Trading - What is trading?

Everybody is familiar with the term “trading? Most of us have traded in our everyday life, although we may not even know that we have done so. Essentially, everything you buy in a store is trading money for the goods you want. Now you will learn how to trade the financial markets online ?but exactly what is online trading? This article will give you an understanding of how trading can be defined and how online trading works.

The principles of trading

The term trading means exchanging one item for another. In the financial markets, you either buy something for one price and sell it again for another, hopefully at a higher price for a profit, or you sell something for one price and buy it again for another, hopefully lower price for a profit. The term “trading?simply means “exchanging one item for another? We usually understand this to be the exchanging of goods for money or in other words, simply buying something. When we talk about trading in the financial markets, it is the same principle. Think about someone who trades shares. What they are actually doing is buying shares (or a small part) of a company. If the value of those shares increases, then they make money by selling them again at a higher price. This is trading. You buy something for one price and sell it again for another ?hopefully at a higher price, thus making a profit and vice versa.

Increase in demand means an increase in price

 

An increase in demand means an increase in price. For example, if a market stall owner is selling apples, and more people enter the market, he may raise the price because these customers are willing to pay to make sure they can get an apple. We can explain this using a simple everyday example of buying food. Let’s say you are in a market and there are only ten apples left on a stall. This is the only place where you can buy apples. If you are the only person and you only want a couple of apples, then the market stall owner will most likely sell them to you at a reasonable price. Now let's say that fifteen people enter the market and they all want apples. To make sure that they will actually get them before the others do, they are willing to pay more for them. Hence, the market stall owner can put the price up, because he knows that there is more demand for the apples than supply of them. Once the apples reach a price at which the customers think they are too expensive, they will then stop buying them. When the market stall owner realises that he is not selling his apples anymore because they are too expensive, he will stop raising the price and it may come back down to a level, at which customers will start to buy the apples again.hot pants

Increase in supply means a decrease in price

 

An increase in supply means a decrease in price. For example, if another market stall owner enters the market, there are now more apples for the customers. The first owner may drop his price to entice those customers to his stall. Let’s say that suddenly another market stall owner comes into the market and has even more apples to sell. The supply of apples has now increased dramatically. It stands to reason that the second market stall owner may want to sell apples at a cheaper price than the first stall owner to entice customers. It also stands to reason that the customers would probably want to buy at the lower price. Seeing this, the first stall owner will most likely bring his prices down. The sudden increase in supply has therefore brought the price of the apples down. The price at which demand matches supply is called the “market price? i.e. the price level at which both the market stall owner and the customers agree on both a price and number of apples sold.

Application to the financial markets

 

The concept of supply and demand is the same in the financial world. If a company posted some great results and is paying very good dividends, then more people want to buy the shares of the company. This increased demand will lead to an increase of the price of those shares.

What is online trading?

 

For a long time financial trading was purely conducted electronically between banks and financial institutions. This meant that trading in the financial markets was closed to anyone outside of these institutions. With the development of high speed Internet, anyone who wanted to become involved in trading was able to do so online. Almost anything can be traded online: stocks, currencies, commodities, physical goods and a whole host of other things ?at this stage, you do not need to worry about all of these. For now, just keep in mind that if something can be traded, it will be traded.

What is the difference between investing and trading?

 

Investing and trading are two very different methods of attempting to profit in the financial markets. The goal of investing is to gradually build wealth over an extended period of time through the buying and holding of a portfolio of stocks, baskets of stocks, mutual funds, bonds and other investment instruments. Trading, on the other hand, involves the more frequent buying and selling of stock, commodities, currency pairs or other instruments, with the goal of generating returns that outperform buy-and-hold investing. While investors may be content with a 10 to 15% annual return, traders might seek a 10% return each month. Trading profits are generated through buying at a lower price and selling at a higher price within a relatively short period of time. The reverse is also true: trading profits are made by selling at a higher price and buying to cover at a lower price (known as "selling short") to profit in falling markets.

What is the difference between investing and trading?

 

A trader's "style" refers to the timeframe or holding period in which stocks, commodities or other trading instruments are bought and sold. Traders generally fall into one of four categories:

  • Position Trader ?positions are held from months to years
  • Swing Trader ?positions are held from days to weeks
  • Day Trader ?positions are held throughout the day only with no overnight positions
  • Scalp Trader ?positions are held for seconds to minutes with no overnight positions
Traders often choose their trading style based on factors including: account size, amount of time that can be dedicated to trading, level of trading experience, personality and risk tolerance. Both investors and traders seek profits through market participation. In general, investors seek larger returns over an extended period through buying and holding. Traders, by contrast, take advantage of both rising and falling markets to enter and exit positions over a shorter timeframe, taking smaller, more frequent profits.


Stock Trading Terminology Stock/Share Market Terminology

Understanding the stock trading terminology is a necessary step for anyone interested in the stock market.

  • Averaging Down: This is when an investor buys more of a stock as the price goes down. This makes it so your average purchase price decreases.
  • Bear Market: This is trading talk for the stock market being in a down trend, or a period of falling stock prices. This is the opposite of a bull market.
  • Beta: A measurement of the relationship between the price of a stock and the movement of the whole market. If stock XYZ has a beta of 10, that means that for every 1 point move in the market, stock XYZ moves 10 points and vice versa.
  • Blue Chip Stocks: These are the large, industry leading companies. They offer a stable record of significant dividend payments and have a reputation of sound fiscal management. The expression is thought to have been derived from blue gambling chips, which is the highest denomination of chips used in casinos.
  • Bull Market: This is when the stock market as a whole is in a prolonged period of increasing stock prices. Opposite of a bear market.
  • Broker: A person who buys or sells an investment for you in exchange for a fee (a commission).
  • Buy and Hold: to buy and hold is a long term stock trading strategy. It implies buying stocks and keeping them for a long period of time before selling them. For a good number of stocks, it is historically a sound strategy, as the stock market has always gone up as a whole in the long run.
  • Capital Gain: when the value of an asset exceeds its purchase price, the increase is called capital gain. Capital gain is either realized or unrealized, depending on whether the assets have actually been sold or not.
  • Capital Loss: when there is a decrease in an asset’s current value versus its purchase price, there is a capital loss.
  • Day Trading: The practice of buying and selling within the same trading day, before the close of the markets on that day. This is what Tim typically does, although he does have a long-term portfolio as well. Traders that participate in day trading are often called “active traders?or “day traders.?/li>
  • Dividend: this is a portion of a company’s earnings that is paid to shareholders, or people own that company’s stock, on a quarterly or annual basis. Not all company’s do this.
  • Exchange: An exchange is a place in which different investments are traded. As NSE National Stock Exchange or BSE Bombay Stock Exchange.
  • Execution: When an order to buy or sell has been completed. If you put in an order to sell 10 shares, this means that all 10 shares have been sold.
  • Equity: equity represents ownership in a corporation, in the form of common or preferred stock. It can also be interpreted, in the case of futures or margin accounts, as the net value of the account if all positions were to be closed and margins paid off.
  • Going Long: going long means that a trade is done with the expectation that profit will come from an increase in the exchange rate. It the most intuitive and optimistic way a trade can be profitable.
  • Going Short (Selling Short): going short is the opposite of going long; it occurs when a trader is confident in making profit from a drop in the value of the traded assets.
  • Growth Strategy (growth stock): betting on growth stock is a stock trading strategy in which a trader aims at generating capital gains rather than dividends. Growth stocks are expected to grow at a rate superior than the average, and growth companies usually reinvest earnings. Technology companies often classify themselves as growth companies.
  • Hedge: This is used to limit your losses. You can do this by taking an offsetting position. For example, if you hold 100 shares of XYZ, you could short the stock or futures positions on the stock.
  • Index: An index is a benchmark which is used as a reference marker for traders and portfolio managers. A 10% may sound good, but if the market index returned 12%, then you didn’t do very well since you could have just invested in an index fund and saved time by not trading frequently.
  • Initial Public Offering (IPO): The first sale or offering of a stock by a company to the public, rather than just being owned by private or inside investors.
  • Large Cap: large cap stands for large capitalization, and refers to companies with a market capitalization value of 10 billion US dollars or more.
  • Margin: A margin account lets a person borrow money (take out a loan essentially) from a broker to purchase an investment. The difference between the amount of the loan, and the price of the securities, is called the margin.
  • Moving Average: A stock’s average price-per-share during a specific period of time. Some time frames are 50 and 200 day moving averages.
  • Mid Cap: mid cap and refers to corporations with a market capitalization value between 2 and 10 billion US dollars.
  • Order: An investor’s bid to buy or sell a certain amount of stock or option contracts. You have to put an order in to buy or sell 100 shares of stock.
  • Overweight: being overweight means that an investor’s portfolio holds more of a particular type of stock compared to the weight of that type of stock, in the relevant index. For instance, if an investor’s portfolio is comprised of 30% Growth stocks, and that Growth stocks represent 20% of the associated index, the portfolio is referred to as ?0% overweight?in Growth stocks.
  • Portfolio: A collection of investments owned by an investor. You can have as little as one stock in a portfolio to an infinite amount of stocks.
  • Quote: Information on a stock’s latest trading price. This is sometimes delayed by 20 minutes unless you are using an actual broker trading platform.
  • Rally: A rapid increase in the general price level of the market or of the price of a stock.
  • Sector: A group of stocks that are in the same business. An example would be the “Technology?sector including companies like Apple and Microsoft.
  • Spread: This is the difference between the bid and the ask prices of a stock, or the amount someone is willing to buy it and someone is willing to sell it.
  • Stock Symbol: A one-character to three-character, alphabetic root symbol, which represents a publically traded company on a stock exchange. Apple’s stock symbol is AAPL
  • Shorting: shorting, or short selling, or going short, means that an investor, hopeful that some assets?value will drop, borrows them from a third party (a broker, most often), sells them, and makes the promise of returning the assets at a later time. The profit made is the difference between the price of the assets when sold versus its price when they were bought back. This can obviously yield a loss for the trader if the value goes up.
  • Small Cap: small cap, or small capitalization corporations, typically hold a market capitalization of between 300 million and 2 billion US dollars.
  • Spread: the spread for a security or asset is the difference between the current ask and the current bid price.
  • Volatility: volatility is a measure of risk for a security. It refers to the standard deviation of a security’s price over a certain period of time. High volatility means that the price of the security tends to move up and down quickly over a determined period of time, making it more risky.
  • Volume: The number of shares of stock traded during a particular time period, normally measured in average daily trading volume.
  • Yield: This usually refers to the measure of the return on an investment that is received from the payment of a dividend. This is determined by dividing the annual dividend amount by the price paid for the stock. If you bought stock XYZ for $40-a-share and it pays a $1.00-per-year dividend, you have a “yield?of 2.5%

Trading Segments Difference Between Futures And Options (F&O) And Regular Cash Market

There are two segments that you can trade in the stock markets in India. One is the Futures and Options (F&O) market and the other is the cash market. The third of course is the IPO market, but, you do not trade here, because you can only buy and cannot sell. The difference between the cash market and the F&O segment can be explained with the help of this analogy. Let's say you buy a product. You either pay by cash or by credit card. In the cash segment of the stock exchange, you pay the entire amount in cash and the shares are delivered to you.When you buy an item on a credit card, you buy now and pay later. Difference Between Futures And Options (F&O) And Regular Cash Market In the futures segment, you buy shares and pay only a margin amount. You have to then square-off your position and sell the entire lot of shares. Let's make this even simpler. If you buy 100 shares of Bank of India you pay Rs 13,800, because the share price is at Rs 138. In the futures segment (F&O) you cannot buy 100 shares, because you have to buy in a minimum lot of 1, which is 1000 shares. So, you buy 1000 shares, but, you do not pay Rs 1,38,000, but only the margin amount, which could be anywhere between 10-20 per cent (mostly). So, you may end-up paying only Rs 25,000-30,000 in the futures and options market. If you had to buy a similar quantity in the cash market you would need to pay the entire amount of Rs 1,38,000. But, in the futures and options market (F&O) you have to sell the shares, within a maximum period of three months, depending on the contract you have purchased. In the cash segment, you can buy and hold for a lifetime and your children could inherit the shares. You do not have to sell.


So, the basic difference between the Futures and Options F&O segment and cash market is explained in the table below.

Futures Cash market
 Very high exposure, because you cannot trade in small amounts. Can buy even 1 share.
 You are not a shareholder You are a shareholder.
 You do not receive dividends, bonus, rights and other benefits. You receive dividends, bonus, rights and other benefits.
 Generally suitable for traders. Suitable for long term investors.
 Highly risky. Not very risky for long term investors.
 Have to sell or square-off your position. Can keep the shares for a lifetime.

F& O Trading Frequently Asked Questions about F&O Trading

1. What is Derivative (Futures and Options) Trading?

Like share trading in the cash segment (buy & sell shares), derivative is another kind of trading instrument. They are special contracts whose value derives from an underlying security.

Futures and Options (F&O) are two types of derivatives available for the trading in India stock markets.

In futures trading, trader takes the buy/sell positions in an index (i.e. NIFTY) or a stock (i.e. Reliance) contract. If, during the course of the contract life, the price moves in traders favor (rises in case you have a buy position or falls in case you have a sell position), trader makes profit. In case the price movement is adverse, trader incurs losses.

Few fundamental things you should know about F&O trading:

  • The F & O segment accounts for most trading across stock exchanges in India. They are the most popular trading instruments worldwide.
  • To take the buy/sell position on index/stock futures, trader has to place certain % of order value as margin. Which mean if a trader buy future contract worth of Rs 5 Lakhs, he pays just around 10% cash to broker (known as margin money) which is Rs 50,000. This gives opportunity to trade more with little cash.
  • Profit or losses are calculated every day until trader sells the contract or it expires.
  • Margin money is calculated every day. Which means if the trader doesn't have enough cash (margin money) in his account (on any day when trader is holding the position), he has to deposit the margin money to broker or broker can sell his F&O contract and recover the money.
  • Unlike stocks; derivative has an expiry. Which means if trader do not sell until a pre-decided expiry date, the contract is expired and profit or loss is shared with you by the broker.
  • Future Trading can be done on the indices (Nifty, Sensex etc). NIFTY Futures are among the most traded future contracts in India.

2. Why should I trade in F&O?

  • With futures trading, trader can leverage on trading limit by taking buy/sell positions much more than what you could have taken in cash segment. However, the risk profile of your transactions goes up.
  • Settlements are done on daily basis (MTM) until the contract expires. Profits/losses are calculated (and credited/debited in traders account) on end of the day every day.
  • Demat account is not needed for F&O trading. All futures transactions are cash settled. Contract positions are hold by the exchanges until they expire.
  • The F&O positions are carrying forward to next day and can be continued till the expiry of the respective contract and squared off any time during the contract life. This is different from 'Margin Trading' where trader has to close the position the same day.

3. What are different types of Equity Futures & Options available in India?

In the Futures and Options segment at NSE and BSE; trading is available in mainly two types of contracts:

1. Index Futures & Options

At NSE; Index F&O are available for 6 indices. This includes; CNX Nifty Index, CNX IT index, Bank Nifty Index and Nifty Midcap 50 index.

  • CNX Nifty Index (based on the Nifty index.)
  • CNXIT Index (based on the CNX IT index)
  • CNX Infrastructure Index (based on the CNX Infrastructure index)
  • CNX PSE Index (based on the CNX PSE index)
  • Nifty Midcap 50 Index ( based on the Nifty Midcap 50 index)
  • BANK Nifty Index (based on the BANK NIFTY index)

Similar way BSE offers trading in future for underlying assets as following indexes:

  • SENSEX
  • BSE100
  • BSETECK
  • BANKEX

2. Futures & Options on Individual Securities

Stock exchanges offer F&O contracts for individual scripts (i.e. Reliance Infra, Coal India etc.); which are traded in the Capital Market segment of the Exchange.

NSE offers F&O trading in 135 securities stipulated by the SEBI. The stock exchange defines the characteristics of the futures contract such as the underlying security, market lot, and the maturity date of the contract.

3. Why all stocks are not available for F&O trading?

F&O contracts of individual companies are not available for all the companies listed in stock exchanges. Only those stocks, which meet the criteria on liquidity and volume, have been considered for futures trading. Or companies whose shares have high liquidity and volume of trades at stock exchanges are eligible for F&O trading.

Stock exchange decides which company's F&O contracts can be traded at the exchange.

4. What does 'Square off' means in future trading?

'Square off' means selling a future position.

For example; if you buy 1 lot of NIFTY future on 20th Aug 2014 and decide to sell it on 24th Aug 2014; you actually square off your future position.

5. Can I sell (or square off) the F&O Contract before expiry date?

Yes, you can sell the contract (or square off the open position) anytime before the expiry date. If you do not sell the contract by expiry date; the contract get expired and profit / loss is shared with you.

6. What does Cover Order' mean?

The order place to sell square off in advance an open future position is called cover order.

7. What are different types are settlements for Futures?

Future contracts are settled in two ways:

  • Daily Mark to Market (MTM) Settlement :- The profits/losses are calculated on daily basis at the end of the day. MTM goes until the open position is closed (square off or sell). The next question and an example in the later part of this article will explain you MTM process in detail.
  • Final Settlement :- On the expiry of the futures contracts; the exchange marks all positions of a CM to the final settlement price and the resulting profit / loss is settled in cash.

8. What is Mark to Market (MTM) in Future Trading?

Note: MTM is the most important process in F&O trading and very little difficult to understand for conventional stock market investors who buy and sell shares for long term.

At the end of every trading day; the open future contracts are automatically 'marked to market' to the daily settlement price. This means; the profits or losses are calculated based on the difference between the previous day and the current day's settlement price.

In other words; MTM means every day the settlement of open futures position takes place at the closing price of the day. The base price of today is compared with the closing price of previous day and difference is cash settled.

i.e. For 1 lot of NIFTY Futures (50 shares) if

  • Previous Day Last Price (Brought Forward Price) = Rs 7629.55
  • Today Last Price (Carry Forward Price) = Rs 7678.00
  • Net Profit = (7678.00-7629.55)*50 = Rs 2422.50

Note:

  • After the profit/loss calculated; the future position is Carry Forward to next day.
  • The same process of MTM repeats and profit/losses are calculated again every day until the position is squared off or it expires.
  • Every day is like a fresh position until contract is sold or expires.
  • Through the profit/loss are credited/debited on daily basis in traders account; the brokerages / fees / taxes are only charged at the time of buying and selling future contract.
  • MTM is a very important concept and very important to understand for future stock traders.
  • End of Day EOD MTM is mandatory for future contracts.
  • The sample F&O Day Bills for couple of days to understand this concept.

9. Why different contracts are available for same index or stock? Explain the F&O Trading Cycle? What is F&O Contract life?

Equity futures & options are traded in 3 'trading cycles'. The 3 month trading cycle includes the near month (one), the next month (two) and the far month (three).

i.e. If current month is Aug 2014; the contracts available for NIFTY Futures are as below:



The contract life of the F&O contract is until the last Thursday of the expiry month. If the last Thursday is a trading holiday, then the expiry day is the previous trading day.

For example; in the above table; 28th Aug 2014 is the expiry of this month's contract. The contract life of this future contract is from today to 28th Aug 2014.

New contracts are introduced on the trading day following the expiry of the near month contracts. The new contracts are introduced for three month duration. This way, at any point in time, there will be 3 contracts available for trading in the market (for each security) i.e., one near month, one mid month and one far month duration respectively.

10. What is 'Expiry day' for F&O contract?

Futures contracts expire on the last Thursday of the expiry month. If the last Thursday is a trading holiday, the contracts expire on the previous trading day.

11. What is 'Margin' amount in future trading?

To start trading in futures contract, you are required to place a certain percentage of the total contract as margin money.

Margin is also known as a minimum down-payment or collateral for trading in future. The margin amount usually varies between 5 to 15% and usually decided by the exchange.

Note: This feature (only paying small margin money) makes F&O trading most attractive because of high leverage. You can make a larger profit (or loss) with a comparatively very small amount of capital using F&O trading.

Margin % differs from stock to stock based on the risk involved in the stock, which depends upon the liquidity and volatility of the respective share besides the general market conditions.

Normally index futures have less margin than the stock futures due to comparatively less volatile in nature.

The margin amount usually recalculated daily and may change during the life of the contract. It depends on the volatility in the market, script price and volume of trade. It is possible that when bought the future position; the margin was 10%; but later on due to the increased volatility in the prices, the margin percentage is increased to 15%.

In that scenario, trader will have to allocate additional funds to continue with open position. Otherwise broker can sell (square off) the future contract because of insufficient margin. Thus It is advisable to keep higher allocation to safeguard the open position from such events.

12. How is futures trading different from margin trading?

While buy/sell transactions in margin segment have to be squared off on the same day, buy/sell position in the futures segment can be continued till the expiry of the respective contract and squared off any time during the contract life.

Margin positions can even be converted to delivery if you have the requisite trading limits in case of buy positions and required number of shares in your demat in case of sell position. There is no such facility available in case of futures position, since all futures transactions are cash settled as per the current regulations. If you wish to convert your future positions into delivery position, you will have to first square off your transaction in future market and then take cash position in cash market.

Another important difference is the availability of even index contracts in futures trading. You can even buy/sell indices like NIFTY in case of futures in NSE, whereas in case of margin, you can take positions only in stocks.

Trade in Equity Futures In 3 Easy Steps

Below example demonstrate how to buy and sell one lot of NIFTY Future.

Step 1: Buy Equity Future

Assuming that you have an account with a share broker in India to trade in F&O segment; the first step is to buy (or sell in case of short-selling futures) a future contract. You can visit NSE or BSE websites to check the available future contracts for indexes as well as securities.

In this example; we will buy 1 lot of NIFTY ( 50 shares). Note that you can buy/sell the F&O contracts only in lots. The lot size is different from contract to contract.

Placing a buy order is pretty simple and similar to buying shares for delivery.

Below screenshot shows that we are placing an order to by 1 lot (50 shares) of NIFTY Futures at the price of Rs 7643.90.



In above 'buy order entry' form some of the important fields are:

  • Exchange segment = NFO (NSE F&O segment)
  • Inst Name (Instrument Name) = FUTIDX (Future Index)
  • Symbol = NIFTY
  • Expiry = 25Sep2014
  • Share Quantity = 50

Step 2: Hold Equity Future

You hold the equity future contract until you sell it or it expires on predefined expiry day (in our case its 25th Sept 2014). In this example we will hold the F&O contract for 7 days and then sell it.

For each day we hold the contract, the broker send a 'Future & Options Day Bill' along with few other statements including margin statement, client ledger detail, contract note etc.

The F&O day bill provides the accounting information of the contract on daily basis. Let's go through the F&O day bills for each day and discuss the accounting:

Day 1:

  • Buy Price (NIFTY): 7643.90
  • Close Price (NIFTY): 7629.55

Below is the Future & Options Day Bill for end of day 1, the day when we bought the contract. Let's check few useful fields in this.

  • Brokerage: The Rs 20 (as I placed this order though Trade Hut, The flat fee discount broker) is debited by the broker as brokerage charge. Brokerage is charged on the day when we buy the F&O contract and the day when we sell it.
  • Regular Trade: This is used for buy & sell transaction. It show which F&O script you bought, its expiry date, quantity, Rate at which you bought it and total amount (Rs 3,82,195). Note: Though total debit amount is Rs 3.82 Lakhs; it doesn't mean you have to pay this much amount. It's just for accounting. You pay only margin amount to the broker for this trade, which is around 10% of total amount (i.e. Rs 38,219).
  • Carry Forward: As we decided to hold the position for next few days; our F&O contract will be carry forward. The 'Carry Forward' value of the contract is decided by the exchange at the end of the trading day. In our case it's Rs 7629.55 (NIFTY actually fall on day 1). Based on this rate; the total credit to our account is Rs 381477.50.
  • Net (Profit / Loss): Day 1 accounting shows the loss of Rs 717.50. Various taxes and charges (applicable on buy transaction) are added to our losses and net due to us is now Rs 787.97. This is the amount broker will take from our account by end of the day.


Contract Note - Buy NIFTY F&O

For buy and sell transactions of F&O contract, broker send a contract note. Below is the contract note received from broker on Day 1. The next contract note will be send to you on the day you sell the contract.



Client Account Ledger Details:

Brokers also share the ledger detail with the client with a 'client account ledger detail' document. This document provides you detail about all the financial transaction done by broker on day 1



Day 2 (Market Close on Saturday):

On day 1 I decided to carry forward the F&O position. But on day 2 the market is closed as its Saturday. Note that the position is now name as 'Brought Forward'.

  • Brought Forward: The F&O position which is brought forward from previous day.
  • Brought Forward Price (NIFTY): 7629.55
  • Close Price (NIFTY): NA


Note: The above day bill doesn't have any 'Carry Forward' position as the market was closed.

Day 3 (Market Close on Sunday):

  • Brought Forward: The F&O position which is brought forward from previous day.
  • Brought Forward Price (NIFTY): 7629.55
  • Close Price (NIFTY): NA


Note: The above day bill doesn't have any 'Carry Forward' position as the market was closed.

Day 4

  • Brought Forward Price (NIFTY): Rs 7629.55
  • Close Price (NIFTY): Rs 7678.00

This is the first trading day (Monday) for NIFTY future and it went up around 50 points. Now let's check the accounting for Day 4:

  • Brought Forward: The contract values from last day. It's similar to the 'Carry Forward' row in last trading day's day bill.
  • Carry Forward: On day forward we decided to carry forward the F&O contract (or decided not to sell it). NIFTY futures went up and NIFTY Sept Contract, which we are holding went up Rs 48.45 (closed at Rs 7678.00). This way end of the day the amount credited to our account is Rs Rs 3,83,900 and we made profit of Rs 2422.

The net profit of Rs 2422 is credited to the account.



Day 5

  • Brought Forward Price (NIFTY): Rs 7678.00
  • Close Price (NIFTY): Rs 7781.70

Similar to previous day, we decided to carry forward the future contract. The price went up by Rs 103.7 and we made decent profit of Rs 5185.00.



Day 6

  • Brought Forward Price (NIFTY): Rs 7781.70
  • Close Price (NIFTY): Rs 7779.55

Again we decided to carry forward the contract. The price remain flat and actually went down by Rs 2.15, loss of Rs 107.50.



Step 3: Sell Equity Future

On day 7 I decided to sell the contract for Rs 7800.00. Here is my transaction:



Day 7:

  • Brought Forward Price (NIFTY): Rs 7779.55
  • Sell Price (NIFTY): Rs 7800.00

Below is the Future & Options Day Bill from day 7, the day when we sold the contract.

  • Brokerage: The Rs 20 is charged by the broker as brokerage charge. This is similar to how we paid brokerage on day 1 when we buy the F&O Contract.
  • Regular Trade: The sell transaction is captured here.
  • Net (Profit / Loss): Day 7 accounting shows the profit of Rs 1022.50. After deducting taxes and brokerage; we made net profit of Rs 947.15. This is the amount broker will pay us on Day 7.


Note: The above day bill doesn't have any 'Carry Forward' position as the market was closed.

Days Net Profit/Loss
Day 1 -787.97
 Day 2 0
 Day 3 0
 Day 4 +2422.50
 Day 5 +5185.00
 Day 6 -107.50
 Day 7 +947.15
 Total Profit / Loss+7659.18

Brokerage Paid:

Days Brokerage Paid
Day 1 (Buy) 20
 Day 7(Sell) 20

Tips for a beginner in F&O trading

  • F&O trading is about predicting the future, which is not an easy in any way, shape, or form.
  • F&O trading is very high risk financial instrument. More risk you take while F&O trading, more rewards you will get. At the same time, the losses are also huge.
  • The concept of margin money (or only paying small money upfront for large positions) makes F&O trading most attractive. You can make a larger profit (or loss) with a comparatively very small amount of capital using F&O trading.
  • If enough margin money is not available in your account with the broker; most brokers closes the position automatically without informing you. Especially at the time of sudden falls in stock markets, short of margin may cause huge losses.

Intraday Trading Important Points About Intraday Trading.

What is IntraDay Trading

Intraday trading as the name suggests refers to the trading system where you have to square-off your trade on the same day. Squaring off the trade means that you have to do the buy and sell or sell and buy transaction on the same day before the market close. Intraday Trading is also referred to as Day trading by many traders.

Lets explain Intraday trading with an example.

Suppose that you have bought 100 stocks of XYZ limited during the open market hours, then you have to sell the same no. of stocks of XYZ limited before market closure. Same is the case if you have sold the stocks, you have to buy the same quantity of the stock you have sold earlier. In online trading platforms when you are making an intraday transaction, you have to explicitly specify (as shown below) that it is a Intraday transaction while placing the order. However in case of a buy transaction you always have the option to change it to delivery later before the market close.


In most of the online trading platforms positions bought under intraday trading are squared off automatically if not done by you before the market closure.

Difference between buying stocks on intraday basis and delivery basis.

Intraday trading, as the name suggests, is trading stocks within trading hours in a single day. Many new investors and traders are keen to know about how intraday trading works. To begin with, you buy shares when the price is low and sells them when the price is high, thus taking advantage of the price movement. You can use real-time charts to identify these price movements and make profits. On the other hand, if you purchase and hold shares overnight, then you take delivery of shares. This is known as delivery trading. In the delivery method, stocks are transferred to your demat account. You can sell these stocks for either a short-term period (maybe next day) or after a few weeks, months or years. The benefit of intraday trading is that the cost of brokerage is low compared to delivery trading. Also, you receive margin profits the same day as opposed to delivery trading.


How to Go About Intraday Trading

It is important to understand the fundamentals of intraday trading in order to make consistent profits. A good tip is to trade with the current market trend. If the market is falling, sell first and buy later, and vice versa. Make an intraday trade plan and stick to the plan. Set your desired profit and stop-loss limit. Do not be greedy. Instead, book your profits at regular intervals. Maintain stop-loss levels. It helps you to limit your loss if the market does not perform. Also, choose highly liquid shares and trade in a small number of shares at a time, if you are not a seasoned trader.


Things to know about Intraday

Consistent Profit

Most traders have a straight and simple goal - to make consistent profits. The best day trading strategy you can implement to achieve this is to buy when the stock moves above the Opening Range high and sell when the stock moves below the Opening Range low. In the first 30 minutes of day trading, each stock creates a range, known as the opening range. The fluctuations of this range are taken as support and resistance. If the stock movement is observed to cross the Opening Range high, then it is advisable to buy. Similarly, you can sell when stock movement is observed below the Opening Range low. This strategy can give you consistent profits if done with discipline, proper assessment of the market performance and optimal usage of indicators.

Keeping Stop loss

Keeping stop loss is very important for intraday trade. Otherwise one will loose heavily. Where to keep stop loss is a very important question. Again previous days intraday charts will help. If one shorted in a stock, keep stop loss at previous days high or days high. Also if bought, keep stop loss at previous days lows, or days lows. Another thing to remember is keep trailing stop loss and revise stop loss when one is in profit. Instead of booking profit, one can keep stop loss for profit and can revise according to upward movement. Normally this will help a lot in intraday trade.

Panic and Greedy

The two things to avoid in stock market and particularly in intraday trade is panic and greedy. When one enters in a trade and goes in opposite direction, don’t be panic. Wait some time, keep strict stop loss. If stop loss triggers, don’t enter again. Wait some time and relax, watch the market trend and enter in some other stocks. Another thing to avoid is greediness. Some people will not book profit and wait for more and more profit. But such people will end up in loss only. In intraday trade book profit in every highs. Wait for a dip and enter again if trend sustains.

Timing for successful Intraday trade

The best time to enter for intraday trade is after 20 to 30 minutes when the market opens. Some people will jump in the market at the opening bell itself. It is risky always. Watch the market in the early trades and find out the trend. First enter in some small quantity, say 25% of the quantity one is intended to buy. Then buy more in the next 10 to 15 minutes. The trend observed is intraday trading is stocks will shoot up till after 45 to 1 hour when the market opens. This is the best time to book profit. Once booked profit in a particular stock, better wait some time and watch the next movement and enter accordingly.

Things to learn to do Day Trading safely :

As the gain is great in day trading so is the loss. Main Mistake usually done by the beginners is to do over trading. This of course will land them in loss and then they frantically try to get that money back probably making more mistakes.

?Day Traders must dedicate their time from starting till closing

?Avoid investing in penny stocks that have very low liquidity

?Concentrate only on one or two stocks so that it will be easier for you to follow them online.

?When beginners buy stocks, determine the entry and target prices well in advance so that they need not miss maximum gains from market upside

?It is always better to buy the stocks of the company that has met with good financial gains or has announced good news.

?Intelligent use of stop loss facility must be practiced for safe trading.

? Trading should be done only with the spare money, the money you don’t need and can afford to loose. Trading, although very profitable ,is associated with substantial risk.

? Overtrading is suicidal. More trades become difficult to manage .So trade only that quantity you are comfortable with.

? Discipline is the major quality of the successful traders. Avoiding overtrading, not fighting against the trend and cutting short losses and keeping fear and greed emotions out of the trading are some important steps.

? ‘Trend is your Friend? So, always follow the trend and trade in that direction only. In up trending markets, select stocks which are strong on charts and have long positions. In down trending markets, select the weaker stocks and short them. Never trade against the trend.

? Exit Strategy is really important. Take your profits and get out of the market when your target are achieved. Letting the profits run beyond targets leads to greed which is dangerous for trading. You never know when the market will turn around and throw you in losses after eating all the profit.

?Don't ignore brokerage expenses, check time to time

?Don't try to guess tops or bottoms.

?Don't follow a blind man's advice. Try to find out holes in your strategy.

?Divide your risk capital in 2 equal parts. Never take risk more than 5% of your trading capital in a single trade.

? Never borrow money from someone for trading.

?Having contacts with other day traders and becoming a member of a network will be very useful for exchanging new ideas and news.


Best Theory For Calculation

Pivot Point Theory

Taking previous day’s trading prices of a stock ,we can calculate the support and resistance levels for that stock for the next day. Support and Resistance terms are self explanatory.A stock which is moving higher, may stop at resistance level and come back. Similarly, a stock moving lower, may stop at support level and reverse its move. After crossing first support or resistance level, stock is expected to move to next support or resistance level.

Coming to the Pivot Point Formula, we select a stock for Intraday Trading. For that stock, we need its previous day trading data- Intraday high price it touched ( H), intraday low price it touched ( L) and the previous day closing price ( C) for that stock.

Add theses three values- H+L+C=X.

Divide the total value by 3 (P) = X/3.

Multiply it by 2 :- X/3*2=Y

This value P is called the Pivot Point. Stock sustaining above Pivot Point is likely to move higher towards first resistance level and above that towards second resistance level. If stock continues to trade below the Pivot Point, it is likely to drift lower towards first support level and after that towards second support level.

Let’s calculate resistance and support levels.

First resistance level ( R1) = It is the difference between the {Pivot Point X 2} or Y and the Intraday Low price.

R1= Y-L

R2=P+( H-L)

First support level ( S1) = it is the difference between Y and the Intraday High price.

S1= Y-H

S2= P-(H-L).


Fraction Theory

This theory is also based on previous day price movements of a stock.

Add up high (H),low(L) and closing (C) price of previous day of the stock and multiply it by 0.67 (ratio of 2:3 as in pivot theory and it is constant)

(H+L+C)* 0.67=Y

Resistance (R1)= Y-L

Support (S1)= Y-H

Possible Buy (P.B.)= Y-C

Above possible buy (P.B.),buy the stock for resistance levels.


2652 Theory of intraday Trading

2652 Theory is based on previous day and present day High and Low prices of a stock. This theory has its own disadvantage that it makes you trade for gain of 0.5% while keeping your stop loss 1% lower .Your risk is double of your profit and using such strategy in day trading doesn’t make sense where probability of going wrong remains high.

You should also use technical analysis based on short-term charts for stock to know the trend and other indicators of technical analysis. Buy stock which show uptrend while look to short which are down trending.

The Intraday Chart with 15 Minute interval remains best for effective Intraday trade, though you may use any interval like 1 Minute,5 Minute or 10 Minute. Prefer to use trend lines on Intraday Charts to take buy or sell call on your trade.5 Minute Bar Chart can be a good method to use trend lines for Intraday Trading.


Commodity Trading

What is the 'Commodity Market'

A commodity market is a physical or virtual marketplace for buying, selling and trading raw or primary products, and there are currently about 50 major commodity markets worldwide that facilitate investment trade in approximately 100 primary commodities.

Commodities are split into two types: hard and soft commodities. Hard commodities are typically natural resources that must be mined or extracted (such as gold, rubber and oil), whereas soft commodities are agricultural products or livestock (such as corn, wheat, coffee, sugar, soybeans and pork).

The four categories of trading commodities include:

?Energy (including crude oil, heating oil, natural gas and gasoline)

?Metals (including gold, silver, platinum and copper)

?Livestock and Meat (including lean hogs, pork bellies, live cattle and feeder cattle)

?Agricultural (including corn, soybeans, wheat, rice, cocoa, coffee, cotton and sugar)

Commodity Exchanges in India

Commodity trading is progressively becoming a prominent business in India. To facilitate this trading there are various exchanges setup in India. These exchanges are the center of the trading of various commodities. The two important commodity exchanges in India are as follows :

?Multi Commodity Exchange of India (MCX)

?National Commodities and Derivatives Exchange Limited (NCDEX)

The main Indian commodity exchange is the Multi Commodity Exchange of India (MCX). The other very famous commodity exchange is National Commodities and Derivatives Exchange Limited (NCDEX). NCDEX is located in Mumbai and offers facilities in more than 550 centers in India.

MCX features amongst the world's top three bullion exchanges and top four energy exchanges. MCX is the only Exchange in India to have such investment and technical support from the commodity pertinent institutions. The day-to-day operations of the Exchange are administered by the experienced and qualified professionals with perfect integrity and expertise.

Who Regulates Commodity markets?

SEBI regulates Commodity Derivative Markets Since September 2015. Prior to that Forward Market commission, Overseen by Ministry of Consumer Affairs regulated Commodities.

BREAKING DOWN 'Commodity Market'

There are numerous ways to invest in commodities. An investor can purchase stock in corporations whose business relies on commodities prices, or purchase mutual funds, index funds or exchange-traded funds (ETFs) that have a focus on commodities-related companies. The most direct way of investing in commodities is by buying into a futures contract. A futures contract obligates the holder to buy or sell a commodity at a predetermined price on a delivery date in the future.

Futures prices evolve from the interaction of bids and offers emanating from all over the country - which converge in the trading floor or the trading engine of an Exchange. The bid and offer prices are based on the expectations of prices on the maturity date.

Futures Contracts

Each type of commodity that trades on the commodity futures exchanges has specifications unique to that commodity. Contract specifications will include the quantity of the commodity per contract, contract delivery dates and minimum contract price changes. For example, the futures contract for corn calls for the delivery of 5,000 bushels of No. 2 yellow corn. Contract dates for corn are the end of the upcoming March, May, July, September and December. The minimum price fluctuation is one-quarter cent per bushel, equal to $12.50 per contract.

Features of commodity futures

1. Organized : Commodity Futures contracts always trade on an organized exchange, e.g. NCDEX, MCX, etc in India and NYMEX, LME, COMEX etc. internationally.

2. Standardized : Commodity Futures contracts are highly standardized with the quality, quantity, and delivery date, being predetermined.

3. Eliminates Counterparty Risk : Commodity Futures exchanges use clearing houses to guarantee that the terms of the futures contract are fulfilled. The Clearing House guarantees that the contract will be fulfilled, eliminating the risk of any default by the other party.

4. Facilitates Margin Trading : Commodity Futures traders do not have to put up the entire value of a contract. Rather, they are required to post a margin that is roughly 4 to 8% of the total value of the contract (this margin varies across exchanges and commodities). This facilitates taking of leveraged positions.

5. Closing a Position : Futures markets are closely regulated by government agencies, e.g. Forward Markets Commission (FMC) in India, Commodity Futures Trading Commission in (CFTC) USA, etc. This ensures fair practices in these markets.

6. Regulated Markets Environment : Commodity Futures contracts are highly standardized with the quality, quantity, and delivery date, being predetermined.

7. Physical Delivery : Actual delivery of the commodity can be made or taken on expiry of the contract. Physical delivery requires the member to provide the exchange with prior delivery information and completion of all the delivery related formalities as specified by the exchange.

Commodity Market Participants: Hedgers, Speculators and Arbitrageurs

An efficient market for commodity futures requires a large number of market participants with diverse risk profiles. Ownership of the underlying commodity is not required for trading in commodity futures. The market participants simply need to deposit sufficient money with brokerage firms to cover the margin requirements. Market participants can be broadly divided into hedgers, speculators and arbitrageurs.

1. Hedgers : They are generally the commercial producers and consumers of the traded commodities. They participate in the market to manage their spot market price risk. Commodity prices are volatile and their participation in the futures market allows them to hedge or protect themselves against the risk of losses from fluctuating prices. For e.g. a copper smelter will hedge by selling copper futures, since it is exposed to the risk of falling copper prices

2. Speculators : They are traders who speculate on the direction of the futures prices with the intention of making money. Thus, for the speculators, trading in commodity futures is an investment option. Most Speculators do not prefer to make or accept deliveries of the actual commodities; rather they liquidate their positions before the expiry date of the contract

3. Arbitrageurs : They are traders who buy and sell to make money on price differentials across different markets. Arbitrage involves simultaneous sale and purchase of the same commodities in different markets. Arbitrage keeps the prices in different markets in line with each other. Usually such transactions are risk free.

Commodity Futures as an Investment

Commodity futures are globally recognized to be a part of every successful and diversified investment portfolio. The fact that the returns from most of the commodities in the last 53 years from 1951 to 2006 have been higher than the global inflation rate, establishes that investments in commodity are an effective hedge against inflation.

Some of the reasons that make investing in commodity futures an attractive preposition are described below:

1. Leverage : Commodity Futures trading is done on margins. The investor only deposits a fraction of the value of the futures contract with the broker to cover the exchange specified margin requirements. This gives the investor greater leverage and thus the ability to generate higher returns

2. Liquidity : Unlike investment vehicles like real estate, investments in commodity futures offer high liquidity. It is equally easy to both buy and sell futures and an investor can easily liquidate his position whenever required. There is also another advantage of being able to use the profits from a trade elsewhere, without having to close the position

3. Diversification : Investments in commodity markets are an excellent means of portfolio diversification. For example, gold prices have historically shown a low correlation with most other asset prices (such as equities) and thus offer an excellent means for portfolio diversification.

4. Inflation Hedge : As the commodity prices determine price levels and consequently inflation, investing in commodity futures can act as a hedge against inflation.

5. Physical Gold : Physical Gold is a product by which retail and high net worth investors can take investment positions in dematerialized physical gold using the futures market. In this product, the investor can hold physical gold, in a safe deposit vault approved by the exchange, which is reflected in the investor's demat account. The main features of this are:

?Liquidity

?Assurance of purity

?Transparency of rates

?Safety

These features have attracted a large number of clients to the product since its introduction.

Commodities Traded in Commodity Exchanges :

Large numbers of commodity are traded on commodity exchanges in around the world. The commodities are classified on the basis of their use and consumption. Further classification is based on the characteristics of the commodity.



Holidays for the calendar year 2018 :

Market Timing & Holidays

Sr. No.DateDayDescription
126-Jan-2018FridayRepublic Day
213-Feb-2018TuesdayMahashivratri
302-Mar-2018FridayHoli
429-Mar-2018ThursdayMahavir Jayanti
530-Mar-2018FridayGood Friday
601-May-2018TuesdayMaharashtra Day
715-Aug-2018WednesdayIndependence Day
822-Aug-2018WednesdayBakri ID
913-Sep-2018ThursdayGanesh Chaturthi
1020-Sep-2018ThursdayMoharram
112-Oct-2018TuesdayMahatama Gandhi Jayanti
1218-Oct-2018ThursdayDasera
137-Nov-2018WednesdayDiwali-Laxmi Pujan*
148-Nov-2018ThursdayDiwali-Balipratipada
1523-Nov-2018FridayGurunanak Jayanti
1625-Dec-2018TuesdayChristmas