5 Mantras for Call Option
Right and obligation: A call option is a derivative that derives value from an asset, that could be a stock, bond, commodity or any other asset. It gives the purchaser the right, but not the obligation to purchase the asset at a specified price on expiry. The seller, however, has an obligation to sell the asset if the purchaser exercises his right at expiry. For this right, the purchaser pays the seller a fee called premium.
Premium: A call option’s premium is made up of two portions: Intrinsic Value and Time Value. The call option is at least worth the difference between the specified price (strike price) and the current market price, if the current market price is higher, this is the intrinsic value of the call option. It is positive or zero. Time value is the balance of the premium – it is attributable to the time remaining until expiry. This portion of the value keeps decreasing as the option approaches expiry.
Asymmetric Payoff: The payoff for an investor purchasing or selling a call option is asymmetric. An investor purchasing a call option will only exercise the call if it is profitable, thus his profit is potentially unlimited but his loss is limited to the premium paid to acquire the call option. For an investor selling a call option, it is the opposite. He will have to fulfil the contract if it is profitable to the purchaser and thus his potential loss is unlimited. Whereas, if he is right and the price is unfavorable, he will only earn the premium amount, keeping his profit limited.
Tool for Hedging or Speculation: Just as any other derivative, Call options are a tool for hedging as well as speculation. Call options can be purchased to protect short trades. They can be sold to offset the losses from stocks owned by an investor (called covered calls). Naked calls can be purchased or sold for speculation; these can be done very cheaply. Several popular strategies such as a bull call spread, long call butterfly spread, straddle and strangle can be executed with the help of call options.
ITM/ATM/OTM: A call option is In the Money (ITM) if the current market price of the underlying is above the strike price of the option. It is At the Money (ATM) if the current market price of the underlying is the same as the strike price. Similarly, it is Out of Money (OTM) if the current market price is below strike price. Whether or not it is profitable will also factor in the price paid for the premium.
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Sahajanand Medical Files for Rs.1,500 Crore IPO
Sahajanand Medical Technologies has filed the draft red herring prospectus (DRHP) with SEBI for its proposed Rs.1,500 crore IPO. The company is into the design and manufacture of vascular devices, with specialization in stents. Sahajanand already has strong institutional PE backing with investments from Samara Capital and Morgan Stanley PE Fund.
The Rs.1,500 crore IPO will comprise of a fresh issue of Rs.410 crore and an offer for sale of Rs.1,090 crore. While the OFS will be used to give partial exit to the promoters and to the early investors, the fresh issue component will be predominantly used by the company to reduce its debt and deleverage its balance sheet and also for working capital purposes.
Currently, the company is predominantly PE Fund owned. While Morgan Stanley PE Fund has a 18.44% stake, Samara Capital has a 36.59% stake in Sahajanand Medical Technologies. The company is based out of Surat in Gujarat and is a leader in drug eluting stents (DES). In the year FY21, it had a 31% share of the DES market, making it the undisputed niche leader.
Cardio vascular diseases are striking people more frequently and also striking them early. Hence it is critical that people are able to lead a normal life despite cardio vascular problems. The vascular devices market is expected to grow at 8.6% between 2021 and 2026 even as the incidence of cardio vascular afflictions have doubled globally in last 30 years.
The COVID pandemic has resulted in greater health consciousness and the vascular devices market is also likely to benefit from this trend. The global market size of cardio vascular devices is close to $26 billion and this is likely to see steady growth in the coming years. That will also open up a huge global opportunity for the stent manufacturer.
The Sahajanand Medical IPO will be managed by Axis Bank, BOFA Securities, Edelweiss and UBS. This marks the second IPO filing by a medical devices manufacturer. The first such company to file DRHP was Healthium Medtech, which is largely into surgical sutures and medical consumables.
List of Upcoming IPOs in 2021
SEBI Approves Setting Up Gold Exchange
In its latest board meeting held on 28th September, the SEBI Chairman Ajay Tyagi announced a slew of changes to capital market regulations to expand the offering for retail investors and better protect their interest. One such move is the proposed framework for a gold exchange. Here are the highlights of the gold exchange announcement.
1) The proposed gold exchange is intended to create a robust and transparent market to trade in spot gold. This will also offer a scientific process for price discovery of gold on a daily basis. It will trade in standardized spot gold.
2) The Gold Exchange will be set up under the aegis of the recognized stock exchanges and the platform will offer trading, clearing and settlement of trades in gold. The trading will be regulated by SEBI and will be covered by Settlement Guarantee Fund.
3) Gold will be traded on the gold exchange through Electronic Gold Receipts (EGRs), the equivalent of warehouse receipts in commodities. Gold being a perpetual asset, EGRs will have perpetual validity. EGRs will be classified as securities under SCRA definition.
4) SEBI will authorize Vault Managers subject to a minimum net worth of Rs.50 crore. They will provide vaulting services including taking gold deposits, safekeeping gold, issue of EGRs, verification of physical gold, reconciliation with EGRs etc.
5) The EGRs will be fungible both ways. Gold can be converted into EGRs and EGRs can be surrendered for gold. EGRs will be traded like a security on the stock exchange with real time quotes. EGRs and physical gold of two vaulting managers will also be fungible.
6) Electronic Gold Receipts or EGRs will be the closest to physical trading in gold and will add a lot of value to intraday traders, short term traders, arbitrageurs, hedgers like jewellers looking for price protection, gold ETFs etc.
7) The spot gold exchange was in the works for a long time, but post the NSEL spot exchange crisis, the regulator had been doubly wary of the systems required in regulating a spot exchange. That now appears to be under control.
In a related development, the SEBI has also authorized the launch of Silver ETFs, on the lines of gold ETF, as an additional asset class.
Stock Market Basics - All You Need to Know to Start Investing In India
With the end of the fiscal year 2021, about a whopping INR 99 trillion had been parked in the public sector banks in the form of fixed deposits earning an average of 5% interest. On the other hand, retail inflation averaged at approximately 6%. This means that if you're putting money in the bank, it is not only not growing, it is, in fact, getting eroded. To make things worse, if you fall in the tax-paying brackets, you have to pay taxes on that interest income that further deflates the value of your deposit.
While there are other avenues for investing your money, the stock market is perhaps the most enigmatic and paradoxical financial realm - a place that you dread, yet covet to get the best of, simultaneously.
We won't deny that for beginners, it is easy to get overwhelmed and hence abstain entirely from dipping your toes into stock market waters. Don't worry, we're here to guide you every step of the way.
What Is the Stock Market?
Like any market, this is a collection of platforms or exchanges where the buyers of shares meet the sellers/issuers of shares. Only here, the buyer or the seller could be me, you, or anyone for that matter. As public money is mainly at stake, this market is extensively regulated and monitored by SEBI, an independent body, to boost investors' confidence.
When you buy a share of a company listed in the markets, you essentially become the co-owner of that company (even if the stake is less than 1%) and thus bear the risk and rewards that the company is exposed to. But it's not that you have to keep holding the shares forever. You can sell it off to interested buyers, take your exit, and encash the amount. This is how the market provides liquidity to you as an investor.
The Common Myths That Have Been Hardwired into Us
I) The market is risky - it is as good as gambling:
Yes, it is risky, and the trends show that there have been booms and crashes; sure, it's not a smooth hike. But if we look at the leading index, we can see how it has grown exponentially in the long term.
So, How Do You Get Started?
Even a decade ago, you would have had to break a sweat to open your Trading or Demat account with a registered stockbroker. A trading account is through which you buy or sell securities and is needed irrespective of whether you wish to do day trading or investing (more on it later).
But if you want to buy and hold shares for a certain period of time you have to have a Demat account too. Gone are the days of intensive paperwork. With the advent of digital trading and investment platforms, your first stock market investment is only a few clicks away.
a) Your PAN card
b) Aadhar card [preferably with your mobile number linked to it for complete electronic authentication through OTP]
c) Address proof
d) A recent photograph
e) Passbook copy or cancelled cheque to verify your bank account details.
Digital copies work just fine, and in no time, you can have your Trading cum Demat Account opened with an online broker. However, you should only choose and stick to a decent and reputed broker after thorough research.
Deciding on Your Investment Approach
Now that you know the stock market basics and your account is all set, verified, and linked with your bank accounts, you have to take a call on which investment strategy you would follow to make gains from the stock market. There are two broad approaches:
1. Share Trading:
You're probably aware that stock prices continuously fluctuate throughout a trading day (9:15 AM to 3:30 PM). When the demand for a particular stock goes higher, the prices increase, and share prices also drop when it falls. As a trader, you make profits out of this price movement: buy when you anticipate it will go higher and sell when you consider it will fall.
However, this isn't done randomly and ideally has to be backed by some technical analysis done on your part (we promise it's not rocket science). It is the trend analysis of past movements of prices and their patterns based on which possible prices and ranges are predicted.
This is a relatively passive approach to buying and selling stocks, and adopts a long-term horizon. You buy stocks of companies that you feel have the potential to grow in the future and expect the prices to go up at that time. Again, this expectation ideally should be backed by some fundamental analysis - studying the company's past financial data, future plans, and to some extent, the country's economy as a whole.
Assess Your Profile as an Investor
Before you plunge in, you need to have clarity about your level of risk tolerance and aversion. There is no one-size-fits-all approach.
Only when you consider these factors can you decide where you are in the spectrum of 'very conservative' to 'very aggressive' as an investor. The higher the aggression, the more you should be predisposed towards riskier stocks.
Picking Your First Stocks - Things to Keep in Mind
The biggest mistake you can make is starting to put your money in stocks based on what everyone else is doing or talking about, without knowing why you're doing it. Before you invest, make sure:
a) You pick an industry that intrigues you or that you're somewhat aware of.
b) Start really small and spend some time watching the share prices.
c) Research the company well. In the age of the internet, everything you need to know and every resource is at your fingertips.
d) Look at how the share prices have shifted in the past 5-10 years as compared to the movement of the market indices like Nifty or Sensex.
The way to garner profits from the markets is either by a rise in share prices (known as Capital Gains in trade terminology), or you could receive dividends from stock. In either case, the taxation is different.
On Capital Gains: If you sell shares after holding for at least one year (Long Term Capital Gains), you would have to pay taxes at the rate of 10% over and above your first INR 1 lakh profits. Selling before one year (Short Term Capital Gains) will attract a higher rate of flat 15% taxes.
On Dividends: Dividends are now taxed at the rate applicable to you as per the slab structure based on your total income. So if your total income, including dividend gains after claiming all the deductions, are exempt from taxes, you can very well do away with taxes on dividends received. However, a TDS of 10% will be deducted if the amount credited to your account is more than Rs 5000 in a financial year.
Go Start Investing!
Now that you know the stock market basics, you can very well start your investment journey. Like the greatest investors of all time, Warren Buffet says:
“If you have more than 120 or 130 I.Q. points, you can afford to give the rest away. You don’t need extraordinary intelligence to succeed as an investor.”
How to invest in stock market for beginners
Everything You Must Know About Taxation on Mutual Funds in 2021
The COVID-19 pandemic was a spirit dampener across the globe, but the timely actions and policies of the government have brought India's development trajectory back on track. And since the capital markets react to positive news faster than anything else, the stock market's meteoric rise is a testament to India's fascinating story.
AMFI's data shows that the Indian mutual fund industry's Assets Under Management (AUM) soared to a record INR 36.59 trillion in August 2021 compared to a measly INR 6.97 trillion a decade ago.
Since mutual funds are typically more tax efficient than fixed deposits and safer than stocks, it's no surprise that Indian investors are making a beeline for these high-return investment instruments.
If you plan to invest in mutual funds or already hold units, you need to know the tax implications. Scroll down to learn about the tax on mutual funds an investor might have to pay on their investments.
How Do You Earn from a Mutual Fund?
Before understanding the tax implications, you should know how investors earn money from mutual funds.
Generally, you can earn from a mutual fund in two ways:
i) Capital Gains (or loss)
1. Capital Gains (or Loss)
Capital gain or loss refers to your investment's profit or loss should you sell your mutual fund units. Let's understand this with an example.
Suppose you invest INR 10,000 in the XYZ fund and receive 100 units in your account. After one year from the investment date, you find that your account value has grown to INR 15,000. If you want to sell your 100 units then, it will be termed as Capital Gains. Conversely, if the fund value reduces to INR 9,000, it will be called Capital Loss.
The Short-Term Capital Gains Tax (STCG) applies on withdrawals before twelve (12) months from the investment date for equity and balanced schemes and thirty-six (36) months for debt schemes. For withdrawals made after 12 or 36 months from the investment date, the Long-Term Capital Gains Tax (LTCG) applies. The STCG is usually 5% higher than the LTCG.
This table will tell you all about long-term and short-term capital gains:
Equity (where the exposure to equity is more than 65%)
Less than 12 months
More than 12 months
Balanced Funds (where the exposure to equity is more than debt)
Less than 12 months
More than 12 months
Debt Funds (where the exposure to debt is more than 65%)
Less than 36 months
More than 36 months
Companies often issue interim and final dividends when their profit margin increases. Some companies even distribute dividends when their profit hasn't beat the company estimates. They do so to retain loyal investors. Dividend-focused investors invest in such companies to get handsome dividends periodically.
Until March 2020, the dividend issuer had to pay taxes, known as the DDT or Dividend Distribution Tax, every time they released dividends. However, in Budget 2020, the central government declared that the dividend issuer would not have to pay taxes on the dividend. Instead, the dividend income will be added to the investor or unit holder's taxable income and taxed accordingly.
So, as an investor in the financial year 2021-22, you have to include the dividend income in your net income and calculate the taxes correctly. So, if you fall in the highest income bracket, your tax liabilities will increase further. The possibility of a higher tax has also prompted many investors to switch to 'Growth' schemes offered by mutual funds.
Now that you know how mutual funds generate income and how the dividend is taxed let's shift our focus to understanding the tax implications on Capital Gains.
Taxation on Mutual Fund Capital Gains
As already discussed, mutual fund capital gains are taxed in two ways:
The following sections describe each of these taxes in detail.
1. Long-Term Capital Gains Tax (LTCG)
For standard equity mutual funds, the LTCG is exempt on an income of up to INR 1 lakh every financial year. But, if the LTCG exceeds INR 1 lakh in a financial year, you will have to pay a tax of 10% without indexation.
In contrast, if you invest in a debt scheme, the LTCG applies on withdrawals after 36 months. The rate will be 20% after indexation. You might also have to pay the cess and surcharge.
Now, you can invest in a special type of mutual fund to save taxes - The Equity-Linked Savings Scheme or ELSS. By investing in ELSS, you become eligible to claim tax deductions of up to INR 1.5 lakhs under Section 80C. But, ELSS schemes come with a lock-in of three years. If you withdraw before three years, the tax benefits might be reversed. The tax rate is 10% for any income above INR 1 lakh a financial year.
What is Indexation?
Indexation refers to the process of recomputing the purchase price of a mutual fund after factoring in the inflation index and making adjustments. Generally, the Income Tax Department publishes the inflation index after evaluating various macroeconomic parameters. Depending on the inflation index, your effective capital gains might be lower after indexation.
2. Short-Term Capital Gains Tax (STCG)
Short-term capital gains are usually taxed at 15%. STCG applies when you sell units before one year from the investment date (for equity funds) and three years from the investment date (for debt funds).
Hence, if you fall in the 30% tax bracket and sell the units before 12 or 36 months, you will be taxed at the rate of 30%.
Do You Have to Pay Any Other Tax When Selling Mutual Fund Units?
Besides LTCG, STCG, and tax on dividends, you may also have to pay a Securities Transaction Tax (STT), currently 0.001% of the value of the sold units. But, the STT applies only to equity or balanced funds and not to debt funds.
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Invesco Approaches NCLT to Call EGM for Change of Zee Board
In an interesting development, the largest shareholder of Zee Entertainment, Invesco Fund, has moved the National Company Law Tribunal (NCLT). It has asked the NCLT to intervene and instruct the Zee board to call an Extraordinary General Meeting (EGM) to decide on the future composition of the board post the merger with Sony Pictures.
Invesco holds 18% in Zee Entertainment, while the Subhash Chandra family holds just about 3.44% pre-merger. Invesco had earlier sought the removal of Punit Goenka from the post of MD & CEO of Zee Entertainment. Just a week later, Zee Entertainment announced a merger with Sony Pictures with an agreement that Punit Goenka would continue for 5 years.
Invesco has made Punit Goenka, Zee chairman R Gopalan and independent director Vivek Mehra respondents to the petition. The matter will be heard by the NCLT today i.e. 30-Sep. Invesco had two demands. Firstly, it wanted Punit Goenka and 2 other directors to be moved out. Secondly, it wanted to nominate its own set of 6 directors on the board of Zee.
Check :- Invesco wants EGM to Replace Punit Goenka from the Post of MD & CEO
In response, the two directors; Manish Chokhani and Ashok Kurien, resigned from the board but Punit Goenka was reappointed for a period of 5 years as part of the merger deal with Sony Pictures. Invesco wants the new board, consisting of 6 of its nominees, to take a final call on the Sony Pictures merger, purely on the merits of the case.
One of the concerns for Invesco is that the merger will dilute the stake of Zee shareholders in favour of Sony Pictures shareholders, since the merger is in the ratio of 47: 53. This would also result in Invesco Fund having a much lower stake in the merged entity. A couple of years back, the Subhash Chandra family had lost control of Zee and was reduced to just 3.44%, after these shares had been pledge for loans to group companies.
The Subhash Chandra family is likely to end up with enhanced stake in the merged entity due to the 2% stake that Sony will forfeit to the ex-promoters as part of non-compete clause.
What does the Zee merger with Sony mean