What should I know about Indian share market?

What should I know about Indian share market?
by Prasanth Menon 20/06/2017

The Indian share market is a place where shares of public companies are listed for trading. Here, trading shares bifurcate to two sub-categories; the primary market and the secondary market. Investors buy shares directly from the companies in the primary market. In the secondary market, investors trade shares amongst themselves.

In recent times, India had always been a leader as per the GDP rate that averaged around 7-7.5%. The world GDP rate languishes at 2.5%. This portrays India as a growing and lucrative market. Worldwide, the USA contributes 23% of the global GDP, Europe does 20%, China provides 9.3%, Japan provides 8.7% and India provides 2.4%.

The Inside Story

As is the case, any person through a broker can purchase or sell stocks pertaining to one or many companies. This exchange takes place at primary stock exchanges in India; the Bombay Stock Exchange (BSE) and the National Stock Exchange(NSE). Both are situated in the financial capital of India, Mumbai. The Bombay Stock Exchange claims to be the world's fastest stock exchange while the National Stock Exchange was the first exchange in India that provided a computer based electronic trading system. As of March 2017, the BSE and NSE rank 11th and 12th worldwide, respectively.

The market opens for trading at 9.30am and shuts down at 3.30pm, with a pre-open trade session from 9.00am-9.15am. Trade in both the exchange processes through the electronic order book, which is like an electronic shopping list for shares, sorted by their prices. These markets follow a T+2 day settlement cycle period, where T is the day a share got traded and T+2 is the day when the order got settled.

More About Trading Shares

Typically, trading has to be done by choosing an appropriate SEBI registered broker. The broker can be an individual, investment firm or a corporate body. An investor must have a Demat(Dematerialized) account, which is required to trade shares. An order can be placed with the order, with instructions specifying details about buying/selling shares such as price range, stop loss etc. After the trade is executed and a contract has been signed, it would take T+2 days to settle the trade.

After the 1990s, India let in foreign companies to invest here. The investment by foreign companies is possible only after it is registered under the Foreign Institutional Investor(FII) or as a sub to an FII registered company. Lately, the government of India's 'Make In India' initiative has increased the FDI rate to 48%.

Summing It Up

It is to be noted that India is a service driven country. And it is only when the value of other currencies rise( specifically dollar) that many Indian IT/Service oriented companies would reap profits. More profit is equal to a greater capability of expansion, which is again equal to more employment. At present, as the rupee strengthens the IT and Pharmaceutical companies are making losses.

With the world making efforts towards shifting to non-renewable energy sources as primary energy source, prices of crude oil is unlikely to shoot up that adversely affects the Indian economy since India is a heavy importer of crude oil. Latest measures by the central government such as Make in India, Startup India, Skill India and Digital India provides a potential investor with optimism. India's fiscal deficit is around 3.2%, which perfectly in par with the international standard fiscal deficit of 3%. The Indian share market does look like it is heading towards creating another golden year.

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Difference between Cash and Future Market

Difference between Cash and Future Market
by Prasanth Menon 20/06/2017
BASIS FOR COMPARISON CASH MARKET FUTURE MARKET
Meaning A place where financial instruments are traded, wherein the delivery of stock takes place. Future market is a place where only future contracts are bought and sold at an agreed date in the future and at a predefined price.
Ownership When you buy shares and take delivery, you become shareholder of the company till you hold the shares. You can never be a shareholder when you trade in Futures.
Delivery It is done on T+2 days. No delivery takes place as the Future contract expires on expiration date.
Payment Full amount needs to be paid at the time of buying shares in cash. Only margin money requires to be paid for initiating Future contract.
Lot size One can buy even single share of company. One has to buy a minimum lot size which is already defined. Such as in case of NIFTY lot size is 75.
Holding period In cash market you can buy shares and hold for life. In futures, you have to settle the contract on the expiration date i.e. maximum of three month.
Dividends When you are shareholder of the company, you are entitled to receive dividend. In future contract you are not entitle for any dividend.
Objectives People buy shares in cash market for investment purpose Futures can be traded for Arbitrage, hedging or speculation purpose.

 

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Short Call Strategy Explained - Online Option Trading

Short Call Strategy Explained - Online Option Trading
by Nilesh Jain 20/06/2017

Short Call Strategy:

 

What is Short Call strategy?

 

A Short Call means selling of a call option where you are obliged to buy the underlying asset at a fixed price in the future. This strategy has limited profit potential if the stock trades below the strike price sold and it is exposed to higher risk if the stock goes up above the strike price sold.

When to initiate a Short Call?

A Short Call is best used when you expect the underlying asset to fall moderately. It would still benefit if the underlying asset remains at the same level, because the time decay factor will always be in your favour as the time value of Call option will reduce over a period of time as you reach near to expiry. This is a good strategy to use because it gives you upfront credit, which will help you to somewhat offset the margin. But by initiating this position you are exposed to potentially unlimited losses if underlying assets goes dramatically high in price.

How to construct a Short Call?

A Short Call can be created by selling 1 ITM/ATM/OTM call of the same underlying asset with the same expiry. Strike price can be customized as per the convenience of the trader.

Strategy

Short Call Option

Market Outlook

Neutral to Bearish

Motive

Earn income from selling premium

Breakeven at expiry

Strike price + Premium received

Risk

Unlimited

Reward

Limited to premium received

Margin required

Yes

Probability

66.67%

Let’s try to understand with an Example:

NIFTY Current market Price

9600

Sell ATM Call (Strike Price)

9600

Premium Received

110

BEP (Rs.)

9710

Lot Size

75

Suppose Nifty is trading at Rs 9600. A Call option contract with a strike price of 9600 is trading at Rs 110. If you expect that the price of Nifty will fall marginally in the coming weeks, then you can sell 9600 strike and receive upfront premium of Rs 8,250 (110*75). This transaction will result in net credit because you will receive money in your broking account for writing the Call option. This will be the maximum amount that you will gain if the option expires worthless.

So, as per expectation, if Nifty falls or remains at 9600 by expiration, therefore the option will expire worthless. You will not have any further liability and amount of Rs 8,250 (110*75) will be your profit. The probability of making money is 66.67% as you can profit in two scenarios: 1) when price of underlying asset falls. 2) When price stays at same level.

Loss will only occur in one scenario i.e. when the underlying asset moves above the strike price sold.

Following is the payoff schedule assuming different scenarios of expiry. For the ease of understanding, we did not take into account commission charges and Margin.

On Expiry Nifty closes at

Net Payoff from Sell Buy (Rs.)

9300

110

9400

110

9500

110

9600

110

9700

10

9710

0

9800

-90

9900

-190

10000

-290

10100

-390

10200

-490

Payoff Diagram:

Impact of Options Greeks:

Delta: Short Call will have a negative Delta, which indicates any rise in price will have a negative impact on profitability.

Vega: Short Call has a negative Vega. Therefore, one should initiate Short Call when the volatility is high and expects it to decline.

Theta: Short Call will benefit from Theta if it moves steadily and expires at or below strike sold.

Gamma: This strategy will have a short Gamma position, which indicates any significant upside movement, will lead to unlimited loss.

How to manage Risk?

A Short Call 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:

A Short Call strategy can help in generating regular income in a falling or sideways market but it does carry significant risk and it is not suitable for beginner traders. It’s also not a good strategy to use if you expect underlying assets to fall quickly in a short period of time; instead one should try Long Put strategy.

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How is Income from Mutual Funds taxed?

How is Income from Mutual Funds taxed?
by Priyanka Sharma 20/06/2017
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India is a fairly non-tax compliant economy. This is a reality! Most of the investment schemes that the government unfolds for its citizens are utilized by many as a part of their tax saving initiative, rather than their saving initiative. While the income of the salaried class is tabbed correctly as well as their interest income through the slab rate, the gains received from mutual funds, also called capital gains is taxed under separate provisions.

Mutual fund investors remain perpetually complexed about the taxation from returns of investments. Investments in mutual fund are subject to scrutiny as it involves a huge amount as well as an appetite for risk. Financial managers are always quizzed about the possibility of tax evasion, deduction and payment. The reason for the numerous questions and no uniformity in the answers of the financial experts is due to difference in treatment of mutual fund returns and different ways of calculating its tax liability.

The profit or returns earned from mutual funds are taxed under the category of 'Income from Capital Gains.' Capital gains can be short-term or long-term and this division is based on the holding period of investments. Tax rates are definitely different for both with the rules of capital gains differing for equity as well as non-equity schemes.

There is too much information to be processed, so get ready for it.


Taxation: Equity Schemes

Mutual fund schemes that invest 65% of their total corpus into equity instruments are subjected to taxation under the equity scheme provision. If an equity mutual fund is held for more than a year than the returns from that equity mutual fund are taxed under long term capital gains. The current income tax laws have exempted such returns completely from the burden of paying income tax.

Returns held for less than a year or a year are treated under the short-term gain and the returns from the same are taxed at a rate of 15%.

Taxation: Debt Schemes

Mutual fund schemes that do not invest more than 65% of the corpus in equity are termed non-equity funds and they are taxed separately. Debt mutual funds are within the ambit of this category. Gold funds, fund of funds, international funds too are categorized as non-equity schemes when it comes to taxation.

The returns of non-equity funds that have been held by the investor for more than three years are treated under long-term capital gains and the returns are taxed at 20 per cent with the indexation benefit.

What is Indexation?

It is a process by which the purchase cost is inflated to account with the help of a price index. By indexation an investor achieves a relief from taxable profits.

Investments that are held for less than three years or three years than the returns on the mutual fund scheme is considered under short-term capital gains. Such gains are added to the income and they are taxed as per the income tax rate applicable.

Taxation: Hybrid Schemes

Hybrid schemes can be either equity-oriented or debt-oriented. Before the initial investment in the equity, the information document would provide details on the specific investment pattern, making it clear for the investor that the mutual fund scheme is an equity fund or a debt fund.

Investors are expected to pay close attention to details in the terms and conditions while opting for investment in hybrid scheme because the tax liability differs from the above two described earlier.

Calculating the Holding Period

The date of purchase or investment in the mutual fund till the day it is sold is classified as the holding period. In case of a Systematic Investment Plan (SIP), an investor purchases certain units or shares of the scheme every month or quarter and the holding period for all of these need to be calculated individually.

Calculating the Taxed Dividends

Investors often invest in a mutual fund scheme under the dividend option. Investors under this option receive annual dividends and are not liable to pay any tax on them as they are exempted from income tax in both equity as well as the debt investment scheme. Though an individual investor is not taxed on dividends, mutual fund houses before declaring the dividends pay a distribution tax of 28.84%.

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5 Questions You Cannot Miss Asking Your Life Insurance Agent

5 Questions You Cannot Miss Asking Your Life Insurance Agent
by Nutan Gupta 20/06/2017

If there is something easy to tackle for everyone while planning their or their family’s financial future, it is the life insurance policies. Simple to understand, the policies come with various terms and conditions that are often misinterpreted or missed while buying a policy. Here’s a quick run through of 5 questions that you must ask your life insurance agent to avoid any loopholes in your financial planning to secure the future of your loved ones.

There is no harm in being upright honest and straightforward in addressing your concerns. Asking your agent anything under the ambit of your policy is your right. And before you begin bombarding him with questions on your financial future, we suggest you ask him the very basic question on his credentials.

What is your credibility in the market?

As embarrassing as this question sounds on the first go, it is extremely prudent of you to enquire about your agent’s credibility and credentials in the market to avoid any mishap in the long run. Agents are here to sell different policies, however you need to see whether your agent has the credentials to advise you on the right policy or plan. Question him on his suggestions meted out to you; enquire the factors that lead him to advise you on this specific policy or plan.

Policies are decided post a thorough examination of an individual’s income, expenses, financial goals, preferences and other crucial factors. The agent should be able to assess a larger scenario before suggesting a specific policy with a said premium.

Your questions should not end at his credentials, your premium and returns. You need to take into account the bigger picture and one of it is…

Will the Policy Chosen by Me Adjust Inflation on Account of My Death Benefit?

If you are happy to secure your family’s future with a life insurance policy of 10 lakh rupees, think again. The value of money keeps on decreasing in a robust economy and inflation is hitting the country at a steady rate. Despite the government’s measures, inflation is on a rise. Thus, before buying a life insurance policy, ask your agent if your policy will adjust inflation in the long run. Because if the policy won’t adjust inflation, it would wear down with time, even if you do not miss out on your premium payment.

Will My Policy Take Care of My Health Changes in the Future?

Health is never going to be permanent. While you will be buying your policy in your youth and definitely undergo a medical examination before it, there is no guarantee or constant assurance that your health may not deteriorate or remain the same in the future. Therefore, it is important to be aware of the terms and conditions of your policy and know whether you stand a chance of improving your rating in case your health improves and what happens if your health deteriorates.

Will the Amount Chosen by Me Suffice?

Insurance policies are the best financial security you can offer to your loved ones hence you need to be sure whether amount chose by you will suffice them in case you don’t survive them. The amount secured by you should be enough for their expenses and other regular needs.

What are the exclusions of the Policy?

While it is good to know the inclusions of clauses, you need to also be clearly informed on the exclusions as well to avoid any problems at the time of claiming the policy returns. You might require multiple covers to ensure your family’s safety completely.

Conclusion

Don’t hesitate to ask questions to your insurance agent. A good agent would answer all your questions and help you to understand the policy in an extremely easy manner. Decide on a policy by weighing all the pros and cons in specific to your needs. Do not go ahead with a policy that you do not feel conducive to your loved one’s safety in the future.

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Short Box Spread Explained - Online Option Trading Guide

Short Box Spread Explained - Online Option Trading Guide
by Nilesh Jain 20/06/2017
New Page 1

Short Box Spread explained:

The Short Box Spread is an arbitrage strategy that will be implemented with the combination of Bear Call spread along with Bull Put spread with the same expiry and strike price.

When to initiate a Short Box Spread?

Short Box Spread is initiated to capture riskless profit when the spreads are overpriced in relation to their expiration value.

How to construct a Short Box Spread?

Short Box Spread can be created by Selling 1 ITM call, Buying 1 OTM call, Selling 1 ITM put and buying 1 OTM put of the same underlying security with the same expiry and same strike price. Strike price can be customized as per the convenience of the trader; however, the upper and lower strike must be same for call and put.

Strategy

Sell 1 ITM Call, Buy 1 OTM Call, Sell 1 ITM Put and Buy 1 OTM Put

Market Outlook

Neutral

Motive

Earn risk free profit

Risk

Risk-free arbitrage, No risk involved

Reward

Limited

Margin required

Yes

Let’s try to understand with an example:

Nifty Current spot price (Rs)

9500

Sell 1 ITM call of strike price (Rs)

9400

Premium received (Rs)

270

Buy 1 OTM call of strike price (Rs)

9600

Premium paid (Rs)

115

Sell 1 ITM put of strike price (Rs)

9600

Premium received (Rs)

112

Buy 1 OTM put of strike price (Rs)

9400

Premium paid (Rs)

51

Lot Size

75

Net Premium received (Rs)

216

Expiration value of Box

200

Risk-free arbitrage

16

Suppose Nifty is trading at 9500. Short Box Spread is currently trading at Rs 216, the actual value of box on expiry should be 200. Since the current value of box is more than its expiration value, a risk free arbitrage of Rs 16 is possible. Selling the box will result in a net premium received of Rs 16,200 (216*75). The expiration value of the box is computed as: 9600-9400=200, which is Rs 15000 (200*75). Since you have collected Rs 216 for shorting the box, your profit comes to Rs 16 after buying it back for Rs 200. Therefore, risk-free profit would be Rs 1,200(16*75).

For the ease of understanding of the payoff, 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 Sold (Rs) 9400

Net Payoff from 1 OTM Call Bought (Rs) 9600

Net Payoff from 1 ITM Put Sold (Rs) 9600

Net Payoff from 1 OTM Put Bought (Rs.) 9400

Net Payoff (Rs)

8900

270

-115

-588

449

16

9000

270

-115

-488

349

16

9100

270

-115

-388

249

16

9200

270

-115

-288

149

16

9300

270

-115

-188

49

16

9400

270

-115

-88

-51

16

9500

170

-115

12

-51

16

9600

70

-115

112

-51

16

9700

-30

-15

112

-51

16

9800

-130

85

112

-51

16

9900

-230

185

112

-51

16

10000

-330

285

112

-51

16

Impact of Options Greeks before expiry:

Overall Greek impact on this strategy will be neutral as this strategy provides risk free return.

Analysis of Short Box Spread:

A Short Box Spread is only used when the value of box is overpriced, so you can short and hold the position till expiry. However, this strategy should be used by advanced traders as the gain from short box is very minimal, the commission payable when implementing this strategy can wipe out all the profits, so this strategy should only be implemented when the charges paid are lower than the expected profit.