FAQs

Stocks are one of the most effective tools for building wealth, as stocks are a share of ownership of a company. You thus have great potential to receive monetary benefits when you own stock shares. Owning stocks of fundamentally strong companies simply lets your money work harder for you since they appreciate in value over a period of time while also offering rich dividends on a periodic basis.

Traditionally, indices have been used as information sources. By looking at an index we know how the market is faring. This information aspect also figures in myriad applications of stock market indices in economic research.

Derivatives are financial contracts that derive their value from an underlying asset. These could be stocks, indices, commodities, currencies, exchange rates, or the rate of interest. These financial instruments help you make profits by betting on the future value of the underlying asset. So, their value is derived from that of the underlying asset. This is why they are called ‘Derivatives’. The value of the underlying assets changes every now and then. For example, a stock’s value may rise or fall, the exchange rate of a pair of currencies may change, indices may fluctuate, commodity prices may increase or decrease. These changes can help an investor make profits. They can also cause losses. This is where derivatives come handy. It could help you make additional profits by correctly guessing the future price, or it could act as a safety net from losses in the spot market, where the underlying assets are traded.

Suppose you buy a Futures contract of Infosys shares at Rs 3,000 – the stock price of the IT company currently in the spot market. A month later, the contract is slated to expire. At this time, the stock is trading at Rs 3,500. This means, you make a profit of Rs. 500 per share, as you are getting the stocks at a cheaper rate. Had the price remained unchanged, you would have received nothing. Similarly, if the stock price fell by Rs. 800, you would have lost Rs. 800. As we can see, the above contract depends upon the price of the underlying asset – Infosys shares. Similarly, derivatives trading can be conducted on the indices also. Nifty Futures is a very commonly traded derivatives contract in the stock markets. The underlying security in the case of a Nifty Futures contract would be the 50-share Nifty index.

A futures contract is an agreement between two parties – a buyer and a seller – wherein the former agrees to purchase from the latter, a fixed number of shares or an index at a specific time in the future for a pre-determined price. These details are agreed upon when the transaction takes place. As futures contracts are standardized in terms of expiry dates and contract sizes, they can be freely traded on exchanges. A buyer may not know the identity of the seller and vice versa. Further, every contract is guaranteed and honored by the stock exchange, or more precisely, the clearing house or the clearing corporation of the stock exchange, which is an agency designated to settle trades of investors on the stock exchanges. Futures contracts are available on different kinds of assets – stocks, indices, commodities, currency pairs and so on. Here we will look at the two most common futures contracts – stock futures and index futures.

At the basic level, there are 2 types of options:

1. Call option (CE) – In simple terms, you buy call if bullish or sell call if bearish.
2. Put option (PE) – Again simply put, you buy put if bearish or sell put if bullish.

Based on option price w.r.t price of underlying stock/index, there are 3 types of options:

1. OTM – Out of money options – e.g. if NIFTY is trading at 8317 currently, all CE’s above strike of 8300 i.e. 8400, 8500, 8600 etc are OTM options. Similarly all puts below 8300 are OTM.
2. ATM – At the money – Options where strike price is same as price of underlying stock/index. e.g. Coal India is trading at about 340. So, 340 CE & PE are ATM options.
3. ITM – In the money – These are CE’s where strike is below spot (spot is current price of underlying stock/index) or PE’s where strike is above spot e.g. all CE’s below 8400 are ITM.

One advantage of option trading as compared to stock trading is the amount of flexibility, you have lots of option strategies to make money in any kind of market –

1. Stocks going up
2. Stocks going down
3. Stocks remaining stagnant or range bound

Another advantage is that your money is always liquid. This being a long term investment group, this may not be a consideration for people, but to make money from stocks, you need to block your capital for comparatively longer period of time.

Whereas, in options, mostly trades are held maximum till expiry of current month, which is last Thursday of every month. So, you make money without really blocking your capital.

All FNO stocks & major indices like NIFTY, BANKNIFTY etc can be traded.

But in Indian stock market, most of the stock options are illiquid & hence pose a big risk of getting stuck in case stock makes an unfavorable movement.

So, always trade in liquid options.

Some of the stocks which are amply liquid are – Reliance, Bharti, DLF, Coal India, Infy, Tata Steel etc.

Out of some 200 FnO stocks, there are about 40-45 stocks where current month options are reasonably liquid.

So, do not trade outside of these instruments.

NIFTY is a great instrument for options trading for following reasons:

1. Highly liquid.
2. Huge option of strikes available which can be used in different option strategies.
3. Even options of next few months are reasonably liquid which can be used in strategies like Calendar Spreads where you combine options of this month & next month expiries.

2 ways viz. Through the dedicated dealer provided to you [Offline Services] & by login to any of the Online products provided to you.

Yes, in selected commodities [Agri/Gold/Silver]

How will you benefit from Currency Trading?