Sunday, January 15, 2017

How To Make Money By Trading In Futures Contracts?

In an earlier post I had covered in some detail the concept of futures. In this post I will discuss how you can make money by trading in futures. 

Before we proceed a recap, of the distinguishing characteristics of a futures contract would help:
  • Futures are contracts to buy and sell a “standardized quantity” of a particular asset (known as the underlying) on a given ‘future’ date at a predetermined rate (the Futures Price). The standardised quantity is denoted by the lot size. 
  • Futures are always exchange traded. 
  • Futures contracts are net-settled (price difference paid/received in cash; no delivery of assets is involved). 
  • Futures come with an expiry date. 

In India generally the following types of futures contracts are traded: 

Index Futures [ E.g NIFTY Futures]: In case of an Index Future, the underlying is a stock Market Index like the NIFTY.

Stock Futures [E.g Infosys Futures]: In case of a Stock Futures, the underlying is an individual stock or share. In other words, stock futures are contract to buy or sell a specific lot of equity shares on a given 'future' date (contract expiry date) at a predetermined price (the futures price).

Commodity Futures [Eg. Gold Futures]: A Commodity futures is a contract to buy or sell a fixed quantity of a commodity like gold or copper on a a given 'future' date (contract expiry date) at a predetermined price (the futures price).

Currency Futures [E.g USDINR Future Contracts]. A currency futures also known as a Foreign Exchange (FX) Future is an agreement to buy or sell a specific currency (E.g USD) in exchange of another currency (E.g INR) at a future date and at a predetermined future price.

Interest Rate Futures [E.g NSE Bond Futures]: An Interest Rate Future is an agreement to buy or sell a specific interest bearing debt security at a future date and at a predetermined future price.

Duration of Futures Contracts.  

Futures contracts are available in duration of 1, 2 and 3 months. These are called near month, middle month and far month contracts, respectively. All 3 contracts are traded simultaneously. The month in which a contract expires is called the contract month.

In India futures generally expire on the last Thursday of their respective contract months.

Short Selling. 

In the futures market the concept of short selling is applicable. Short selling is selling a security that you don't own now and then buying them back later. Short selling works in situations where the security price falls (subsequent to short-selling) so that the open position can be squared off by buying the security at a lower price thus enabling the trader to register a profit.  

However, unlike in the spot market where short positions cannot be carried overnight, you can carry short positions in derivative contracts till the contract expiry date. 

Making Money By Trading In Futures Contracts. 

The following example will help you understand how you can make money by trading in futures contracts.

Let us assume that you want to trade in futures of Infosys [Stock Futures]. The following data is available:

Current Stock Price (Spot market): Rs 5000

Price in the futures market (near month): Rs 5010. [The difference between spot price and Futures Price is due to the cost of carry i,e Interest.]

Lot size: 125 shares

Margin: 20%

While in the spot market, you can deal in even one Infosys share, in the futures market you will have to trade the minimum lot size. In the present case, the lot size is 125 shares. 

Today is January 1. You are bullish on Infosys and expect the price to rise in a month's time. You buy one Infosys futures contract (January Expiry) at the futures price of Rs. 5010. 

Note that the lot size is of 125 shares so your traded value is: 5010 x 125 = Rs. 626250. 

You, however, need not pay the entire traded value of Rs. 626,250 to buy the contract. The margin requirement being 20%, you only need to have Rs. 125,250 in your account to buy the future contract. 

On the contract expiry date, the price of Infosys in the futures market is 5310. You close out your open position (buy) by taking an opposite position (sell) on the expiry date. You had effectively bought the contract at a value of 5010 per share. Now you sell them at a value of 5310, thus making a gain of Rs.300 per share (5310 - 5010). 

Since the futures contract is comprised of a lot of 125 shares, you make a profit of

300 x 125 = Rs. 37,500. 

On an investment of Rs. 125250 this is a profit of 30% in just one month! 


Futures can thus help you leverage your capital to make some extra-ordinary profits. However, there is always a risk of huge losses as well. So one must trade in futures with caution.

What Are Futures Contracts?

Future Contracts or futures, are exchange-traded contracts between two parties to buy and sell a standardized quantity of a particular asset (the underlying), on a given 'future' date, at a pre-determined price.  

Futures are derivative products, similar in many aspects to a forward contract; but, with a few distinguishing characteristics. 

For a better understanding of the concept of future contracts I would recommend that you read this post on forward contracts

Recommended Read: How to Make Money by Trading in Futures Contracts.

Distinguishing characteristics of future contracts: 

The following are some of the distinguishing characteristics of future contracts (setting them apart from forward contracts): 

1. Futures are standardized contracts traded on a stock exchange

2. Since futures are traded on stock exchanges, they carry negligible counter party risk. Counter party risk is the risk that the other party to the contract will default on his or her obligation(s). It is for this reason that stock exchanges require that you maintain sufficient 'margin' in your account to trade in futures. 

3. Though futures are contracts to buy and sell a "standardized quantity" of a particular asset on a given 'future' date, most future contracts will be "net-settled." This means that the parties to the contract will NOT exchange the actual underlying asset but the "net price difference" in the value of the contract on the contract settlement date. 

4. The value of the contract will 'move' with the changes in the price of the "underlying asset" between the date of the contract and the settlement date. It is for this reason that futures are referred to as derivative products. Derivative is a contract whose value is derived from the (changes in) value of an underlying asset. 

5. Futures contracts come with an expiry date

Examples of the underlying asset. 

The underlying asset could be a particular stock (e.g Tata Motors futures) or the stock market index (NIFTY futures). It could also be a precious commodity (e.g gold futures or crude oil futures) or a currency (Eurodollar futures). 

Forward Contracts - Concept And Example

Forwards are the simplest form of a derivative contract. We can define a forward contract as an agreement between two parties to exchange a specific asset on a specified future date at a predetermined price (forward price). Both the delivery and the payment is made on the specified future date.

The concept of forward contracts can be better understood with the following example.

A Ltd is a manufacturer of Apple juice. It acquires a 1000 kg of Apples from the open market every month. Today is 1st of January and the prevailing market price of Apple is Rs 10 per kg. It however anticipates, owing to deficient production, that the price of Apple would escalate to Rs. 15 per kg in a month's time.

It therefore enters into a contract with a farmer to acquire from him 1000 Kg of Apples at a mutually determined price of Rs. 12 per kg; one month hence.

Therefore on the settlement date of the contract i.e on 1st of February, A ltd makes a payment of Rs. 12000 (1000 kg at Rs. 12 per kg) to the farmer and takes delivery of 1000 Kg of Apples from the farmer.

From the above example, the following features of a forward contract emerge:

1. A forward is a contract - which is entered into today and settled at a future date. 

2. The terms of the contract (including the settlement date and the forward price) are mutually agreed upon by the parties to the contract at the time of entering into the contract. Forward contracts are therefore non-standardised.

3. The parties to the contract are bound to perform the contract on the contract settlement date.

4. There is a counter party risk involved. Counter party risk is the risk that one of the parties to the contract defaults on his/her obligations on the settlement date.

5. The parties can, by mutual agreement, alter the terms of the contract before the contract settlement date. 

Saturday, January 14, 2017

25+ Stock Market Terms And Their Meanings

This post is a collection of important stock market terms and their meanings:

1. Beta: Beta is a measure of the sensitivity of the stock relative to the stock market.

2. Bull Market: A rising market where the overall market sentiment is positive.

3. Bear Market: Market condition characterized by falling prices and an overall negative sentiment among the investors. Opposite to that of a bear market.

4. Bid Price: The price at which an investor is willing to buy a security.

5. Basis Point: One-hundredth of a percentage point. .

6. Dividend: Portion of the company's profits distributed among the shareholders.

7. Derivative Contract: A contract whose value is 'derived' from the value of an underlying asset. Forwards, Futures, Options, and Swaps are all examples of a derivative contract.

8. Long and Short: Simply put, going 'long' means buying and going 'short' signifies selling.

9. Square off: Taking an opposite position from the one currently held to close out open trades. For example if you go long 100 shares of X Ltd @ Rs 100 per shares and then subsequently sell them @ Rs 105, you've squared off your long position.

9. Intraday Trading: A trading strategy where the trader 'squares of' his trades before the close of markets for the day.

10. Swing Trading: A trading strategy where overnight positions  are held for open for a few days in-order to capitalize on short term 'swings' in stock prices.

11. IPO: Initial Public Offer - a company offering its shares for the very first time for public subscription through a stock exchange.

12. Further Public Offer (FPO) - Any fresh offer of shares for public subscription post an IPO.

13. Rally: A rapid increase in the price of a stock and/or the overall market capitalisation (as measured by an index like the NIFTY).

14. Offer: The price at which an investor is willing to sell a stock held by him.

15. Spread: The difference between the bid price and the offer price.

16. Circuit Breaker: A measure deployed by stock exchanges to prevent extreme volatility in stocks by halting trade in a particular stock when the price of the said stock rises or falls by a certain percentage over the closing price of the previous trading session.

17. P/E Ratio: The ratio between the market price of a share and its earnings per share (EPS). [Read more about P/E Ratio]

18. Right Shares: Shares offered by a company to its existing shareholders.

19. Stock Split: A stock split occurs when a company increases the number of its shares by reducing the face value of its shares. For example in a 2:1 split, a company will issue 2 shares of Rs 5 each to every share-holder holding 1 share of the face value of Rs 10 in the company.

20. Bonus Issue: In a bonus issue a company will issue new shares free of cost to its existing shareholders by capitalizing its reserves.

21. Ex date: The date on which a security goes 'ex', the market price of the security is adjusted for the most recently announced corporate action with may be a dividend declaration, a bonus issue or a stock split.

22. Short Selling: Short selling involves selling a stock which you don’t own and then buying it back later in order to square your position.

23. Dematerialisation: Dematerialisation is the process of converting physical shares into an electronic format. Post conversion the shares are held in an account that the 'beneficial owner' maintains with a Depository Participant. 

24. Reverse Stock Split: Consolidation of two or more shares of a company into one share whereby the face face of the stock increases while the number of shares outstanding goes down. 

25. Earnings Per Share (EPS): EPS is arrived at by dividing the total profit of a company available to equity shareholders by the number of shares outstanding. You can find this information in the company's financial statements. 

26. Settlement: The process of exchanging securities and funds after a trade/deal is concluded.

Friday, January 13, 2017

The Best Amul Ads Featuring Sachin Tendulkar

She is witty, she is humorous! 

Yes, she is India's Most Loved Mascot - our very own Amul Girl. 

In this picture post, dedicated to the quintessential Amul Girl, we will showcase the best Amul Ads featuring the Master Blaster Sachin Tendulkar. 

With Sachin playing his final test match, India truly retires hurt. 
With Tendulkar retiring from One Day International cricket, Amul celebrates the rare gem.  
Amul Girl gives her Good wishes for Sachin Tendulkar to return to form. 
Sachin Tendulkar making a sparkling return to International Cricket.  
With Sachin becoming the first batsman to score 50 test centuries, Amul salutes Sachin's Incredible appetite for runs. 

Sachin's Nomination to the Rajya Sabha. 
He came. He saw. He conquered. That's want Amul says on Sachin's Incredible Hundredth Hundred. 
Amul Girl take on the Media's obsession with Sachin's Hundredth Hundred. 
Amul Girl Congratulates Sachin on becoming the first batsman to score a double century in One Day Cricket. 
Amul celebrates the Sachin Sehwag Partnership with the 'Twindulkar' Ad.
On master blaster Sachin Tendulkar's 35th Test Hundred making him the highest centurion in the history of Test Cricket - surpassing the Great Sunil Gavaskar.
Amul Girl's take on master blaster Sachin Tendulkar failing to convert 90 into Hundrends in One-dayers.
Tendulkar launches his restaurant. 
Amul Girl expresses concern on Sachin's Elbow Injury that kept him out of Cricket. 
Our Amul Girl's witty take on the waiver of import duty on the Ferrari gifted to Sachin Tendulkar
Amul congratulates Sachin Tendulkar on playing his 100th Test Match. 
With Tendulkar performing and the rest of the batsmen failing, our Amul Girl says "Ten Du and the rest Ten Don't". 
Tendulkar being accused of ball tampering. 


Monday, January 9, 2017

How To Create Your Own Stock Market Index [With Real Life Example]

Have you ever wondered whether it possible to create your own Stock Market Index like the Sensex or the Nifty? 

The Answer is yes and today, as a fun activity, I will teach you how you can Create your very own Stock Market Index.  

How To Create Your Own Stock Market Index [With Real Life Example]

However, before we start, let us understand what a Stock Market Index is. 

What is a Stock Market Index? 

A Stock Market Index is an indicator of Market Momentum or Sentiment. An Index is created by selecting stocks that are representative of the entire market or a specific sector of the market.

It indicates the market movement by tracking the changes in Market Capitalisation of Stocks that represent the Index. A company's Market Capitalisation is arrived at by multiplying the total outstanding shares of a company by its current market price. 

For a more detailed understanding of Stock Market Indices, refer to the following post: 

What Is A Stock Market Index and What Does It Represent 

Here are a Few Quick Facts about a Stock Market Index. 

>> A Stock Market is created by selecting stocks that either represent the entire market or a specific sector of the market. 

>> A weightage is assigned to each individual stock that comprise the Index. 

>> A Stock Market Index tracks the changes in Market Capitalization of the stocks it represents. 

>> The Market Capitalisation is Free-Float Market Capitalisation. Free-float market capitalization takes into consideration only those shares issued by the company that are readily available for trading in the market. It excludes locked in shares like government holding or shares locked in under a contract. 

>> The Index tracks the Market Capitalization with respect to a base date. 

>> A score is assigned to the Base Date Market Capitalization of the stocks that represent the Index. This score can be 100 or any other number. 

>> Daily changes in Market Capitalization is tracked with reference to this Base Date Score. 

Now that we have a basic understanding of a Market Index, let us proceed to create our very own Stock Market Index. 

We will create our Stock Market Index in the following steps: 

>> Naming our Index. 

>> Selecting Stocks that will represent our Index. 

>> Determining the weightage of each individual stock in the Index. 

>> Selecting a Base Date. 

>> Determining the Base Date Market Capitalization of the stocks that represent the Index. 

>> Assigning a Score to this Base Date Market Cap. 

>> Tracking daily changes in Market Cap of the constituent stocks with reference to this Base Date Score. 

Let us now follow each of these steps to create our own Market Index.

Naming our Index. 

We start by assigning a name to our Index. I will call my Index the "FINMINT FOCUS 5". You can select your own name for your Index - just be as creative as possible.  

Selecting Stocks that will represent our Index. 

The next step is to select stocks that will represent our Index. I wish to model "FINMINT FOCUS 5" as a broad market Index, so I will select 5 different stocks from 5 sectors of the economy. 

A Broad Market Index represents the different sectors of the economy as a whole.  

The following are the stocks that I have selected along with the industries that they represent. 

1. State Bank Of India [ Financial Services - Bank].

2. Sun Pharmaceutical Industries Ltd. [ Pharma]. 
3. Tata Motors Ltd [Automobile]. 
4. Larsen & Toubro Ltd. [Construction]. 
5. NTPC Ltd. [Energy]. 

Note that you can select any number of stock for your Index.  

Determining the weightage of each individual stock in the Index. 

For "FINMINT FOCUS 5" I will assign an equal weightage to all the 5 stocks that comprise the Index.

Selecting a Base Date. 

Next we will proceed to select a Base Date for our Index. "FINMINT FOCUS 5" will have a Base Date of 6th January, 2017

Determining the Base Date Market Capitalization of the stocks that represent the Index. 

The Base Date Closing Price and Market Cap of the 5 selected stocks are as follows: 

 1. State Bank Of India [ Closing Price - 246.05, Market Cap - 76,354.67 cr ].

2. Sun Pharmaceutical Industries Ltd. [ Closing Price - 641, Market Cap - 69,395.74 cr ]. 
3. Tata Motors Ltd [ Closing Price - 498.55, Market Cap - 96,286.07 cr ].
4. Larsen & Toubro Ltd. [ Closing Price - 1390.20, Market Cap - 114,098.93 cr ].
5. NTPC Ltd. [ Closing Price - 163.70, Market Cap - 40,567.68 cr ]

The Total Market Cap of the 5 stocks is: 396,703.09 cr

Assigning a Score to this Base Date Market Cap. 

The Total Market Cap of "FINMINT FOCUS 5" on the base date of 6th Jan, 2017 is 396,703.09 cr. We assign a Base Date score of 100 to this value. 

Thus, the value of our Index as on 6th Jan 2017 is 100 Points

Tracking daily changes in Market Cap of the constituent stocks with reference to this Base Date Score.

Next we will track the changes in the value of our Index on the next trading day with reference to the changes in Market Cap of the 5 constituent stocks. 

The Closing Price and Market Cap of the 5 selected stocks as on 09.01.2017 are as follows: 

1. State Bank Of India [ Closing Price - 246.70, Market Cap -  76,711.76 cr ].
2. Sun Pharmaceutical Industries Ltd. [ Closing Price - 632.10, Market Cap -  68,453.50 cr ]. 
3. Tata Motors Ltd [ Closing Price - 501.25, Market Cap -  96,750.34 cr ].
4. Larsen & Toubro Ltd. [ Closing Price - 1,379.00, Market Cap -  1,13,254.03 cr ].
5. NTPC Ltd. [ Closing Price - 163.35, Market Cap -  40,332.69 cr ]

Thus, the Total Market Cap of the 5 stocks as on 09.01.2017 is: 395,502.30 cr

We proceed to determine the Value of our Index as on 09.01.2017 with the help of some simple arithmetic. 

Value of Index on 09.01.2017 = Current Market Cap / Base Market Cap * Base Index Value (100)

= 395,502.30 / 396,703.09 * 100
= 99.70 Points

Thus, the value of our Index, "FINMINT FOCUS 5" on 09.01.2017 is 99.70 Points

This represents a change of 0.30 points or 0.30 % from our base date. You can compute the value of your Index on any given day in a similar manner. 

Hope you have like this little presentation of our's. Thanks for your time and happy experimenting! 

Source Data for Stock Prices and Market Cap: NSE

Sunday, January 8, 2017

7 Qualities Of A Professional Blogger

Those of you who are into blogging would realise that making a living out of it is not easy. 

It is demanding and takes years of patience and hard-work to make a name for yourself in the competitive world of professional blogging. Yet, there are bloggers who have shunned well paying careers in favour of blogging and are doing very well indeed.

So what defines these professional bloggers? What qualities maketh them what they are? In this article we will try to analyse the qualities that make a professional blogger. 

1. Knowledgeable. 

One thing you would realise is that the best bloggers are experts in their respective niche. The very fact that these bloggers have been churning out quality articles day in and day out, speaks volumes about the kind of expertise and in-depth knowledge these men possess. 

2. Persistent. 

A majority of the bloggers give up blogging in the first year of their journey itself. However bloggers like Darren chose to stick around even when others around them quit. It sees this persistence of their’s that has been rewarded in the long run. They now rank among the very best. 

3. An eye for quality. 

Quality and quality alone can make a blog stand apart. The guys who have now turned pro have always had an eye for quality. Read any of their blogs, and you would find that almost every article has something new and unique to offer. 

4. Hard working. 

This is perhaps one of the most important attributes that define a professional blogger. Maintaining a high quality blog is extremely demanding. It indeed takes a lot of hard work and effort to consistently be there at the top, and every blogger who aspires to someday turn pro must be prepared to put in those extra few hours that professional blogging demands. 

5. Focused and Dedicated. 

Most of the bloggers who are professionals today have been blogging for years. Their focus, dedication and passion for blogging have remained unchanged all through these years. It is this dedication of theirs’ to their work that has helped them to succeed. 

6. Helpful. 

The best bloggers are always willing to find the time out of them busy schedule to help people who seek their advice and guidance. 

7. Pioneers. 

Professional bloggers are pioneers in their own right. Thousands follow in their footsteps drawing inspiration for everything from their blog design to their writing skills. These bloggers and inspire many who someday aspire to become just like them.

So what according to you are the qualities of a professional blogger? Do share your views on the same.
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