mutual funds is that instead of YOU being your own
portfolio manager and investor, you relay on other people to
growth your own money and sometimes it comes back with highmanagement fees.
Bonds
During the bear market of 2001 investing in bonds became very
famous. Keeping part of your money in bonds is a good way todiversify a stock portfolio. Another advantage of bond investment
are the tax advantages of bonds, especially municipal bonds. But
keep in consideration that bonds do not offer a good return
relative to stocks and that they have their own risk, including
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default risk, sensitivity to interest rates, currency exchange rates,
and the business cycle.
Options
Investing in options remain one of the less well understood
trading to new investors and we encourage new investors to stay
out of options until they can understand the level of speculation
that it carries. Most options are short-term investments and must
be monitored closely. Options carry the big potential for
spectacular returns through financial leverage, though sometimes
they are marketed as a way of insuring your portfolio against a
market downturn. The cost of trading options is frequently veryhigh for individual investors and that most individuals who use
options to speculate lose money.
Futures
The last investment vehicles we will discuss are futures. Like the
options, futures trading have many of the same uses as options.
The degree of return compare to its leverage is very high for theindividual investor but with added risk of margin calls. New
investor should stay away from futures at all cost since you have
How to diversification your stock:
Investing is a threatening venture whether you're an experienced
professional or a rank beginner. If this is your first turn round the
dance floor you need to realize firstly that all investing is a
likelihood of some type. There's not any such thing as hassle-free
investing though categorical sorts of investments really involve
more risks than others. This is the actual reason that it is so
critical to have a stock portfolio that is diversified enough to offer
some insulation from devastation due to one stock, bond, or fund
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performing poorly while also making a conspicuous difference
when one performs strangely well. Put simply, dilating your
portfolio tempers the dangers you are taking by investing to some
level. You've heard the old chestnut "never put your eggs in one
basket".
Dilating your portfolio moves your eggs around so that your nest-
egg has more than one layer or protection from the evils of the
planet and the variable minds of men and the NY Stock Exchange.
You want to diversify your portfolio so that one sector or one
stock does not have the power to sink your financial future in one
slipped swoop.
Mutual Funds & Penny Stocks
You want to feel safe that your investments are secure to some
level without reference to the many risks you will face. In fact you
need that sense of security to keep on investing and building your
financial future.
You can find that it is nearly impossible to work on a financialfuture you do not believe in. If that isn't acceptable however you
need to diversify so you've got the opportunity to spread the
wealth a bit too. You would like to have some opportunities to
take the hazards which make the real cash in the market game.
You can not actually do this if all your money are tied up in
ventures that are built to take no probabilities and run the
marathon. It's nice, often to feel the wind in your hair as you run
towards your cash goals rather than going at the snails pace forsecurity. To paraphrase, variety brings a sense of balance to your
portfolio too. There are all kinds of investments. You will find
many alternative firms, many varied sectors, differing types of
stocks, bonds, funds, and all demeanor of investment
opportunities that each bring to the table a different kind of risk
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and a different kind of security on which you can feast while
organizing your stock portfolio in a meal that should is intended to
last a whole life and keep your family fed, dressed, and content
for a couple of years to come. To do all of these things your
finance situation must be as well-rounded as you are as a personand your stock portfolio wishes that liberal humanities education
that incorporates a hardly any of everything.
If you can do this with your portfolio then your economic outlook
should be much brighter and bolder than it may be if you left your
efforts in one basket and dined on one plate for the rest of your
life.
Make more of an effort to check out your finance holdings and if
you don't have a little bit of variety on your plate it's time to add
a little sprinkling of risk or conservation accordingly.
THE FIVE BASIC METHODS OF MARKET RESEARCH
While there are many ways to perform market research, most
businesses use one or more of five basic methods: surveys, focus
groups, personal interviews, observation, and field trials. The type
of data you need and how much money youre willing to spend
will determine which techniques you:
1. Surveys. With concise and straightforward questionnaires, you
can analyze a sample group that represents your target market.
The larger the sample, the more reliable your results will be.
In-person surveys are one-on-one interviews typically
conducted in high-traffic locations such as shopping malls.
They allow you to present people with samples of products,
packaging, or advertising and gather immediate feedback. In-
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person surveys can generate response rates of more than 90
percent, but they are costly. With the time and labor involved,
the tab for an in-person survey can run as high as $100 per
interview.
Telephone surveys are less expensive than in-person surveys,
but costlier than mail. However, due to consumer resistance to
relentless telemarketing, convincing people to participate in
phone surveys has grown increasingly difficult. Telephone
surveys generally yield response rates of 50 to 60 percent.
Mail surveys are a relatively inexpensive way to reach a broad
audience. They're much cheaper than in-person and phone
surveys, but they only generate response rates of 3 percent to15 percent. Despite the low return, mail surveys remain a cost-
effective choice for small businesses.
Online surveys usually generate unpredictable response rates
and unreliable data, because you have no control over the
pool of respondents. But an online survey is a simple,
inexpensive way to collect anecdotal evidence and gather
customer opinions and preferences.
2. Focus groups. In focus groups, a moderator uses a scripted
series of questions or topics to
Focus groups. In focus groups, a moderator uses a scripted
series of questions or topics to lead a discussion among a group
of people. These sessions take place at neutral locations, usually
at facilities with videotaping equipment and an observation room
with one-way mirrors. A focus group usually lasts one to two
hours, and it takes at least three groups to get balanced results.
3. Personal interviews. Like focus groups, personal interviews
include unstructured, open-ended questions. They usually last for
about an hour and are typically recorded.
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Focus groups and personal interviews provide more subjective
data than surveys. The results are not statistically reliable, which
means that they usually don't represent a large enough segment
of the population. Nevertheless, focus groups and interviews yield
valuable insights into customer attitudes and are excellent ways
to uncover issues related to new products or service
development.
4. Observation. Individual responses to surveys and focus
groups are sometimes at odds with people's actual behavior.
When you observe consumers in action by videotaping them in
stores, at work, or at home, you can observe how they buy or use
a product. This gives you a more accurate picture of customers'usage habits and shopping patterns.
5. Field trials. Placing a new product in selected stores to test
customer response under real-life selling conditions can help you
make product modifications, adjust prices, or improve packaging.
Small business owners should try to establish rapport with local
store owners and Web sites that can help them test their
products.
6. Telephone surveys. Hire summer students or part-time
people for a few days every six months to do telephone surveys.
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CHAPTER IV
DATA COLLECTIONAND
DATA ANALYSIS
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DATA COLLECTION AND INTERPRETATION
1. Participated Gender in stock market investment accordingmy survey.
Particulars No. of Respondents PercentageMale 24 80%
Female 06 20%Total 30 100%
Interpretation:
MALE
80%
FEMALE
20%
MALE
FEMALE
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Above Data reveals that most of the respondents were male
whereas female have participated only 20% of the total number
of the respondents due to male oriented organizational
framework.
2. In which securities would you like to Invest?
Particulars No. of Respondents PercentageShare 19 64%
Mutual Fund 4 13%Commodity 1 3%
Others 6 20%Total 30 100%
Interpretation:
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Above data reveals that most of the respondents from share
investment. Most of people would like to invest in share and those
people dont want to take risk they are invested in mutual fund
and other securities. Only three per cent people they want to take
risk for getting more money.
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1. Are you satisfied in Ventura Securities Limited?
Particulars No. of Respondents Percentage
Yes 23 77%No 07 23%Total 30 100%
Yes
77%
No
23%
Yes
No
Interpretation:
Above table and Graphs is the evident for investment satisfaction
into the organization and I came to know that 77% investors are
satisfied with service and rests are unsatisfied with service
i.e.23%.
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2. Which of these factors do you keep in mind while purchasingstock?
Particulars No. of Respondents Percentage
Dividend policy 7 13%Company message 18 64%Brand name 4 3%Broker hints 1 20%
Total 30 100%
Interpretation:
13% of the respondents were having dividend policy and most of
the respondents were having company massage. The other
people are depend on broker hints and brand name of company.
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3. In which trading would you like to invest?
Particulars No. of Respondents Percentage
Online trading 21 70%Offline trading 09 30%Total 30 100%
Interpretation:
The more number of people are invested in online on there own
opinion or knowledge. 30% people are depend on broker hints
because lack of knowledge in securities.
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4. What do you think about the broking charged in a Ventura
Securities?
Particulars No. of Respondents PercentageReasonable 24 80%
Unreasonable 06 20%Total 30 100%
Interpretation:
Ventura Securities broking charges are affordable to the
middle level and higher level investor. But lower level
investors are not affordable broking charges.
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5. Do you prefer to buy share on cash basis or credit basis?
Particulars No. of Respondents Percentage
cash 24 80%Credit 06 20%Total 30 100%
Yes
80%
No
20%
Yes
No
Interpretation:
People are interested buying securities on cash basis for
reducing transaction charges. The few people would like to
buying securities on credit basis. Because getting more risk and
getting more profit .
COMPANY ANALYSIS
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With a shortlist of companies, an investor might analyze the
resources and capabilities within each company to identify
those companies that are capable of creating and
maintaining a competitive advantage. The analysis could
focus on selecting companies with a sensible business plan,
solid management and sound financials.
I) Business Plan
The business plan, model or concept forms the bedrock upon
which all else is built for a new business, the questions may be
these:
Does its business make sense? Is it feasible? Is there a market?
Can a profit be made? For an established business, the questions
may be: Is the company's direction clearly defined? Is the
company a leader in the market? Can the company maintain
leadership?
II) Management
In order to execute a business plan, a company requires top-
quality management. Investors might look at management to
assess their capabilities, strengths and weaknesses. Some of the
questions to ask might include: How talented is the management
team? Do they have a track record? How long have they worked
together? Can management deliver on its promises? If
management is a problem, it is sometimes best to move on.
III) Financial Analysis
The final step to this analysis process would be to take apart
the financial statements and come up with a means of
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valuation. Below is a list of potential inputs into a financial
analysis.
DERIVATIVES STRATEGIES
What are Strategies?
Strategies are specific game plans created by you based on your
idea of how the market will move. Strategies are generally
combinations of various products futures, calls and puts and
enable you to realize unlimited profits, limited profits, unlimited
losses or limited losses depending on your profit appetite and risk
appetite.
How are Strategies formulated?
The simplest starting point of a Strategy could be having a clear
view about the market or a script. There could be strategies of an
advanced nature that are independent of views, but it would be
correct to say that most investors create strategies based onviews.
What views could be handled through Strategies?
There could be four simple views: bullish view, bearish view,
volatile view and neutral view. Bullish and bearish views are
simple enough to comprehend. Volatile view is where you believe
that the market or scrip could move rapidly, but you are not clear
of the direction (whether up or down). You are however sure thatthe movement will be significant in one direction or the other.
Neutral view is the reverse of the Volatile view where you believe
that the market or scrip in question will not move much in any
direction.
1. Bullish Strategies
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2. Bearish Strategies
1. Various bullish strategies possible
Buy a Future
Buy a Call Option
Sell a Put Option
Create a Bull Spread using Calls
Create a Bull Spread using Puts
Let us discuss each of these using some examples.
Buy a Futures Contract
If you buy a Futures Contract, you will need to invest a small
margin (generally 15 to 30% of the Contract value). If the
underlying index or scrip moves up, the associated Futures willalso move up. You can then gain the entire upward movement at
the investment of a small margin. For example, if you buy Nifty
Futures at a price of Rs 1,100 that moves up to 1,150 in say 10
days time you gain 50 points. Now if you have invested only 20%,
i.e. 220, your gain is over 22% in 10 days time, which works out
an annualized return of over 700%.
The danger of the Futures value falling is very important. You
should have a clear stop loss strategy and if youre Nifty Futures
in the above example were to fall from 1,100 to say 1,080; you
should sell out and book your losses before they mount.
The graph of a Buy Futures Strategy appears below:
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Buy a Call Option
If you buy a Call Option, your Option Premium is your cost which
you will pay on the day of entering into the transaction. This is
also the maximum loss that you can ever incur. If you buy a Cipla
May 260 Call Option for Rs 21, the maximum loss is Rs 21. If Cipla
closes above Rs 260 on the expiry day, you will be paid the
difference between the closing price and the strike price of Rs
260. For example, if Cipla closes at Rs 300, you will get Rs 40.
After setting off the cost of Rs 21, your net profit is Rs 19.
The Call buyer has a limited loss, unlimited profit profile. No
margins are applicable on the buyer. The premium will be paid in
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cash upfront. If the scrip moves nowhere, the buyer is adversely
impacted. As time passes, the value of the Option will fall. Thus if
Cipla is currently at around Rs 260 and remains around that price
till the end of May, the value of the Option which is currently Rs
21 would have fallen to nearly zero by that time. Thus time
affects the Call buyer adversely.
The graph of a Buy Call position appears below:
Sell a Put Option:
Another bullish strategy is to sell a Put Option. As a Put Seller,
you will receive Premium. For example, if you sell a Reliance May
300 Put Option for Rs 18, you will earn an Income of Rs 18 on the
day of the transaction. You will however face a risk that you might
have to pay the difference between 300 and the closing price of
Reliance scrip on the last Thursday of May. For example, if
Reliance were to close on that day at Rs 275, you will be asked topay Rs 25. After setting of the Premium received of Rs 18, the net
loss will be Rs 7. If on the other hand, Reliance closes above Rs
300 (as per your bullish view), the entire income of Rs 18 would
belong to you.
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As a Put Seller, you are required to put up Margins. These margins
are calculated by the exchange using a software program called
Span. The margins are likely to be between 20 to 35% of the
Contract Value. As a Put Seller, you have a limited profit,
unlimited loss profile which is a high risk strategy. If time passesand Reliance remains wherever it is (say Rs 300), you will be very
happy. Passage of time helps the Sellers as value of the Option
declines over time.
The profile of the Put Seller would appear as under:
Bull Spreads:
First of all, Spreads are strategies, which combine two or more
Calls (or alternatively two or more Puts). Another series of
Strategies goes by the name Combinations where Calls and Puts
are combined.
Bull Spreads are those class of strategies that enable you benefit
from a bullish phase on the index or scrip in question. Bull
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spreads allow you to create a limited profit limited loss model of
payoff, which you might be very comfortable with.
Bull Spread using Calls/ Puts:
Bull spreads can be created using Calls or using Puts. You need to
buy one Call with a lower strike price and sell another Call with a
higher strike price and a spread position is created. Interestingly,
you can also buy a Put with a lower strike price and sell another
with a higher strike price to achieve a similar payoff profile.
2. Bearish Strategies
2. Various bearish strategies possible
Sell Scrip Futures
Sell Index Futures
Buy Put Option
Sell Call Option
Bear Spreads
Combinations of Options and Futures
Let us discuss each one of them now.
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Sell Scrip Future or Index Futures:
In the current Indian system, when you sell Scrip Futures, you are
not required to deliver the underlying scrip. You will be required
to deposit a certain margin with the exchange on sale of Scrip
Futures. If the Scrip actually falls (as per your belief), you can buy
back the Futures and make a profit. For example, Cipla Futures
are quoting at Rs 250 and you sell them today as you are bearish.
You could buy them back after 10 days at say Rs 230 (if they fall
as per your expectations), generating a profit of Rs 20. Question
of delivering Cipla does not arise in the present set up.You will be required to place a margin with the exchange which
could be around 25% (an illustrative percentage). If you
accordingly place a margin of Rs 62.50, a return of Rs 20 in 10
days time works out to a wonderful 30% plus return.
Obviously, if Cipla Futures move up (instead of down) you face an
unlimited risk of losses. You should therefore operate with a stop
loss strategy and buy back Futures if they move in reverse gear.
You could adopt the same strategy with Index Futures if you are
bearish on the market as a whole. Similar returns and risks are
attached to this strategy.
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Buy Put Option
The Put Option will rise in value as the scrip (or index) drops. If
you buy a Put Option and the scrip falls (as you believe), you can
sell it at a later date. The advantage of a Put Option (as against
Futures) is that your losses are limited to the Premium you pay on
purchase of the Put Option.
For example, a Cipla 260 Put may quote at Rs 21 when Cipla is
quoting at Rs 264. If Satyam falls to Rs 244 in 8 days, the Put will
move up to say Rs 31. You can make a profit of Rs 10 in the
process.No margins are applicable on you when you buy the Put. You
need to pay the Premium in cash at the time of purchase.
Sell Call Option
If you are moderately bearish (or neutral or bearish), you can
consider selling a Call. You will receive a Premium when you sell a
Call. If the underlying Scrip (or Index) falls as you expect, the Call
value will also fall at which point you should buy it back.
For example, if Cipla is quoting at Rs 264 and the Cipla 260 Call is
quoting at Rs 18, you might well find that in 8 days when Cipla
falls to Rs 244, the Call might be quoting at Rs 7. When you buy it
back at Rs 7, you will make a profit of Rs 11.
However, if Cipla moves up instead of down, the Call will move up
in value. You might be required to buy it back at a loss. You are
exposed to an unlimited loss, but your profits are limited to the
Premium you collect on sale of the Call. You will receive the
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Premium on the date of sale of the Option. You will however be
required to keep a margin with the exchange. This margin can
change on a day to day basis depending on various factors,
predominantly the price of the scrip itself.
You should be very careful while selling a Call as you are exposed
to unlimited losses.
Bear Spreads
In a bear spread, you buy a Call with a high strike price and sell a
Call with a lower strike price. For example, you could buy a Cipla300 Call at say Rs 5 and sell a Cipla 260 Call at Rs 26. You will
receive a Premium of Rs 26 and pay a Premium of Rs 5, thus
earning a Net Premium of Rs 21.
If Cipla falls to Rs 260 or lower, you will keep the entire Premium
of Rs 21. On the other hand if Cipla rises to Rs 300 (or above) you
will have to pay Rs 40. After set off of the Income of Rs 21, your
maximum loss will be Rs 19.
Cipla
Closing
Price
Profit on
260 Strike
Call (Gross)
Profit on
300 Strike
Call (Gross)
Premium
Received
on Day One
Net Profit
250 0 0 21 21255 0 0 21 21260 0 0 21 21270 -10 0 21 11281 -21 0 21 0290 -30 0 21 -9300 -40 0 21 -19310 -50 10 21 -19
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The pay off profile appears as under:
In a bear spread, your profits and losses are both limited. Thus,you are safe from an unexpected rise in Cipla as compared to a
clean Option sale.
Combination of Futures and Options
If you sell Futures in a bearish framework, you run the risk of
unlimited losses in case the scrip (or index) rises. You can protect
this unlimited loss position by buying a Call. This combination will
result effectively in a payoff similar to that of buying a Put.
You can decide the strike price of the Call depending on your
comfort level. For example, Cipla is quoting at Rs 264 currently
and you are bearish. You sell Cipla Futures at say Rs 265. If Cipla
moves up, you will make losses. However, you do not want
unlimited loss. You could buy a Cipla 300 Call by paying a small
Premium of Rs 5. This will arrest your maximum loss to Rs 35.
If Cipla moves up beyond the Rs 300 level, you will receive
compensation from the Call, which will offset your loss on Futures.
For example, if Cipla moves to Rs 312, you will make a loss of Rs
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37 on Futures (312 265) but make a profit of Rs 12 on the Call
(312 300). For this comfort, you shell out a small Premium of Rs
5 which is a cost.
5. Covered Call
A Covered Call is a strategy that could also incidentally fit into a
bearish orientation.
A Covered Call is a strategy where you have sold a Call. As a
seller, you are exposed to unlimited losses. However, you hold the
underlying security as a result of which, if the situation arises, you
can always deliver the underlying and thus avoid such unlimited
losses.
For instance, you are holding Cipla, which is currently quoting at
Rs 230. You are bearish on Cipla and you believe it might touch
Rs 200 in the next 30 days. You therefore sell a Call with Strike
Price 220 for Rs 15. You have earned this Income of Rs 25 as a
Seller.
Now if Cipla were to move up (rather than down as per your
expectation) you will face losses. For example, if Cipla moves to
Rs 270, you will, as a seller, pay Rs 50 (difference between the
Cipla price and the strike price).
However, you are not affected by this loss because, as a holder of
Cipla itself, your holding has appreciated from the current level of
Rs 230 to Rs 270 which has generated a profit of Rs 40.
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Thus, the loss on the Call has been offset with the rise in the price
of the underlying security. Your overall profit is Rs 15 computed
as follows:
Rs 25 as Income from Sale of the Call
Rs 40 as appreciation in Cipla shares
Less Rs 50 payout on the exercise of the Call.
There are several situations, which might make this product
interesting. The classic one is where you hold a share which you
like and would like to hold it in the medium to long term. You
have no inclinations of selling it. However, you do believe that in
the short term, there is no great potential for appreciation.
In fact you believe that the share will either stay where it is
(neutral view) or it might even fall in price.
In this situation, you wonder how you can make money even
when holding on to the share itself. For example, you hold Infosyswhich is currently quoting at Rs 3,400. You love Infosys and would
like to keep it forever. However, in the short run, you believe
Infosys will either fall or stay around the Rs 3,400 mark.
Infosys 3,400 strike one month calls are currently quoting at Rs
150. If you sell these calls, you can generate an equivalent
income. If your view is correct, you get to retain the entire Rs 150
with no costs.
2 Volatile Strategies
Straddle
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A Straddle is a strategy where you buy a Call Option as well as a
Put Option on the same underlying scrip (or index) for the same
expiry date for the same strike price. For example, if you buy a
Cipla July Call Strike Price 240 and also buy a Cipla July Put Strike
Price 240, you have bought a Straddle.
As a buyer of both Call and Put, you will pay a Premium on both
the transactions. If the Call costs Rs 12 and the Put Rs 9, your
total cost will be Rs 21. You will buy a Straddle if you believe that
Cipla will become volatile. Its current price is say Rs 240, but youthink it will either rise or fall significantly. For example, you could
believe that Cipla could rise right up to Rs 300 or fall up to Rs 200
in the next fortnight or so.
There could be various situations, which might warrant heavy
movement. For example, during Budget time, a favourable
proposal might impact the price favorably and if nothing favorable
is proposed, the price could fall significantly. An Indian company
could be considering collaborations with a major foreign
company. If the collaboration were to happen, the price could
rise, and if it were not to happen, the price could fall.
An Indian company might be expecting a huge order from a
foreign company. The market might be awaiting news on this
front. While a positive development might result in a price rise, a
negative development might dampen the prices.
Some companies might face huge lawsuits. The decision could
significantly impact prices any which direction.
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In all these cases, you are sure that the price will either move up
or move down, but you are not clear which way.
Let us continue the above example. You have bought the Call and
the Put and spent Rs 21. The current price and the strike price are
the same Rs 240. Your profile will be determined as under:
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Cipla
Closing
Price
Profit on
CallProfit on Put Initial Cost Net Profit
200 0 40 21 19
210 0 30 21 9
220 0 20 21 -1
230 0 10 21 -11
240 0 0 21 -21
250 10 0 21 -11
260 20 0 21 -1
270 30 0 21 9
280 40 0 21 19
Thus you make maximum profit if the price falls significantly to Rs
200 or rises significantly to Rs 280. You will make a maximum
loss of Rs 21 (your initial cost) if the price remains wherever it
currently is.
As a buyer of the Straddle, you will pay initially for both the Call
and the Put. You need not place any margins as you are a buyer
of both Options. If time passes and the scrip remains at or around
the same price (in this case Rs 240), you will find that the Option
Premier of both the Call and the Put will decline (Time Value of
Options decline with passage of time). Hence, you will suffer
losses.
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Sell a Straddle
You bought a Straddle because you thought the scrip will become
volatile. Conversely, the seller of the Straddle would believe that
the scrip will act neutral. The seller will believe that the price of
Cipla will stay around Rs 240 in the next fortnight or so.
Accordingly, he will sell both the Call and the Put.
If the price indeed remains around Rs 240, he will make a
maximum gain of Rs 21. If the price were to move up or down, he
will make a lower gain as he will have to pay either on the Call (if
it moves up) or on the Put (if it moves down).
As a seller, he will receive the Premier of Rs 21 on day one. He
will have to place margins on both the Options and hence these
requirements could be fairly high. If time passes and the scrip
stays around Rs 240, the seller will be happy as the Option values
will decline and he can buy back these Options at a lower level.
On the other hand, if the scrip moves, he should be careful and
think of closing out early.
You will look up the Delta of the option, which happens to be 0.54.
One contract of Cipla is 1,200 Units. You have a positive Delta
which means that with Cipla going up the price of the Call will
move up (Rs 0.54 for every upward movement of Re 1.00 in Cipla)
and will move down correspondingly.
You do not want to bet on this directional movement. You will
therefore buy Cipla futures to the tune of 1,200 x 0.54 i.e. 648
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Futures. This will neutralize the impact in such a manner that
whether Cipla moves up or down, the changes in Futures price will
offset the changes in the Option price.
For example, if Cipla moves up to Rs 245 tomorrow, you will find
that the Option price has moved up to Rs 14.54. In case you
wonder why, the background is with a Delta of 0.54, the Option
price should go up by Rs 2.70 (0.54 x Rs 5 upward movement in
Cipla ). As one day has passed, the time factor will impact Option
prices downward say by Rs 0.16. Thus, the net Option price will
tend to go up by Rs 14.54 (derived from the Black Scholescalculator). You will have lost Rs 3,048 on the Call. You will find
that you have gained Rs 3,240 on the Futures, thus generating a
net gain of Rs 152.
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CHAPTER - VFINDINGS AND SUGGESIONS
FINDINGS
During the Market Research business class people show
positive attitude in Share Trading
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Those who have Interest in share trading most of them were
aware of Ventura Securities.
Mostly Investors show their first preference for share tradingin Ventura Securities Ltd.
As per the survey results all Ventura Securities brokers and
frenchancy in Pune area show positive attitude in share
Trading
In some areas especially Ventura Securities in Pune,
Mumbai, Chennai, Hyderabad etc. a big part of Investors
were found to be Interested in Commodity Market
In survey few clients expressed full satisfaction for the
products of Ventura Securities Mostly for PVS.
(Power Ventura Securities)