Beginner Series -1 - PDF

BEGINNER SERIES -1  TYPES OF INVESTMENT MARKET Physical Fixed Fluctuating Assets Returns Return 1. Land 1. FD 1. Stocks 2. Building 2. RD...

BEGINNER SERIES -1  TYPES OF INVESTMENT MARKET Physical Fixed Fluctuating Assets Returns Return 1. Land 1. FD 1. Stocks 2. Building 2. RD 2. Derivatives 3. Property 3. NSC 3. Mutual Funds 4. GOLD 4. PPF 4. Investment trust 5. Business 5. Govt Securities 5. Crypto Currency 6. Govt Bonds 7. Govt Schemes 8. Non Convertible Debentures 9. Insurance WHAT IS SHARE MARKET  Who Is an Investor An investor is any person or other entity (such as a firm or mutual fund) who commits capital with the expectation of receiving financial returns. Investors utilize investments in order to grow their money and/or provide an income during retirement, such as with an annuity.  Whyshould invested in stock market? Stock Market investments offer you benefits like  Liquidity  Flexibility of amounts invested  Operated under high level of regulatory framework to safeguard investor rights  Technology based Investment  High return  Capital growth  Dividend  TYPES OF TRADING MARKET The Smart wealth creator certification will provide you the basic understanding of Capital, Debt Market, Derivative , Commodity, Currency Market and how these operates. This program is specially designed for new market entrants and students those who wants to seeks knowledge in this area 1.CAPITAL MARKET 2.DEBT MARKET 3.DERIVATIVE MARKET 4.CURRENCY MARKET 5.COMMODITY MARKET Investment Vstrading  Investors are more interested in fundamentals.  Investors hold for the long-term  usually Investors hold a wide range of portfolio  Most investors adopt a “buy and hold” approach to assets.  Traders are more interested in technical.  Traders hold for the short term.  Traders hold small basket of portfolio.  Trader always adopt buy and use stop loss approach  FINANCIAL MARKET MONEY MARKET CAPITAL MARKET  MONEY MARKET MONEY MARKET INSTRUMENTS Certificate of deposit Repurchase agreements Commercial paper Eurodollar deposit Federal funds Municipal notes Treasury bills Money funds Foreign exchange swaps  Capital Market What is capital market ? A platform where individuals and institutions buy and sales financial securities. Organizations and institutions in the public and private sectors also often sell securities in order to raise funds.  What is Primary market ? IPO issue compan y Compan y float IPO to public Interme diaries PRODUCT OF PRIMARY MARKET IPO, OFS, RIGHT ISSUED, IPP, NCDs  What Is Initial Public Offer (IPO) Initial Public Offer (IPO) is when an unlisted company makes fresh issue of securities for the first time to the public. Any unlisted company can raise money from public through this process. TYPES OF IPO BULK IPO TYPES OF INVESTER IN IPO SME IPO QIBs HNI OR NII RETAILER  How to fix pricing of IPO There are basically two types of pricing in an issue – fixed price and price discovery through book building process 1. Fixed Price Under fixed price, the company and the merchant banker decide the issue price and that’s the price that any person who wants to buy the shares in the primary market has to pay. 2. BOOK BUILDING In the method of price by Book Building the company and the Merchant Banker stipulatea price band and leave it to market forces to determine the final price. Example – Suppose ABC LTD issue its IPO in a price band of Rs105 - Rs125, the lowest price (Rs 105) is called floor price and (Rs 125) is called cap price, and the company allot the share at Rs 120, this Rs 120 is called cut off price. So cut off price is the price at which the company allotted the IPO to public. MERCHANT BANKER ROLE IN IPO Merchant bankers play a very important role in the IPO process of emergence and also have a role in post listing phase. Their responsibilities are higher on emerge platform as in addition to the conventional role of managing and underwriting the IPO they are also responsible for ensuring market making for a period of three year from IPO 1.Educating the applicant company 2.Due diligence and DRHP preparation 3.Display of offer document on website 4.Market making arrangement 5.Underwriting arrangement STEPS IN COMPANY IPO 1.A company appoints a merchant bank. 2.Merchant bank prepares DRHP of company. 3.Merchant bank submit DRHP to SEBI. 4.SEBI verify the DRHP. 5.After verify by SEBI ,company gets IPO approval. 6.Once company gets IPO approval ,it can come with its IPO any time. 7.IPO opens for any three working days. 8.IPO must list on exchanges within 14 days from its closing date. 9.A company can be listed only if its 90% of total shares are subscribed by the public. 10. If the IPO is not subscribed by 90% then company refunds all.  IPO ANALYSIS ABOUT CAMPANY FUNDAMENTL MANAGEMENT MANAGEMENT ANALYSIS PROMOTER PROMOTER POLICIES POLICIES INVESTMENTS INVESTMENTS OBJECT BRAND BRAND P & L A\C PRODUCT PRODUCT CASH FLOW STATEMENT RATIOS ANALYSIS BALANCE SHEET REPAYMENT FOR DEBTS REPORTS LONG TERM CAPITAL GROWTH GENERAL CORPORATE PURPOSES  IPO ANALYSIS NEWS ISSUED DETAILS SUBCRIBTI0N DETAILS ALLOTMENT REVIEW OR DETAILS COMMENTS  Secondary market Once the stock get listed in primary market are started trading in secondary market. It’s a place where investor’s purchase or sales securities from other investors. Investors can buy or sold the securities through exchanges. Who are the Key players in Secondary market SEBI EXCHANGE BROKER CLIENT  What is stock exchange ? Stock Exchange is the platform where investors can Buy / Sell their financial instruments like stocks, shares, bonds, mutual funds and other financial derivative products. Once a company’s public offering is completed, it gets listed on a Stock Exchange. After listing it is available for trading to all investors in the Stock Exchanges where they are listed. In India we have two main stock exchanges NSE BSE National stock exchange was established in 1992. Nifty is a index of NSE having 50 shares and one DVR of Tata motors Bombay stock exchange was established in 1875 and it is the oldest stock exchange in Asia. Sensex is the index of BSE having 30 stocks. Apart from this we have 24 regional stock exchanges which are located in different places of India.  Market Index There are thousands of stocks listed on the exchanges. On a daily basis we do not have the time to look at all the rates and at one glance we want some indicator that will give us an idea about what’s going on in the market today. Stock index is metric that tracks the performance of the individual or group of stocks, it designed to indicate the performance of the market. An Index is a number which measures the change in a set of values overa period of time. The Index represents the change in value of a set of stocks which constitute the Index. Agood stock market index is one which captures the behavior of the overall equity market. It has to be well diversified yet highly liquid. Major Indices in India CNX Nifty – Nifty is an Index created by NSE and has 50 stocks from various sectors. SENSEX - SENSEX is an Index created by BSE and comprises of 30 stocks. Bank Nifty CNX nifty junior CNX 100 CNX 200 CNX 500 CNX IT CNX Midcap CNX Small cap  What is Market Capitalization ? It is current market value of the company’s shares. Indicates sheer size of company, its stock’s liquidity. Based on Market Cap companies are classified as Large Cap, Mid Cap and Small Cap. Market Capitalization = Current Stock Price x Shares Outstanding Let's assume Company ABC LTD has 10,000,000 shares outstanding and the current share price is Rs 9. Based on this information and the formula above, we can calculate that Company ABC LTD market capitalization is 10,000,000 x Rs9 = Rs 90 million  Market Timingsof NSE & BSE Trading on the equities segment takes place on all days of the week (except Saturdays, Sundays and Holidays declared by the exchange in advance). The market timings of the equity segment are as follows: ## Pre open session timings ( NSE and BSE): 09:00 am to 09:15 am. Pre open orders can be placed only for Equity cash segment stocks which constitute the Index ( Nifty50 & Senex30). The orders can be placed in price band of (+) 20% to (-) 20% of the previous day closing price of the stock. ## Normal Market timings (NSE and BSE) : 09:15 am to 03:30 pm. ## Post Closing timings ( NSE and BSE) : 03:40 pm to 04:00 pm. Short cut keys for Order Placement on ODIN / NEST F1 key - To place buy order. F2 key - To place sell order. F3 key - For pending orders F6 – To view Market watch window F8 – Executed orders F11- Net Position Alt +F6 – To view Net Position Shift +F2 – Modification of order Shift + F1 – Cancellation of order F10 – To view message inquiry window ODIN window for Buy order Buy Order ODIN window for Sell order Sell Order  OrderModification  All pending orders can be modified till the time they do not get fully traded.  Order can be modified only in Market hours.  Once an order is modified, the branch order value limit for the branch gets adjusted automatically.  A dealer can modify only the orders entered by him.  A branch manager can modify his own orders or orders of any dealer under his branch.  A corporate manager can modify his own orders or orders of all dealers and branch managers of the trading member firm. In Order modification process the orders can be modified on the basis of and  OrderCancellation  Pending Orders can be cancelled.  Partial traded orders can be cancelled.  Order cancellation can be done only in Market hours & pre open market.  A dealer/ member can cancel a single order or multiple orders in one attempt. ODIN window for Pending order Pending Order Window ODIN window for Executed Executed Order window order Market WatchWindow  STOPLOSSORDER Investors used Stop Loss to minimize the losses All stop loss orders entered into the system are stored in the stop loss book. Every stop loss order is associated with two prices. Trigger Price : It is the price at which the order gets triggered from the stop loss book. Limit Price : It is the price for orders after the orders get triggered from the stop loss book. If the limit is not specified, the trigger price is taken as the limit price for the order. The stop loss condition for buying and selling orders Sell Order : A sell order in the stop loss book gets triggered when the last traded price in the normal market reaches or falls bellow the trigger price of theorder. Buy Order : A buy order in the stop loss gets triggered when the last traded price in the normal market reaches or exceeds the trigger price of the order. TICKSIZE A tick size is the minimum increment / decrement(tick) by which the price required between two prices quotes while entering the order into the system. We can say tick size is the minimum difference between the buyer and seller can placed orders. Such as 5 paisa or 1 paisa LOT SIZE Minimum trading unit is a lot size of a contract to be traded in the market. i.e. 1 share The Quantity are in Units and Prices are in Indian Rupees Example Lot Size of NIFTY – 25 Lot Size of Bank NIFTY – 25 Lot size may varied from instrument to instruments, and it can be change at any point of time with prior notice and circular  Categories of stocks in NSE For the guidance and benefit of the investor, BSE has classified the stocks in Equity Segment intoA, B, T and Z group. (1)‘A’ group comprises of equity stocks of companies considered to be large in size in terms of market capitalization and most liquid with good track record. A group comprises of 200 companies from the entire list of companies listed at BSE. (2)‘B’ group comprise of equity stocks of companies that as compared to ‘A’ group stocks are smaller in terms of market capitalizationand liquidity. (3)‘T’ group represents scrip's which are settled on trade to trade basis. (4)‘Z’ group includes companies which have failed to comply with its listing requirement and / or have failed to resolve investor complaints. Theyhave weak fundamentals based on profitability, turnover and market capitalization.  Order Management consists of order punching, order modification, order what is order management ? cancellation andorder matching. Phases of order Timecondition Conditionof orders  Dayorder- order validated only for the day GTCorder - An order to buy or sell a security at a Activeorder Passiveorder set price that is active until the investor decides to cancel it or the trade is executed. IOC order – immediate or cancel ( as the When any order enters the trading name suggest either it get executed or system, it is an active order. It tries to cancelled automatically) find a match on the other side of the books. If it finds a match, a trade is generated. If it does not find a match, Pricecondition the order becomes a passive order and goes and sits in the orderbook.  Market price order - A market order is a buy or sell order to be executed immediately at current market prices.  Limit order - A limit order is an order to buy a security at no more than a specific price, or to sell a security at no less than a specific price  Order Matching The buy and sell orders are matched on Book Type, Symbol, Series, Quantity and Price to perform a complete order. The Orders can be matched on the basis of price and time. ByPrice Buy order with a higher price gets a higher priority and similarly, a sell order with a lower price gets a higher priority. E.g. Consider the following buy orders: 1)100 shares @ Rs. 35 at time 9:30 a.m. 2)500 shares @ Rs. 35.05 at time 9:43 a.m. The second order price is greater than the first order price and therefore is the best buy order. ByTime If there is more than one order at the same price, the order entered earlier gets a higher priority. E.g. consider the following sell orders: 1)200 shares @ Rs. 72.75 at time 9:30 a.m. 2)300 shares @ Rs. 72.75 at time 9:35 a.m. Both orders have the same price but they were entered in the system at different time. The first order was entered before the second order and therefore is the best sell order.  What isDepository? Depository is like an institution that works like a Bank, bank is actively involved in lending and borrowing of funds, same as depository is involved in receiving and transferring of securities. Like bank holds the funds of the investors , similarly depository holds the securities of investor. Parties involved in Depository System: Depository: facilitates the smooth flow of trading and ensure the investor`s about their investment in securities Depository Participant(DP): provides the service of opening a DEMAT account to the investor. Investor: Individuals investing in securities. Depositories in India: We have 2 depositories in India which are well known as NSDL (National securities depository limited) and CDSL (Central Depository Services (India) Limited).  Sub Broker As per NSE A ‘Sub-Broker’ is any person who is not a Trading Member of a Stock Exchange but who acts on behalf of a Trading Member as an agent or otherwise for assisting investors in dealing in securities through suchTrading Members. All Sub-Brokers are required to obtain a Certificate of Registration from SEBI without which they are not permitted to deal in securities. SEBI has directed that no Trading Member shall deal with a person who is acting as a Sub-Broker unless he is registered with SEBI and it shall be the responsibility of the Trading Member to ensure that his clients are not acting in the capacity of a Sub-Broker unless they are registered with SEBI as a Sub- Broker. It is mandatory for Trading Members to enter into an agreement with all the Sub- Brokers. The agreement lays down the rights and responsibilities of Trading Members as well as Sub-Brokers.  StockBroker Stock Broker is a member (individual or the Organization) of recognized stock exchange. Who is permitted or specially given license to participate in stock market / securities market on behalf of the clients who are register with the stock broker. Stock broker pay an important role in facilitating the trading activities, for the same the stock broker take some commission , that commission is called brokerage. As per NSE guidelines the Stock Broker can not charge morethan 2.5% brokerage of the transactions. Example – Client Aexecute a bought 1000 quantity SBIN @ 2350 per share through XYZ sub broker , for this transaction XYZ sub broker can not charge more than Rs 58750 as brokerage =(1000*2350)= 2350000 = (2350000*2.5%) = Rs58750 Howthe trade take place Decisiontotrade Taking a decision is the first step, where the investor decide whether he is ready and convinced to do trades. PlacingOrder The second step is to place the order, The client can place the order through online or through dealer TradeExecute Once the Orders are place it may execute or may not , execution of orders depend on price and quantity. Clearingtrade The fourth step is clear all the trade which are execute through broker Settlement As per exchange login and mechanism every trade executed should of settle through settlement process Trades Payin & Payout The Last step is to collect / pay the funds or securities  PRICEBANDS Daily price bands are applicable on securities as below: Daily price bands of 2% (either way) Daily price bands of 5% (either way) Daily price bands of 10% (either way) No price bands are applicable on scrip's on which derivative products are available Price bands of 20% (either way) on all remaining scrip's (including debentures, preference shares etc). Scrip's on which no derivatives products are available but which are part of Index Derivatives, are also subjected to price bands.  CircuitBreakers The market shall re-open, after index based market-wide circuit filter breach, with a pre-open call auction session. The extent of duration of the market halt and pre- open session is as given below: Pre-open call auction session post Trigger limit Trigger time Market halt duration market halt Before 1:00 pm. 45 Minutes 15 Minutes At or after 1:00 pm upto 2.30 pm 15 Minutes 15 Minutes At or after 2.30 pm No halt Not applicable 10% Before 1:00 pm 1 hour 45 minutes 15 Minutes At or after 1:00 pm before 2:00 pm 45 Minutes 15 Minutes 15% On or after 2:00 pm Remainder of the day Not applicable 20% Any time during market hours Remainder of the day Not applicable  CLEARING and SETTLEMENT After a trade is executed, it needs to be settled. The clearing and settlement mechanism in Indian securities market has witnessed significant changes. These include use of the state-of-art information technology, emergence of clearing corporations to assume counterparty risk, shorter settlement cycle, dematerialization, electronic transfer of securities and fine-tuned risk management system. T+2 rolling settlement was introduced for all securities. Rolling settlement refers to the settling of trades at a standard fixed period of days after the execution occurred. 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. Key terminologies in Clearing and Settlement Process Pay-in day is the day when the trading members/brokers are required to make payment of funds or delivery of securities to the clearing corporation of the Exchange for all transactions traded by or through them in the respective settlement period. Pay-out day is the day when the clearing corporation of the stock exchange transfers funds and securities to the broker/trading member who have receivable obligation.  Funds Funds Pay-in: The process of transfer of pay funds to the clearing corporation to pay for purchase transactions Payin in Securities Pay-in: The process of delivering Securitie securities to the clearing corporation to effect s pay settlement of a sale transaction. in Funds Funds Pay-out: The process of transfers of funds from the clearing corporation to pay complete the funds settlement of a sale out transaction PayOut Securities Pay-out: The process of receiving securities from the clearing corporation to Securitie complete the securities settlement of a purchase s pay transaction. out  Clearing andsettlement After a trade has been matched by a trading system it needs to be cleared and settled, so that the seller gets paid and the buyer gets ownership of the security traded. Agencyinvolved in clearing and settlement process The NSCCL is responsible for post-trade activities of a stock exchange. It clears all trades, Clearing determines obligations of members, arranges for pay-in of funds/securities, guarantees Corporation settlement. Clearing They are responsible for settling their obligations as determined by the NSCCL.. They have to make available funds and/or securities inorder to meet their obligations on Member the settlement day. s A custodian is an entity who is responsible for safeguarding the documentary evidence Custodians of the title to property like share certificates, etc. The custodian is required to confirm whether it is going to settle a particular trade or not. Clearing banks are a key link between the clearing members and NSCCL for funds ClearingBanks settlement. Every clearing member is required to open a dedicated settlement account with one of the clearing banks The depository runs an electronic file to transfer the securities from accounts of the Depositories custodians/clearing member to that of NSCCL. A depository is an entity where the securities of investor are held in electronic form.. Typeof Margins used in capital Market VAR VAR Itmeasures potentiallossfromanu nlikely adverse event inanormalmarketenvir onment. Itinvolves Margin usinghistoricaldataon ELM marketprices It iscolected/adjustedagainstthetotalliquidassetsofthe andrates,thecurrentp ortfoliopositions,and memberonrealtimebasis.Itiscolectedonthegrossopenpositions. models forpricingthosepositi MTM MTM Margincover markto ons.market losses on ELM outstandingsettlement obligation of the client. Mark to market loss is calculated by marking each transaction in security to the closing price of the security at the end of trading. Role of Different Entities Protection of investor interest , Promotion & development of SEBI securities market.Regulating securities market and monitoring brokeractivities. Stock exchange provides a trading platform where buyer & seller can meet to transact in securities. Set standard rules and Exchange regulation for brokers. Stock broker is an intermediary who arrange to buy , sell securities on behalf of clients. Stock broker is a member of a Broker stock exchange andmust have a certificate of registration from SEBI. Broker can charge maximum 2.5% brokerage on both buy andsell. Sub broker is an important intermediary between stock broker and Sub client in capital market segment. The trading members of the Exchange may appoint sub-brokers to act as agents of the broke concerned trading member for assisting the investors in buying, r selling or dealing in securities. Sub Broker cancharge maximum 1.5% brokerage on both buy andsell.  What is contract note ? BROKER Contract Note is a confirmation of trades done on a particular day on behalf of the client by a trading member. It imposes a legally enforceable relationship between the client and the trading member with respect to purchase/sale and settlement of trades. It contain the details of trades, stamped with requisite value and duly signed by the authorized signatory. Broker issue a contract note to the client within 24 Hrs of the trade ISIN (International Securities Identification What is an ISIN? Number) is a unique identification number for a security Who is a broker? CLIENT A broker is a member of a recognized stock exchange, who is permitted to do trades on the screen-based trading system of different stock exchanges. He is enrolled as a member with the concerned exchange and is registered with SEBI. Who is a sub broker? A sub broker is a person who is registered with SEBI as such and is affiliated to a member of a recognized stock exchange  CORPORATE ACTION Dividend 1. Cash Dividend A cash dividend is a distribution of wealth to the shareholders of a company, made out of the earnings during a period (year, half year or quarter). For index calculation purposes, regular dividends will affect Total Return indices only and not the Price Return indices. ADJUSTEMENT The level of the total return index is adjusted according to the amount of dividends paid in by index constituent companies. When a company issues a dividend, the price of the equity drops in the exact amount of the per share dividend amount. Leaving aside subsequent market movements of the equity price, the direct impact of a dividend upon an index is a drop in the price of the index. However, the total return index is adjusted for the issuance of dividends by reinvesting them. 2. Special Dividend A special dividend is a non-recurring distribution of profit to shareholders, usually in the form of cash. A special dividend is usually larger when compared to normal dividends paid out by the company. Typically, special dividends are distributed if a company has exceptionally strong earnings that it wishes to distribute to shareholders or if it is making changes to its financial structure, such as spin-offs or changes in debt ratio.  CORPORATE ACTION ADJUSTEMENT When executed as a Capital Return the adjustment factor and adjusted price are calculated as: Adjusted Price = P(t) - Cash Adjusted Price Factor = Adjusted Price / P(t) Where P(t) = Price on Ex-Date 3. Stock Dividend A stock dividend is an event in which a corporation distributes a payment to shareholders in the form of shares of stock, as opposed to money, while increasing the number of shares ADJUSTEMENT Adjusted Price = Closing Price * A / (A+B) New Number of Shares = Old Number of Share * (A+B) / A 4. Stock Splits A Stock Split takes place when a company decides to increase the amount of its outstanding shares while decreasing the nominal share  CORPORATE ACTION ADJUSTEMENT Adjusted Price = Closing Price * A / B New Number of Shares = Old Number of Shares * (B/A) Note: It is assumed that shareholders receive B(i), new shares for equity i (denoted B above) for every A(i) shares held (denoted A above). 5. Consolidations (or Reverse Splits) This event may also be referred to as a “Reverse Stock Split”, as it is the exact opposite of a stock split. In a reverse split the company decides to decrease the amount of its outstanding shares while at the same time increasing the share price proportionally, keeping the market capitalization unchanged. ADJUSTEMENT Example: 1 for 4 reverse stock split for company XYZ. Before the reverse split XYZ had 1,000,000 outstanding shares with a nominal value per share of EUR 0.50.  CORPORATE ACTION OTHER CORPORATE ACTION 1. Bonus Issue (or Scrip Issues ) 2. Right Offerings (or “Rights Issues”) 3. Share Repurchase/Buy-Backs 4. Spin-offs 5. Mergers and Acquisitions 6. Bankruptcies 7. Suspensions and halts (from trading) 8. Delistings 9. OFS FUNDAMENTAL ANALYSIS COMPANY ANALYSIS INDUSTRY ANALYSIS ECONOMY ANALYSIS  FUNDAMENTAL ANALYSIS COMPANY ANALYSIS P & L ACCOUNT PROFIT GROWTH SALES GROWTH MANAGEMENT CASH FLOW PROMOTOR STATEMENT PLAN & POLICIES BRAND & PRODUCT BALANCE SHEET  FUNDAMENTAL ANALYSIS RATIOS ANALYSIS RATIOS FORMULAS Current Ratio Current Assets/Current Liabilities Gross Profit Ratio Gross Profit/Net Sales X 100 Net Profit Ratio Operating Profit/Net Sales X 100 Earnings Per Share Ratio PAT /No of equity share Book value Total Assests – Total Liabilities ROE PAT / Total paid up capital  RATIOS FORMULAS Debt Equity Ratio Total Long Term Debts / Shareholders Fund Price Earnings Ratio Market Price Per Share / Earning Per Share X 100 Dividend Pay Out Ratio DPS/EPS X 100 Dividend Yield Ratio DPS/ MPS X 100  1. Choosinga good portfolio. 2. Mind it investment is not a game 3. Risk appetite should be measured well 4. Alwaystake Stop loss for intraday trade 5. Do not go for high leverage trading 6. Do paper trading before real trading 7. Control your greed while profit booking 8. Do not lose more than 10% in a single trade 9. Chose the time horizon before entering in to positions. 10.Employ DisciplinedPrinciples Note – As an investor you need to work under very good discipline and follow the rule and regulation , so that only you can earn money, if you do not follow the discipline then you will lose money Derivative Market session  Basic Knowledge of derivative and derivative products  Key Players in derivative Market  Future and forward contract  Application and pay offs of future contract  Option Contract and its application  Greek  Margin Mechanism in derivative  Regulatory frame work An introduction to derivative Market Derivative is a product whose value is derived from the value of one or more What isderivative? variables, The variables are called underlying. In financial market the underlying assets can be:  Stocks  Bonds  Commodity  Interest rate  Foreign exchange The price of the derivative products solely depend on the price of the underlying.  WhyDerivatives ? Pricediscovery Riskmanagement Hedging Speculation Derivatives play a Derivatives Investors Investors use crucial role in are hedge their financial discovering the instruments financial instruments for present and meant to assets speculative future price of cover risks. though purposes. any commodity derivatives. or financial asset.  Basic DerivativeProducts Derivative products  What is forward contract? Example A forward agreement is a non- A is Ready to buy 5000 standardized contract between two kg wheat @10 per kg parties to buy or sell an asset at a A on Dec2014 specified future time at a price agreed upon today. Forward contracts are traded on over the counter that means not in exchange. The buyer and seller BothA& Benter in directly meet with each other to a contract ,negotiate and execute the contract. B Ready to sell 5000 kg wheat @ 10 per kg ondec2014 B What is future contract ? A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are standardized, exchange-traded contracts. Futures contracts are available on variety of commodities, currencies, interest rates, stocks and other tradable as sets. They are highly popular on stock indices, interest rates and foreign exchange. The buyers of futures contracts take long position whereas the sellers built up short position. It should be noted that this is similar to any asset market where anybody who buys is long and the one who sells is short. Futures can be used either to hedge or speculate on the price movement ofthe underlying asset.  Futures trading road map Stockexchange BROKER Rules and Broker providecommon regulation platform for buyer andseller provider. Client A Client B Ready to buy Ready to sell Terminology inderivatives Spot price -The price at which asset trades in the cash market.  Spotprice  Futureprice  Contractcycle Expirydate Futures price – The price at which the  Contractsize future contract trades in futuremarket. Contract cycle – The period over which a contract trades, the index future contract have 3 months trading cycle. Contract size – It represents the standardized quantity of Expiry date –The last trading day of a future financial instrument. It is contract (usually last Thursday of the the minimum quantity month consider as expiry day). It is the that has to be traded. day on which a derivative contract ceases to exist.  Participants in Derivative Market Folowingarethe categoriesofparticipants in derivatives market. Speculator Hedger Arbitrageurs Theseare These are They take positions individuals investors with in financial markets whotake a view exposure to the to earn riskless onthe future underlying profits. direction of the asset whichis Arbitrage is a deal markets. Theytake subject to price that produces a view risks. Hedgers profit by exploiting whetherprices usethe derivatives a price difference wouldrise or fall in marketsprimarily in a product in two future for price risk different contracts or markets. andaccordingly management of buyor sell futures assets and for portfolios. makingprofit/loss  Desirable Attributes of an Index Agood market index should have threeattributes  Itshould capture the behavior of a large variety of different portfolios in the market. The stocks included in the index should be highlyliquid. It should beprofessionallymaintained. History of Derivative Tradingat NSE  The derivatives trading on the NSE commenced on June 12, 2000  Trading in index options and options on individual Securities commenced on June 4, 2001 and July 2, 2001  Single stock futures were launched on November 9, 2001