Stock Tutorial

Indian Stock Market Overview.

The Bombay Stock Exchange (BSE) and the National Stock Exchange of India Ltd (NSE) are the two primary exchanges in India. In addition, there are 22 Regional Stock Exchanges. However, the BSE and NSE have established themselves as the two leading exchanges and account for about 80 per cent of the equity volume traded in India. The NSE and BSE are equal in size in terms of daily traded volume. The average daily turnover at the exchanges has increased from Rs 851 crore in 1997-98 to Rs 1,284 crore in 1998-99 and further to Rs 2,273 crore in 1999-2000 (April - August 1999). NSE has around 1500 shares listed with a total market capitalization of around Rs 9,21,500 crore (Rs 9215-bln). The BSE has over 6000 stocks listed and has a market capitalization of around Rs 9,68,000 crore (Rs 9680-bln). Most key stocks are traded on both the exchanges and hence the investor could buy them on either exchange. Both exchanges have a different settlement cycle, which allows investors to shift their positions on the bourses. The primary index of BSE is BSE Sensex comprising 30 stocks. NSE has the S&P NSE 50 Index (Nifty) which consists of fifty stocks. The BSE Sensex is the older and more widely followed index. Both these indices are calculated on the basis of market capitalization and contain the heavily traded shares from key sectors. The markets are closed on Saturdays and Sundays. Both the exchanges have switched over from the open outcry trading system to a fully automated computerized mode of trading known as BOLT (BSE On Line Trading) and NEAT (National Exchange Automated Trading) System. It facilitates more efficient processing, automatic order matching, faster execution of trades and transparency. The scrips traded on the BSE have been classified into 'A', 'B1', 'B2', 'C', 'F' and 'Z' groups. The 'A' group shares represent those, which are in the carry forward system (Badla). The 'F' group represents the debt market (fixed income securities) segment. The 'Z' group scrips are the blacklisted companies. The 'C' group covers the odd lot securities in 'A', 'B1' & 'B2' groups and Rights renunciations. The key regulator governing Stock Exchanges, Brokers, Depositories, Depository participants, Mutual Funds, FIIs and other participants in Indian secondary and primary market is the Securities and Exchange Board of India (SEBI) Ltd.

Rolling Settlement Cycle :

In a rolling settlement, each trading day is considered as a trading period and trades executed during the day are settled based on the net obligations for the day. At NSE and BSE, trades in rolling settlement are settled on a T+2 basis i.e. on the 2nd working day. For arriving at the settlement day all intervening holidays, which include bank holidays, NSE/BSE holidays, Saturdays and Sundays are excluded. Typically trades taking place on Monday are settled on Wednesday, Tuesday's trades settled on Thursday and so on.

Going Short:

If you do not have shares and you sell them it is known as going short on a stock. Generally a trader will go short if he expects the price to decline. In a rolling settlement cycle you will have to cover by end of the day on which you had gone short.

Concept Of Margin Trading:

Normally to buy and sell shares, you need to have the money to pay for your purchase and shares in your demat account to deliver for your sale. However as you do not have the full amount to make good for your purchases or shares to deliver for your sale you have to cover (square) your purchase/sale transaction by a sale/purchase transaction before the close of the settlement cycle. In case the price during the course of the settlement cycle moves in your favor (risen in case of purchase done earlier and fallen in case of a sale done earlier) you will make a profit and you receive the payment from the exchange. In case the price movement is adverse, you will make a loss and you will have to make the payment to the exchange. Margins are thus collected to safeguard against any adverse price movement. Margins are quoted as a percentage of the value of the transaction.

What are futures ?

Futures are exchange-traded contracts to buy or sell an asset in future at a price agreed upon today. The asset can be a share, index, interest, bond, rupee-dollar exchange rate, sugar, crude oil, soya bean, cotton, coffee etc.

Terms in futures

Quantity of the underlying assets Unit of price quotation (not the price) Expiration dates Minimum fluctuation in price (tick size) Settlement cycles

Example : when you are dealing in March 2004 Satyam futures contract the market lot, i.e. the minimum quantity that you can buy or sell, is 1,200 shares of Satyam; the contract would expire on March 28, 2004; the price is quoted per share; the tick size is 5 paise per share or (1,200 * 0.05) = Rs60 per contract/market lot; the contract would be settled in cash; and the closing price in the cash market on the expiry day would be the settlement price.

Features

Leveraged positions--only margin required Trading in either direction--short/long Index trading Hedging/Arbitrage opportunity

Advantages of futures over cash trading

In futures the investor can short sell/buy without having the stock and carry the position for a long time, which is not possible in the cash segment. An investor can buy and sell index components instead of individual securities when he has a general idea of the direction in which the market may move in the next few months. The investor is required to pay a small fraction of the value of the total contract as margin. This means trading in stock index futures is a leveraged activity since the investor is able to control the total value of the contract with a relatively small amount of margin. Example: suppose the investor expects a Rs100 stock to go up by Rs10. One option is to buy the stock in the cash segment by paying Rs100. He will then make Rs10 on an investment of Rs100, giving about 10% returns. Alternatively he can take futures position in the stock by paying Rs30 towards initial and mark-to-market margin. Here he makes Rs10 on an investment of Rs30, i.e about 33% returns. In the case of individual stocks, the positions, which remain outstanding on the expiration date will have to be settled by physical delivery, which is not the case in futures. Regulatory complexity is likely to be less in the case of stock index futures compared to the other kinds of equity derivatives, such as stock index options, individual stock options etc.

What are options ?

Options are contracts that give the buyers the right (but not the obligation) to buy or sell a specified quantity of certain underlying assets at a specified price on or before a specified date. On the other hand, the seller is under obligation to perform the contract (buy or sell). The underlying asset can be a share, index, interest rate, bond, rupee-dollar exchange rate, sugar, crude oil, soya bean, cotton, coffee etc. Example: suppose you have bought a call option of 2,000 shares of Hindustan Lever Ltd (HLL) at a strike price of Rs250 per share. This option gives you the right to buy 2,000 shares of HLL at Rs250 per share on or before March 28, 2004. The seller of this call option who has given you the right to buy from him is under the obligation to sell 2,000 shares of HLL at Rs250 per share on or before March 28, 2004 whenever asked.

There are two types of options:

Call options and Put options

Features

Limited risk, unlimited profit-call options Higher returns, higher risk-put options Positions in all market conditions/views

What are call options?

The option that gives the buyer the right to buy is called a call option.

Example: suppose you have bought a call option of 2,000 shares of Hindustan Lever Ltd (HLL) at a strike price of Rs250 per share. This option gives you the right to buy 2,000 shares of HLL at Rs250 per share on or before March 28, 2004. The seller of this call option who has given you the right to buy from him is under the obligation to sell 2,000 shares of HLL at Rs250 per share on or before March 28, 2004 whenever asked.

What are put options?

The option that gives the buyer the right to sell is called a put option

Example: suppose you bought a put option of 2,000 shares of HLL at a strike price of Rs250 per share. This option gives its buyer the right to sell 2,000 shares of HLL at Rs250 per share on or before March 28, 2004. The seller of this put option who has given you the right to sell to him is under obligation to buy 2,000 shares of HLL at Rs250 per share on or before March 28, 2004 whenever asked.

What is a strike price?

The price at which you have the right to buy or sell is called the strike price.