What is Share Market? A Simple but Holistic View on Share Market


What is Share Market?

A Simple but Holistic View on Share Market
Share Market
1. What is Day Trading?
Day Traders usually buy and sell (or sell first and then buy) securities (including Stocks, Bonds, Commodities, currency, options, futures etc) during the same day and, as a general rule, do not hold the securities overnight. They are therefore said to have “Zero Position? at the end of the day. (However some Brokers have started providing facility to square up the Buy-Trades on next market day). Many Day Traders make dozens of trades every day hoping to capture profits that arise from small intra-day price fluctuations.

 

2. What is Swing Trading?
Swing traders usually hold a security from one day to 2 weeks or so. Most of the swing traders concentrate on Breakouts on just a few selected High Volume stocks that they believe will likely make a significant move in price in the near-term.

 

3. What are Derivatives?
Derivatives are financial instruments which derive their value from the underlying assets or securitues. For example if a Buyer enters into a contract with a Seller to buy a specified number of shares (or Index/ Commodity) of a particular company at a specified price after a specified period, the buyer is said to have entered into a Futures contract.
It is interested to note that Buyer has bought the contract and not the stock of shares(or Index/ Commodity) under reference. This type of Future contract is called Derivative. There are many other type of Derivatives commonly used all over the world like Options, Convertibles and Warrants etc.

 

4. What are Futures?
It is an Agreement between the Buyer and the Seller for the Purchase or Sell of a Particular Asset ( like Equity Stock/ Index etc) at a Specified Price and on a specified future date (1 Month/ 2 Months/ 3 Months). It conveys an OBLIGATION on both Buyer and Seller to Fulfill the Terms of the Agreement. Futures are Settled on Last Thursday of the Specified Month and both buyer and seller have to pay minimum Initial Margin as per the requirement of stock exchange and account between buyer and seller is settled Everyday till the expiry of the Futures contract.

 

Nifty Future contract have a multiplier of 50 that means Nifty Futures contract gives rise to an obligation to deliver at settlement cash payment equal to 50 times the difference between the Nifty Index value at the close of the last trading day of the contract and the price at which the Futures Contract was negotiated.

 

Example
Suppose ‘A’ enters (Buys) a Nifty futures contract at 5600 for Nov.2007(expiring on last Thursday of Nov.) with ‘B’. Both ‘A’ & ‘B’ will deposite the required margin with the Stock exchange. On last Thursday of Nov., Nifty closes at 5750. Now ‘A’ will get Rs. 7500/- {( 5750-5600) x 50 = 7500} from ‘B’. In case Nifty closes at 5400, ‘B’ will get Rs. 10000/- {(5600-5400) x 50 = 10000 } from ‘A’.
But their account will be credited or debited from their Margin Account and their position will be ‘marked to market’ at the end of session each day. In case the Margin account falls below the maintenence level, cash is sought from the customer to replenish the margin account back to original level. Either of the customers having surplus margin beyond original margin can withdraw the funds.

 

5. What are Options?
An option is a contract, which gives the Buyer of Option (holder) the right, but not the obligation, to Buy or Sell specified quantity of the underlying assets, at a Specific (Strike) Price on or before a Specified Time (expiration date) i.e 1 Month/ 2 Months/ 3 Months etc. The underlying may be physical commodities like wheat/ rice/ cotton/ gold/ oil or financial instruments like equity stocks/ stock index/ bonds etc.
There are 2 types of Options in share market i.e. Call Options and Put Options.
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