Overview of Online Trading
Technological advancements have reinvented trading procedures, allowing electronic transactions to come a full circle. The Broking business is not left untouched. In fact it has been one of the most widely and successfully impacted one. With online broking, it takes just a few clicks to “buy” or “sell” units. Your bank, trading and demat accounts are connected and all you need to do is log on to your account at your convenience to execute the trade. The servers of the e-broking portals are linked to the stock exchanges, facilitating trade at live market rates. Moreover, the security systems help prevent frauds and protect confidentiality of your account.
Commodity Trading
In India, we have three major commodity exchanges – The National Commodity and Derivative Exchange (NCDEX), The Multi Commodity Exchange of India (MCX) and The National Multi Commodity Exchange of India (NMCE). All three have electronic trading and settlement systems and a national presence. Commodity markets are markets where raw or primary products are exchanged. These raw commodities are traded on regulated commodities. It includes Gold, Silver, Platinum Copper, Zinc, Lead, Nickel, Aluminum etc.
The prices and trading lots, in the bullion market – gold and silver are calculated for ten grams for gold, and one kilo grams for silver. In case of agricultural commodities, the prices vary from exchange to exchange (in kg, quintals or tonnes).
As in stocks, in commodities also the margin is calculated by (value at risk) VaR system. Normally it is between 5 per cent and 10 per cent of the contract value.
Day Trading
Day trading is the buying and selling of various financial instruments, such as futures, options, currencies, and stocks, with the goal of making a profit from the difference between the buying price and the selling price. Day trading differs slightly from other styles of trading in that positions are rarely held overnight or when the market being traded is closed.
• Day Trading involves taking a position in the markets with a view of squaring that position before the end of that day.
• A day trader typically trades several times a day looking for fractions of a point to a few points per trade, but who close out all their positions by day’s end.
• The goal of a day trader is to capitalize on price movement within one trading day.
• Unlike investors, a day trader may hold positions for only a few seconds or minutes, and never overnight.
Advantages of Day Trading
Zero Overnight Risk: Since positions are closed prior to the end of the trading day, news and events that affect the next trading day’s opening prices do not affect your portfolio.
Increased Leverage: Day Traders have a greater leverage on their trading capital because of low margin requirements as their trades that are closed in the same market day. This increased leverage can increase your profits if used wisely.
Example: – On Monday, 1000 shares of XYZ stock are purchased. Later on that same day, 1000 shares of XYZ stock are sold. This is considered to be a day trade.
Future Trading
A futures contract is a type of derivative instrument, or financial contract where two parties agree to transact a set of financial instruments for future delivery at a particular price.
Index Futures : As Stated above, Futures are derivatives where two parties agree to transact a set of financial instruments or physical commodities for future delivery at a particular price. Index futures are futures contracts where the underlying is a stock index (Nifty or Sensex) and helps a trader to take a view on the market as a whole.
Lot size :Lot size refers to the quantity in which an investor in the markets can trade in a derivative of a particular scripts. For Eg-Nifty Futures have a lot size of 100 or multiples of 100.Hence if a person were to buy 1 lot of Nifty Futures , the value would be 100*Nifty Index Value at that point of time.
Similarly lots of other scrips such as Infosys, reliance etc can be bought and each may have a different lot size. Lot sizes are fixed accordingly which will be the minimum shares on which a trader can hold positions.
Expiry period in Futures Trading: Each contract entered into has an expiry period. This refers to the period within which the futures contract must be fulfilled. Futures contracts may have durations of 1 month,2 months or at the most 3 months. Each contract expires on the last Thursday of the expiry month and simultaneously a new contract is introduced for trading after expiry of a contract.
Eg: Let’s say you buy a HPCL Futures contract.
And the price of each HPCL share is Rs180. This will amount to Rs1.17,000 (Rs180 x 650 shares).
You don’t pay the entire amount of Rs1,17,000. You only pay 15% to 20% of that amount and this is called the margin amount.
The margin depends on what the exchange sets for the day. Based on certain parameters, it declares the margin for each stock.
Let’s say the margin for the HPCL Futures is 15%. So you end up just paying just Rs18,550 (not Rs1,17,000).
Profit :-
You purchased a HPCL Futures contract and the underlying price is Rs180 per share.
Let’s say, the next day it moves to Rs182.
The difference is Rs2 per share (182-180)
You get a credit of Rs1300 (Rs2 per share x 650 shares).
This will go on till you sell the Futures contract or it expires (last Thursday of the month).
So, on a daily basis you make money.
Options Trading
An option is part of a class of securities called derivatives.
The concept of options can be explained with this example. For instance, when you are planning to buy some property you might have placed a nonrefundable deposit to hold it for a short time while you evaluate other options. That is an example of a type of option.
Similarly, you have probably heard about Bollywood buying an option on a novel. In ‘optioning the novel,’ the director has bought the right to make the novel into a movie before a specified date. In both cases, with the house and the script, somebody put down some money for the right to buy a product at a specific price before a specific date.
Buying a stock option is quite similar. Options are contracts that give the holder the right to buy or sell a fixed amount of a certain stock at a specified price within a specified time. A put option gives the holder the right to sell the security, a call option gives the right to buy the security. However, this type of contract gives the holder the right, but not the obligation to trade stock at a specific price before a specific date. Several individual investors find options useful tools because they can be used either as:
Options may be classified into the following types:
A) Call Option
B) Put Option
A call option gives the holder the right to buy the underlying stock at the strike price anytime before the expiration date. Generally call options increase in value as the value of the underlying instrument increases.
By contrast, the put option gives the holder the right to sell shares of the underlying stock at the strike price on or before the expiry date. The put option gains in value as the value of the underlying instrument decreases. A put option is one where one can insure a stock against subsequent price fall. If the value of your stocks goes down, you can exercise your put option and sell it at the price level decided upon earlier. If in case the stock price moves higher, all you lose is just the premium amount that was paid.
Profits& Risks involved in Trade
The Sensex and the Nifty are the important index of our Stock market. Both these indices represent market direction and help traders to predict the future price movements of their list of selected stocks in real time.
The Day trading risk level index helps Day traders to reduce risks in their day trading activities.Risks and losses are inevitable in trading. So you should learn to manage risks to avoid losses in trading.
By understanding risks and learning to manage risks involved in Day trading, you can reduce the negative effects of risk on you trading results and by following risk management techniques, you can avoid losses in trading.
• Benefits – you can potentially earn a good return on your investment from selling shares that have gone up in value since you bought them. You may also benefit from any dividends the company you have invested in may pay.
• Risks – if your shares fall in value you can lose money when you come to sell them. Share prices can rise or fall, which makes them more volatile. The potential return from any investment is generally depending to the amount of risk the investor is willing to assume.
There are two common risks that investors should notice them well:
Market Risk: The possibility that the value of financial markets rise or fall.
Inflation Risk: The risk that rising prices of goods and services over time, Inflation risk is also known as ‘purchasing-power risk’ and it is one of the most important factors for long-term investing.
You can’t control the inflation risk, but with a good strategy you can manage and control the affect of market risk on your stocks.
A professional trader always tries to understand and control portfolio risk. Before entering into any trade, good traders first think about how much risk to take and how much risk exposure comes with a particular trade selection. Only then do they allow themselves to think about how much profit they stand to make.