Stock market investing basics

Shares

What are the documents required to open a D-mat account?
To open the D-mat account is almost the same across different firms and institutions. Here the list is: –
1. Photo graphs (latest),
2. Bank Account details,
3. D-mat application (duly filled),
4. Proof of identity and address (duplicate copies with self-attestation),
5. PAN card copy.

Proof of Identity (POI):(Any of the following):
PAN card with a valid photograph. This is a mandatory requirement for all applicants except those who are specifically exempt from obtaining PAN (listed in Section D).
Unique Identification Number (UID) (Aadhaar) / Passport / Voter ID card / driving license.
Identity card/ document with applicant’s Photo, issued by any of the following: Central/State Government and its Departments, Statutory/Regulatory Authorities, Public Sector Undertakings, Scheduled Commercial Banks, Public Financial Institutions, Colleges affiliated to Universities, Professional Bodies.

Proof of Address (POA):(Any of the following):
1. Voters Identity Card
2. Ration Card
3. Registered Lease or Sale Agreement of Residence
4. Driving License
5. Flat Maintenance bill
6. Insurance Copy
7. Utility bills like Telephone Bill (only land line)
8. Electricity bill or Gas bill – Not more than 3 months old.
9. Bank Account Statement/Passbook – Not more than 3 months old.
10. Identity card/document with address, issued by any of the following: Central/State Government and its                Departments, Statutory/Regulatory Authorities, Public Sector Undertakings, Scheduled Commercial Banks,            Public  Financial Institutions, Colleges affiliated to Universities and Professional Bodies.
11. For FII/sub account, Power of Attorney given by FII/sub-account to the Custodians (which are duly notarized) that gives the registered address should be taken.

What is a share market?
The stock market is a place where shares of a public listed companies are traded where the issue through initial public offer to public. After issue (primary issue through primary market), these shares are traded in secondary market, i.e., one investor purchases from another investor at the prevailing market price depends on agreement. These secondary markets (stock markets) are regulated by regulatory bodies in each country. For instance: SEBI (Securities Exchange Board of India) in India.

What is equity market?
Equity markets are almost nothing but stock market. A platform or market that gives companies a way to raise needed capital and gives investors an opportunity to gain by allowing those company stock shares to be traded.

What is money market?
Money market basically refers to a section of the financial market instruments with high liquidity and short-term maturities are traded for buying and selling of securities with short-term maturities i.e., one year or less, such as treasury bills and commercial papers. Over-the-counter trading is done in the money market and it is a wholesale process which is used by the participants as a way of borrowing and lending for the short term.

What is LTP (Last traded price)?
The price of the last trade that has been done in a counter for the day.

LTP vs Closing Price:
LTP: Price of the last trade that has been done in a counter for the day.
Closing Price: It is the volume weighted average of all the trades that were done during the last half an hour of the trading session i.e., between 3 pm to 3.30 pm.

For example:
If 100 shares of ICICI trade at 250, 200 shares at 260 and 50 shares at 280 during the last half an hour on NSE, then the closing price would be

(25000+52000+14000)/(100+200+50) = 260.00.
Thus, 260.00 will be the closing price of ICICI for the day.
Closing Price and LTP are totally different things and if they are same, it would only be a coincidence.Closing Price: It is the volume weighted average of all the trades that were done during the last half an hour of the trading session i.e., between 3 pm to 3.30 pm.

What is derivative instrument?
A derivative is an instrument whose value is derived from the value of one or more underlying such as commodities, precious metals, currency, bonds, stocks, stock indices, etc.,

What is Cash market?
This is one of the market to purchase or sell shares in an open market and where delivery is possible.
The amount of purchase will be based on share price at a particular point of time and lot size (assume 1 lot = 100 shares).
The lot size will be different for each and every scrip.
You need to first register yourself as a client with a Registered Broker by fulfilling all the KYC or Know Your Client rules.
Then, sign up the client agreement form and risk disclosure document provided to you by your broker.
Minimum balance is required to trade depends on market, lot size, share price.

What is forward contract?
A forward contract is a customized contract between two parties, where settlement takes place on a specific date in the future at a price agreed today. The main features of forward contracts are
They are bilateral contracts and hence exposed to counter-party risk.
Each contract is custom designed, and hence is unique in terms of contract size, expiration date and the asset type and quality.
The contract price is generally not available in the public domain.
The contract has to be settled by delivery of the asset on the expiration date.
In case the party wishes to reverse the contract, it has to compulsorily go to the same counter party, which being in a monopoly situation can command the price it wants.
These are not exchange traded contracts and traded through over the counter and customised
Margin payments are not necessary.

What is future market?
Futures are financial contracts which are predetermined agreement for a future date at a specified price to buy or sell of underlying equity shares as agreed upon.
Simply, futures price = spot market price + cost of carry
These are standardised with market price, tick size, quantity and settlement procedure.
Futures price move almost in convergence with the spot price.
At the expiry date, the gap between futures and spot price will be reduced and become zero.
(Basis will be reduced).
Here both the buyer and seller are obligated to buy/sell the underlying shares. Futures offers high leverage, i.e., large position with less capital in terms of initial capital. Initial margin has to pay up-front basis to broker.
One can square up his position at any time till the expiry i.e., take long position first and the short it or vice versa.
All the contracts are settled in cash on settlement price i.e., closing price.
The outstanding position are calculated as mark-to-market on daily basis and the notional profit/ loss will be paid/received on T+1 basis.
You can pay initial margin in non-cash (bank guarantee, securities) form also if the broker accepted but mark-to-market loss incurred on a daily basis has to be settled in cash only.
How to trade: You need to first register yourself as a client with a Registered Broker by fulfilling all the KYC or Know Your Client rules. Then, sign up the client agreement form and risk disclosure document provided to you by your broker.
Deposit upfront margin.

Difference between futures and forwards

Futures Forwards
Exchange traded contracts and therefore they are standardized contracts Private agreements between two parties
Low counterparty risk High counter party risk
Settlement through clearing houses No clearing house settlement
Settlement and delivery are quite distinct Settlement of the contract occurs at the end of the contract
Daily changes are settled day by day until the end of the contract. Only possess one settlement date
Futures contracts are quite frequently employed by speculator Forward contracts are mostly used by hedgers

What is option market?
It is a type of derivative security because the price of an option intrinsically linked to the price of something else. Options are contracts that grant the right, but not obligation to buy or sell an underlying asset at a set price on or before a certain date.

What is premium?
An option premium is the income received by an investor who sells or “writes” an option contract to another party. An option premium may also refer to the current price of any specific option contract that has yet to expire.

Factors influence premium:

SCENARIO STOCK PRICE CALL PRICE PUT PRICE
STOCK INCREASE INCREASE DECREASE
DECREASE DECREASE INCREASE
EXERCISER PRICE INCREASE DECREASE INCREASE
DECREASE INCREASE DECREASE
TIME TO MATURITY INCREASE INCREASE INCREASE
DECREASE DECREASE DECREASE
VOLATILITY INCREASE INCREASE INCREASE
DECREASE DECREASE DECREASE

Intrinsic value and time value (IV & TV):

The premium for an option consists of both IV & TV. If the stock price won’t change for the rest of the month, then the gross pays off, you get is IV.
On expiry all TV’s will be zero.
On expiry date in the option premium equals to zero.
Premium = IV + TV

Options are two types:

Call option                        Put option
Call buyer                                Put buyer

Call seller                                Put seller

Call Option: A call option contract that gives the buyer the right to buy the underlying asset at the strike price at any time on or before the expiry date.
Call buyer/holder pays premium
Call seller/writer receives a premium

Put Option: A call option contract that gives the buyer the right to sell the underlying asset at the strike price at any time on or before the expiry date.
Put buyer/holder pays premium
Put seller/writer receives a premium

Options to understand:

Points to be considered before investing on shares:

  • Percentage offered by the company to the public from total shares.
  • The percentage of shares held by promoters.
  • Background of the promoters, Board of directors and their past performance.
  • Soundness of the company and performance in past.

Leave a Reply

Your email address will not be published. Required fields are marked *