Stock market tips for investors
Investors enter the Indian share market in order to make big money. While the stock market provides numerous opportunities to build wealth, many investors come out unsuccessful and lose their money while trading.
As the share market is highly volatile, there is no saying what can go wrong. To avoid losses and make a profit, you must consider following the stock market tips given below:
img src="https://www.5paisa.com/cms/images/default-source/Blog-Articles/stock-market-tips.jpg?sfvrsn=2" alt="Stock Market Tips" title="Stock Market Investing Tips" class="img-responsive" />
Consult your stockbroker
It could be true that you are capable of making profitable decisions regarding your investments, but it can never hurt to consult your stockbroker before finalizing it. Stockbrokers are financial wizards and experts in the working of the share market.
Stockbrokers know how to do proper research in a company, and one can trust their judgment on dealing shares. Taking their advice in every decision you make will always go a long way in avoiding losses and making profits while buying shares online.
Research before investing
One of the best ways to be successful in share trading is to research about the investment and the company’s background thoroughly. It would mean that you look at the financial statements, long and short-term earnings; past and present market performance, future growth potential and their ability to distribute dividends to the shareholders. Only when you are satisfied that the company is financially sound enough to let you make profits, you should decide to invest.
Know your risk appetite
How much are you comfortable losing on your investments? This is the question you must ask yourself before taking any financial decision tobuy stocks online. As there is a fair possibility that you can lose all of your invested money in the share market, you must figure out what amount you are comfortable losing. Once you have figured out your risk appetite, you should only invest an amount of money which will not create a financial burden on you if you lose it.
Avoid emotional trading
Investors suffer huge losses when they invest in stocks online as they let their emotions in the way of their decisions. The possibility of making a profit on investment is the lowest when the decision for that investment has been taken emotionally. When the market is at its peak, the investors get emotionally involved and sell their shares in a hurry and lose out on bigger opportunities to make more profits. Thus, you should avoid getting emotionally attached and should take an informed decision after consulting your stockbroker.
Don’t time the market
The worst thing you or anyone can do while stock trading is trying to time the market. When you time the market, you make decisions based on the predictions that the market will go in a particular direction at a particular time. Even prominent investors like Warren Buffett have warned about the negative repercussions of timing the market. Stock market predictions should be used only as a tool to prepare you for what can come in the future and nothing else. No one can predict the future, and you should also keep away from trying.
Avoid the herd mentality
An investment can prove to be the best investment for someone, but at the same time, it can destroy your whole financial career. It is only you who knows what type of investment will be best for you as it is you who has to spend the money on buying the stake. You must avoid basing your decisions on the fact that everyone else is buying the shares of a particular company. Even Warren Buffett once said: "Be fearful when others are greedy, and be greedy when others are fearful!"
One of the best ways to counter the negative effects of losses on your overall portfolio is Diversification. It requires an investor to invest in multiple companies rather than spending all of the money in one or two companies. Diversifying allows you to spread the risk across numerous investments and the money you lose in one investment is covered by the profit you make in another. While the level of diversification can differ from investor to investor, it is one of the critical factors to earn profits on your overall portfolio.
Monitor your investments
The best way by which you can know when to buy or sell your shares is to monitor your investments regularly. If an investment is not doing great, you can sell it immediately to avoid further losses, and if an investment is at its peak price, you can sell it to book huge profits.
If you don’t have enough time to monitor your investment consistently, you can always ask your stockbroker to do the same for you. He/she will tell you the ideal time to buy or sell shares in the share market and help you become successful in your investing career.
What is a Demat account? Demat account charges
What is Demat account?
Demat account is like a bank account in which instead of money, the shares and securities you buy are kept in dematerialized form. In the past, the investors were given the physical possession of shares, but now the shares are just credited In the Demat account of an investor.
The Demat account number has to be quoted with every transaction you make, which is a mandatory process for placing a market order. You can access this account anytime you want with a Transaction and an internet password. When you make a sale, the number of shares is debited from your Demat account, and then your stock is sold in the stock market.
If you are looking to trade in the Indian share market, there are certain pre-requisites that you have to consider before you start investing. One of them is to have a Demat account.
Demat account is compulsory for every person who trades or wants to buy or sell shares in the share market.
How to open a Demat account?
You can open an online Demat account by following the given below points:
1. Choose a Depository participant: The primary thing you have to do is choose a DP (Depository participant). They are the intermediary between the depositories (the branch of the stock exchange that holds the securities, like CDSL, NSDL, etc.) and you. A depository participant can be a brokerage firm, a bank or a financial institution.
2. Fill the account opening form: After choosing the Depository participant, you must fill the account opening form which will be available with your Depository Participant. You also have to attach photocopies of documents for your proof of identity and proof of address with the account opening form.
3. Sign the agreement: You have to sign an agreement with your depository participant in the format prescribed by the Depositories. It will contain all the rules and regulations you need to follow with your rights and duties as an investor and as a client of the Depository Participant. You will receive a copy of the agreement so that you can read it thoroughly and refer to it in the future.
4. Demat account opening: After all the formalities are completed, your Depository Participant will open a Demat account for you. A Demat account number will be provided, also known as Beneficial Owner Identification Number (BO ID). From now on, every time you make a purchase, your Demat account will be credited with the shares. In case of a sale, the Demat account will be debited with the number of shares you sell in the market.
Demat account charges
Following are the demat account charges that you have to incur on your Demat account:
- Annual account maintenance fees.
- Transaction fees.
- Dematerialization and Rematerialization of securities.
- Custodian fee (for keeping your shares safe).
You does not charge any brokerage on trading with 5paisa.
Documents Required for Demat Account
Here is the list of documents you will require to open a Demat account online:
For proof of Identity: PAN card, Aadhar card, Voter ID, Driver’s license, Passport, Bank attestation, Telephone bills, Electricity bills, IT returns, ID card with name and photograph issued by the State or the Central government departments, colleges affiliated to universities, Public sector undertakings, Statutory or regulatory authorities, Public financial institutions, scheduled commercial banks or professional bodies like CA, ICAI, ICWA, CS etc.
For proof of address: Driver’s license, Voter ID, Aadhar card, Passport, Ration card, Bank statement or passbook, Telephone or Electricity bills, Self-declaration with Supreme court or High court judges, leave and license agreement or agreement for sale, Identity card with address issued by the State or the Central government departments, colleges affiliated to universities, Public sector undertakings, Statutory or regulatory authorities, Public financial institutions, scheduled commercial banks or professional bodies like CA, ICAI, ICWA, CS etc.
Other things to keep in mind
Other things that you should consider regarding a Demat account:
- You can open as many Demat accounts as you wish.
- There is no minimum number of shares you have to keep in your Demat account.
- No charge is levied on the closure of the Demat account. Only the annual maintenance fees are imposed proportionately.
- You can transfer your shares from one Depository Participant to another without any cost.
- You can authorize any other individual to operate your Demat account by availing the facility of Power of attorney.
You can also choose a person from your family or otherwise to get your shares in the event of your demise.
Long Call Butterfly Options Strategy
A Long Call Butterfly is implemented when the investor is expecting very little or no movement in the underlying assets. The motive behind initiating this strategy is to rightly predict the stock price till expiration and gain from time value with limited risk.
When to initiate a Long Call Butterfly?
A Long Call Butterfly spread should be initiated when you expect the underlying assets to trade in a narrow range as this strategy benefits from time decay factor. However, unlike Short Strangle or Short Straddle, the potential risk in a Long Call Butterfly is limited. Also, when the implied volatility of the underlying assets increases unexpectedly and you expect volatility to come down, then you can apply Long Call Butterfly strategy.
How to construct a Long Call Butterfly?
A Long Call Butterfly can be created by buying 1 ITM call, buying 1 OTM call and selling 2 ATM calls of the same underlying security with the same expiry. Strike price can be customized as per the convenience of the trader; however, the upper and lower strike must be equidistant from the middle strike.
|Strategy||Buy 1 ITM Call, Sell 2 ATM Call and Buy 1 OTM Call|
|Market Outlook||Neutral on market direction & Bearish on volatility|
|Upper Breakeven||Higher Strike price of buy call - Net Premium Paid|
|Lower Breakeven||Lower Strike price of buy call + Net Premium Paid|
|Risk||Limited to Net Premium Paid|
|Reward||Limited (Maximum profit is achieved when market expires at middle strike)|
Let’s try to understand with an example:
|Nifty Current spot price (Rs)||8800|
|Buy 1 ITM call of strike price (Rs)||8700|
|Premium paid (Rs)||210|
|Sell 2 ATM call of strike price (Rs)||8800|
|Premium received (Rs)||300 (150*2)|
|Buy 1 OTM call of strike price (Rs)||8900|
|Premium paid (Rs)||105|
|Net Premium Paid (Rs)||15|
Suppose Nifty is trading at 8800. An investor Mr A thinks that Nifty will not rise or fall much by expiration, so he enters a Long Call Butterfly by buying a March 8700 call strike price at Rs 210 and March 8900 call for Rs 105 and simultaneously sold 2 ATM call strike price of 8800 @150 each. The net premium paid to initiate this trade is Rs 15, which is also the maximum possible loss. This strategy is initiated with a neutral view on Nifty hence it will give the maximum profit only when there is no movement in the underlying security. Maximum profit from the above example would be Rs 6375 (85*75). The maximum profit would only occur when underlying assets expires at middle strike. Maximum loss will also be limited if it breaks the upper and lower break-even points i.e. Rs 1125 (15*75). Another way by which this strategy can give profit is when there is a decrease in implied volatility.
For the ease of understanding, we did not take in to account commission charges. Following is the payoff chart and payoff schedule assuming different scenarios of expiry.
The Payoff chart:
The Payoff Schedule:
|On Expiry NIFTY closes at||Net Payoff from 1 ITM Call Bought (Rs)||Net Payoff from 2 ATM Calls Sold (Rs)||Net Payoff from 1 OTM Call Bought (Rs)||Net Payoff (Rs)|
Impact of Options Greeks before expiry::
Delta: The net delta of a Long Call Butterfly spread remains close to zero.
Vega: Long Call Butterfly has a negative Vega. Therefore, one should buy Long Call Butterfly spread when the volatility is high and expect to decline.
Theta: It measures how much time erosion will affect the net premium of the position. A Long Call Butterfly will benefit from theta if it expires at middle strike.
Gamma: This strategy will have a long gamma position.
How to manage Risk?
A Long Call Butterfly is exposed to limited risk, so carrying overnight position is advisable but one can keep stop loss to further limit losses.
Analysis of Long Call Butterfly strategy:
A Long Call Butterfly spread is best to use when you are confident that an underlying security will not move significantly and will stay in a range. Downside risk is limited to net debit paid, and upside reward is also limited but higher than the risk involved.
How to make Profit in a Neutral Market: Short Straddle Option Strategy
A Short Straddle strategy is a race between time decay and volatility. Every day that passes without movement in the underlying assets will benefit this strategy from time erosion. Volatility is a vital factor and it can adversely affect a trader’s profits in case it goes up.
When to initiate a Short Straddle Options Trading Strategy?
A short options trading straddle strategy can be used when you are very confident that the security won’t move in either direction because the potential loss can be substantial if that happens. This strategy can also be used by advanced traders when the implied volatility goes abnormally high for no obvious reason and the call and put premiums may be overvalued. After selling straddle, the idea is to wait for implied volatility to drop and close the position at a profit. Inversely, this strategy can lead to losses in case the implied volatility rises even if the stock price remains at same level.
How to Construct a Short Straddle Options Trading Strategy?
A short straddle is implemented by selling at-the-money call and put option of the same underlying security with the same expiry.
|Strategy||Sell ATM Call and Sell ATM Put|
|Market Outlook||Neutral or very little volatility|
|Motivation||Earn income from selling option premium|
|Upper Breakeven||Strike price of short call + Net Premium received|
|Lower Breakeven||Strike price of short call + Net Premium received|
|Reward||Limited to Net Premium received (when underlying assets expires exactly at the strikes price sold)|
Let’s try to understand with an example:
|Nifty Current spot price||Rs. 8800|
|Sell ATM Call & Put(Strike Price)||Rs 8800|
|Premium received (per share) Call||Rs 80|
|Upper breakeven||Rs 8970|
|Lower breakeven||Rs 8630|
|Lot Size(in units)||75|
Suppose, Nifty is trading at 8800. An investor, Mr. A is expecting no significant movement in the market, so he enters a Short Straddle by selling a FEB 8800 call strike at Rs 80 and FEB 8800 put for Rs 90. The net upfront premium received to initiate this trade is Rs 170, which is also the maximum possible reward. Since this strategy is initiated with a view of no movement in the underlying security, the loss can be substantial when there is significant movement in the underlying security. The maximum profit will be limited to the upfront premium received, which is around Rs 12750 (170*75) in the example cited above. Another way by which this strategy can be profitable is when the implied volatility falls.
For the ease of understanding, we did not take into account commission charges. Following is the payoff chart and payoff schedule assuming different scenarios of expiry.
The Payoff Chart:
The Payoff Schedule:
|On Expiry NIFTY closes at||Net Payoff from Call Sell (Rs)||Net Payoff from Put Sell (Rs)||Net Payoff (Rs)|
Impact of Options Greeks:
Delta: Since we are initiating ATM options position, the Delta of call and put would be around 0.50.
8800 CE Delta @ 0.5, since we are short, the delta would be -0.5.
8800 PE Delta @-0.5, since we are short, the delta would be +0.5.
Combined delta would be -0.5+0.5=0.
Delta neutral in case of Short Straddle suggests profit is capped. If the underlying assets move significantly, the losses would be substantial.
Gamma: Gamma of the overall position would be Negative.
Vega: Short Straddle Strategy has a negative Vega. Therefore, one should initiate Short Straddle only when the volatility is high and expects to fall.
Theta: Time decay is the sole beneficiary for the Short Straddle trader given that other things remain constant. It is most effective when the underlying price expires around ATM strike price.
How to manage risk?
Since this strategy is exposed to unlimited risk, it is advisable not to carry overnight positions. Also, one should always strictly adhere to Stop Loss in order to restrict losses.
Analysis of Short Straddle Option Trading Strategy:
A Short Straddle Option Trading Strategy is the combination of short call and short put and it mainly profits from Theta i.e. time decay factor if the price of the security remains relatively stable. This strategy is not recommended for amateur/beginner traders, because the potential losses can be substantial and it requires advanced knowledge of trading.
What Is A Bear Put Spread Options Trading Strategy?
A Bear Put Spread strategy involves two put options with different strike prices but the same expiration date. Bear Put Spread is also considered as a cheaper alternative to long put because it involves selling of the put option to offset some of the cost of buying puts.
When To Initiate A Bear Put Spread Options Trading?
A Bear Put Spread strategy is used when the option trader thinks that the underlying assets will fall moderately in the near term. This strategy is basically used to reduce the upfront costs of premium, so that less investment of premium is required and it can also reduce the affect of time decay. Even beginners can apply this strategy when they expect security to fall moderately in near the term.
How To Construct The Bear Put Spread?
Buy 1 ITM/ATM Put
Sell 1 OTM Put
Bear Put Spread is implemented by buying In-the-Money or At-the-Money put option and simultaneously selling Out-The-Money put option of the same underlying security with the same expiry.
|Strategy||Buy 1 ITM/ATM put and Sell 1 OTM put|
|Market Outlook||Moderately Bearish|
|Breakeven at expiry||Strike price of buy put - Net Premium Paid|
|Risk||Limited to Net premium paid|
Let’s try to understand Bear Put Spread Options Trading with an example:
|Nifty current market price||Rs. 8100|
|Buy ATM Put (Strike Price)||Rs 8100|
|Premium Paid (per share)||Rs 60|
|Sell OTM Put (Strike Price)||Rs 7900|
|Premium Received||Rs 20|
|Net Premium Paid||Rs 40|
|Break Even Point (BEP)||Rs 8060|
|Lot Size (in units)||75|
Suppose Nifty is trading at Rs 8100. If you believe that price will fall to Rs 7900 on or before the expiry, then you can buy At-the-Money put option contract with a strike price of Rs 8100, which is trading at Rs 60 and simultaneously sell Out-the-Money put option contract with a strike price of Rs 7900, which is trading at Rs 20. In this case, the contract covers 75 shares. So, you paid Rs 60 per share to purchase single put and simultaneously received Rs 20 by selling Rs 7900 put option. So, the overall net premium paid by you would be Rs 40.
So, as expected, if Nifty falls to Rs 7900 on or before option expiration date, then you can square off your position in the open market for Rs 160 by exiting from both legs of the trade. As each option contract covers 75 shares, the total amount you will receive is Rs 15,000 (200*75). Since, you had paid Rs 3,000 (40*75) to purchase the put option, your net profit for the entire trade is, therefore Rs 12,000 (15000-3000). For the ease of understanding, we did not take in to account commission charges.
Following is the payoff schedule assuming different scenarios of expiry.
The Payoff Schedule:
|On Expiry NIFTY closes at||Net Payoff from Put Buy (Rs)||Net Payoff from Put Sold (Rs)||Net Payoff (Rs)|
Bear Put Spread’s Payoff Chart:
The overall Delta of the bear put position will be negative, which indicates premiums will go up if the markets go down. The Gamma of the overall position would be positive. It is a long Vega strategy, which means if implied volatility increases; it will have a positive impact on the return, because of the high Vega of At-the-Money options. Theta of the position would be negative.
Analysis of Bear Put Spread strategy:
A Bear Put Spread strategy is best to use when an investor is moderately bearish because he or she will make the maximum profit only when the stock price falls to the lower (sold) strike. Also, your losses are limited if price increases unexpectedly higher.
Bearish Options Trading strategies for Falling Markets
Bearish Option Trading strategy is best used when an options trader expects the underlying assets to fall. It is very important to determine how much the underlying price will move lower and the timeframe in which the rally will occur in order to select the best option strategy. The simplest way to make profit from falling prices using options is to buy put. However, buying put is not necessarily the best way to make money in moderately or mildly bearish markets. Following are the most popular strategies that can be used in different scenarios.
Extremely Bearish - Long Put
Moderately Bearish - Bear Put Spread
Long Put Options Trading
When should you initiate a Long Put Options Trade?
A Long Put strategy is best used when you expect the underlying asset to fall significantly in a relatively short period of time. It would still benefit if you expect the underlying asset to fall gradually. However, one should be aware of the time decay factor, because the time value of put will reduce over a period of time as you reach near expiry.
Why should you use Long Put?
This is a good strategy to use because the downside risk is limited only up to the premium/cost of the put you pay, no matter how much the underlying asset rises. It also gives you the flexibility to select the risk to reward ratio by choosing the strike price of the options contract you buy. In addition, Long Put can also be used as a hedging strategy if you want to protect an asset owned by you from a possible reduction in price.
|Strategy||Buy/Long Put Option|
|Market Outlook||Extremely Bearish|
|Breakeven at expiry||Strike price - Premium paid|
|Risk||Limited to premium paid|
Let’s try to understand with an example:
|Current Nifty Price||Rs 8200|
|Strike price||Rs 8200|
|Premium Paid (per share)||Rs 60|
|BEP (Strike Price - Premium paid)||Rs 8140|
|Lot size (in units)||75|
Suppose Nifty is trading at Rs 8200. A put option contract with a strike price of Rs 8200 is trading at Rs 60. If you expect that the price of Nifty will fall significantly in the coming weeks, and you paid Rs 4,500 (75*60) to purchase a single put option covering 75 shares.
As per expectation, if Nifty falls to Rs 8100 on options expiration date, then you can sell immediately in the open market for Rs 100 per share. As each option contract covers 75 shares, the total amount you will receive is Rs 7,500 (100*75). Since, you had paid Rs 4,500 (60*75) to purchase the put option, your net profit for the entire trade is therefore Rs 3,000. For the ease of understanding, we did not take into account commission
How to manage risk?
A Long Put is a limited risk and unlimited reward strategy. So carrying overnight position is advisable but one can keep stop loss to restrict losses due to opposite movement in the underlying assets and also time value of money can play spoil sports if underlying assets doesn’t move at all.
A Long Put is a good strategy to use when you expect the security to fall significantly and quickly. It also limits the downside risk to the premium paid, whereas the potential return is unlimited if Nifty moves lower significantly. It is perfectly suitable for traders who don’t have a huge capital to invest but could potentially make much bigger returns than investing the same amount directly in the underlying security.