Futures and Options (F&O) – Part 2

As you may know, I covered derivatives, types of derivatives, hedging and futures concepts in the previous article. I also explained the concept of Future Contracts and its uses.  Here in Part 2, I am going to discuss another very important derivative called Options. The trading market for Option is so huge and exciting that it commands a dedicated article on itself.

Options
An option is a contract where the buyer has the "right" (depends on buyer to execute it), but not the "obligation" (legally bonded) to buy or sell an underlying asset (a stock or index) at a specific price on or before a certain date. An option is a security, just like a stock or bond, and constitutes a binding legal contract with strictly defined terms and conditions.

Futures Vs Options
Remember from the previous article, Futures are contracts where both the buyer and the seller have the obligation to honor the contract whereas option does not involve any obligation for both the parties. A contract is a zero sum game i.e. one party will book loss while the other take home the profit. If the contract is futures, the losing party will pay the winning party. However, in options, the buyer will decide whether to execute the contract.  You will understand this by the following example.

Let say there is a contract between you and me which says that I will buy one kg of gold at Rs. 1,000 per gm from you on March 1st, 2010. I am the buyer of this contract and you are the seller. So we will either go for cash settlement or you have to deliver the gold to me. Now suppose on the date of settlement i.e. March 1st, 2010, price of gold is Rs. 500 per gram. Thus, the market price of gold on March 1st, 2010 is lower than the contract price.

If the contract were Futures, I would have to buy the gold from you because I have the "obligation" to do so. Hence, I will pay you Rs. 1,000 per gm and you will deliver me the gold. Hence, you make profit while I book loss. Good for you, Bad for me!!

However, if the contract were an Option, I would not have executed it i.e. would not have bought the gold from you. I would have let the contract expire (i.e. do nothing and wait till March 1st, 2010 passes by). How can I do so? I can do it because Options gives me (the buyer) the "right" and not the "obligation" to buy it. Thus, an option would protect me from any adverse movement in the price of underlying asset. In an option, seller has no right because he is compensated by the buyer by paying option premium. Thus, the buyer of an option contract has the "right" but the seller of option contract has the "obligation" to honor the option.

So you may now be wondering that why on earth somebody will ever buy a futures contract when options contract are better. We must know that option has a "premium" attached to it which is called "Options Premium". This is the amount that a buyer of option contract has to pay the seller of the option contract in exchange for higher flexibility and protection against adverse price movement in the value of underlying. Thus, if I have to buy an option contract from you, I will pay a premium to the seller i.e. You.

Options Vs Stocks
In order for you to better understand the benefits of trading options you must first understand some of the similarities and differences between options and stocks.

Similarities:  
• Listed Options are securities, just like stocks.
• Options trade like stocks, with buyers making bids and sellers making offers.
• Options are actively traded in a listed market, just like stocks. They can be bought and sold just like any other security.

Differences: 
• Options are derivatives, unlike stocks (i.e, options derive their value from something else, the underlying security).
• Options have expiration dates, while stocks do not.
• There is not a fixed number of options, as there are with stocks available e.g. there could tens or even hundreds of options written on the same stock
• Stockowners have a share of the company, with voting and dividend rights. Options convey no such rights.

Remember these options are not issued or written by companies who stocks act as underlying asset. These options are generally written by brokers or traders for investors.

Options Terminology

Options Premium
An option Premium is the price of the option that a buyer pays to purchase the contract from the seller.

Strike Price
The Strike (or Exercise) Price is the price at which the underlying security (in this case, XYZ) can be bought or sold as specified in the option contract from the seller. The strike price also helps to identify whether an option is In-the-Money, At-the-Money, or Out-of-the-Money when compared to the price of the underlying security.

Expiration Date
The Expiration Date is the day on which the option is no longer valid and ceases to exist.

Classes of Options
There are two classes of options – American Option and European Option. The key differences are:

1. American option can be exercised before the expiration while an European option is exercised only on the expiration date.
2. Dividends can be issued by the underlying stock in an American option while it is not the case in European option

Types of Options
There are only two types of options: Call option and Put option. In this article we will discuss only European options i.e. options which can not be executed before the agreed upon date.

Call Options
A Call Option is an option to "buy" a stock (underlying) at a specific price on a certain date. The buyer of call option holds the rights while the seller has the obligation to honor the contract. The buyer of a call option enters the contract assuming that the value of underlying will increase in future and benefit him. The seller thinks otherwise i.e. the stock price will not go up and hence the buyer will not execute the contract. So he (seller) will keep the option premium to himself – that would be his profit. Hence, the buyer will execute the contract only when the market price of underlying stock is higher than the strike price.

Example 1 – I bought a call option from you with the following feature: Underlying is an Infosys Stock, Exercise price is Rs. 2700 and expiration period is Sep 30, 2010. Option premium is Rs. 100 per underlying stock and the option is written on only 1 stock.

How call option helps me (the buyer) in realizing profits. Let us assume that the stock price on Sep 30, 2010 is Rs. 2850. Thus, I will execute the call option and you will sell the stock to me for Rs. 2700 and NOT at the current price. I will take that stock from you and sell it for Rs. 2850 in the open market and book a profit of Rs. 2850 – Rs. 2700 – Rs. 100 (Option premium) = Rs. 50. Now look at my return on investment and NOT on amount of investment. Myreturn on investment (ROI) is = (Profit * 100 / Total Cost or investment) %
   = 50*100/100 = 50%

Compare this to someone who invested in Infosys stock and NOT in the option. If he bought the stock at Rs. 2000 and sold for Rs. 2500 in the market, his profit would be
= (Profit * 100 / Total Cost or investment) %
= (500* 100 /2500) = 25%

Isn't it great? One golden rule of investment – Don't measure your profit or loss based on "absolute value of profit or loss" but on return on investment (ROI).

Remember this – The buyer of a call option will execute the contract only when the market price of the underlying stock will be higher than the strike price of the stock. This is because the buyer will buy the stock from the seller at a lower cost and sell in the open market to book the difference as profit. However, if the market price of underlying stock is less than that of the exercise price, the buyer will let the option expire. In the above example, if the stock price of Infosys on Sep 30, 2010 were Rs. 2690, I will not exercise the contract! Thus, my only loss would be Rs. 100, the option premium that I paid to the seller (you).

Put Options 
Put options are options to sell a stock at a specific price on a certain date. Put options mean "right to sell". It is just the opposite of a call option. The buyer of a put option holds the right to sell while the seller has the obligation to buy. Here, the buyer assumes that the price of underlying asset will go down in future and he will benefit from the put option. Hence, the buyer of a put option will execute the contract only when the market price of underlying stock is lower than the strike price.

Profit realization for the buyer - When do you make profit by selling something? Only when you buy something for X amount and sell it for Y amount where Y>X. Or, you sell someone a product at a price higher than the market price. Why will someone buy a product at a price higher than the market price? He will do it only when he has signed a contract to do so. This is put option which protects and benefits its buyer from any downward movement in the stock price.

State of an option
In-the-Money option – This is when strike price is less than the market price for a call option or the strike price is more than the market price for a put option.
At-the-money – This is when strike price is equal to the market price.
Out-of-the-money – This is when the strike price is more than the market price for the call option while the strike price is less than the market price for the put option.

How to read an option traded listed on an exchange
If you read any business newspaper you may find quotations like this:

INFOSYSTCH     Sep 30   CA    2,700.00    51.00     51.00       50.00      51.00

What does this mean? It simply means it is an option with
1. Underlying as Infosys stock
2. Sep 30 is the expiry date
3. to BUY (because it is a "call") Infosys stock - CA is Call Option
4. 2700.00 is the Strike Price
5. The numbers (51.00, 51.00, 50.00, 51.00) shown after the strike are high price, low price, previous close and Last price respectively.

INFOSYSTCH Sep 30 PA 2,700.00 35.00 35.00 52.00 35.00 
It simply means it is an option to SELL (because it is a "put") Infosys stock with similar details.

Table1: Representation of rights and obligations

	CALL	PUT
BUYER (Long)	Right but not the obligation to buy	Right but not the obligation to sell
SELLER (Short)	Obligation to sell	Obligation to buy

Common terminology – people who buy options are also called \"holders\" or are considered to be "Long" on option and, those who sell options are also called \"writers\" or are considered as "Short" on option.

Remember this:
Long –> Buy
Short –> Sell (Selling the right to someone else is like buying obligation for oneself)

Call option –> Right to buy
Put option –> Right to sell (Selling the right to someone else is like buying obligation for oneself)

Long call –> Buy the right to buy
Short call –> Sell the right to buy (Selling the right to someone else is like buying obligation for oneself)

Long put –> Buy the right to sell
Short put –> Sell the right to sell (Selling the right to someone else is like buying obligation for oneself)

Hence, if I buy a call option, I will say "I am Long Call" or "I am a Call Holder". People who buy options have a right to exercise.

When a Call is exercised, Call holders may buy stock at the strike price from the Call seller, who is required to sell stock at the strike price to the Call holder. When a Put is exercised, Put holders (buyers) may sell stock at the strike price to the Put seller, who is required to buy stock at the strike price from the Put holder. Neither Call holders nor Put holders are obligated to buy or sell; they simply have the rights to do so, and may choose to exercise or not to exercise based upon their own judgment.

Let us discuss example 1 from the point of view of put option in the next example.

Example 2 – I bought a put option from you with the following feature: Underlying is an Infosys Stock, Exercise price is Rs. 2700 and expiration period is Sep 30, 2010. Option premium is Rs. 100 per underlying stock and the option is written on only 1 stock. The current price of Infosys stock is say, Rs. 2650.

How put option helps me (the buyer) in realizing profits and protecting my interests. Let us assume that the stock price on Sep 30, 2009 is Rs. 2550. Thus, I will execute the put option and you will buy the stock from me at Rs. 2700 and NOT at the current price which is Rs. 2550. Thus, my profit is Rs. 2700 – Rs. 2550 – Rs. 100 (Option premium) = Rs. 50. Now look at my return on investment and NOT on amount of investment. My return on investment (ROI) is = (Profit * 100 / Total Cost or investment) %
   = 50*100/100 = 50%

Compare this to someone who invested in Infosys stock and NOT in the option. The value of Infosys stocks has come down from Rs. 2650 to Rs. 2550; hence, his profit would be
= (Profit * 100 / Total Cost or investment) %
= i.e. a loss of 3.77%.

Gain, Loss and Breakeven Table

	Calls		Puts
	Long	Short	Long	Short
Maximum gain	Infinite	Premium	Limited
Maximum loss	Premium	Infinite
Breakeven	Market price = Strike Price + Premium		Market Price = Strike Price - Premium

Potential Benefits of Options
• Greater return for smaller amount invested
• Less risk
• Less initial investment
• Diversify portfolio

These previous examples introduced how options can provide investors with more alternatives, allowing them to specify, precisely, the amount of risk they are willing to take in their holdings. If used on a 1-to-1 basis with the underlying shares, then options can be used to invest in stocks with limited risk, to insure stock investments held, or to set levels of market exposure consistent with one\'s investment strategy. Options can also be used as alternatives to stock investments (one option for each 100 shares), giving investors the ability to profit from favorable market moves just as if they held the underlying security, but with lower potential risk due to a lower initial investment.

Final few words
I know you have to read a lot of things which might sound vague and confusing, which is totally understandable. It took me few weeks to completely understand the concepts of F&O! I am not kidding. However, they are wonderful concepts and knowing them only add to your investments knowledge and profile. Go through both Part-1 and Part-2 regularly for sometime. To help you, I have decided to introduce a section on Q&A to test what you learnt in this article. I will publish the answers in the next article.

Test your skills
1. __________ option conveys the right to Buy.
A. Call
B. Put

2. ________ option conveys the right to Sell.
A. Call
B. Put

3. Long on an option means_____.
A. Buy
B. Sell

4. For a call option when the strike price is more than the market price, it is ____.
A. In-the-money
B. At-the-money
C. Out-of-the-money

5. For a put option when the strike price is less than the market price, it is ____.
A. In-the-money
B. At-the-money
C. Out-of-the-money

6. The buyer of a call option will exercise the option when ____.
A. Strike price is higher than the market price
B. Strike price is lower than the market price
C. Strike price is equal to the market price

Nagarjuna Fertilisers and Chemicals Ltd” (BSE Code: 500075) at 28-31/-

Presently Trading at  Cheepest Stock in Oil & Gas Sector.

Recently NFCL declared Decent Results with Net Income 330 Cr and Net profit of 27.35 Cr Compared to Last year raise 25%.

Nagarjuna Fertilisers and Chemicals Ltd doing Fetliser Business and

NFCL having Availability of Natural Gas at the cheapest Rate in comparison to others for next few decades.

NFCL Planning to Demerge 2 companies 1. Nagarjuna Fertilisers Ltd and 2. Nagarjuna Oil Ltd. More than 71% stake in Nagarjuna Oil, Only Refinary in Tamilnadu, expected to be commissioned during 2011-12.

Book value 23/-

EPS 1.55/-

Dividend 5% to 10% yearly.

Share Holding:

Promoters 37.89% (with Foreign Promoters)

Just Consider the following astonishing facts about NFCL and workout it`s worth:

1. Situated at kakinada (land fall point of RIL Gas) in 1130 Acres of land.
2. Availability of Natural Gas at the cheapest Rate in comparison to others for next few decades.
3. Present Capacity of the plant is 1.6 Million Ton, which requires atleast 7000 Cr. and 4 yrs of lead time to set up. 7000 Cr. means Rs. 160/- per share for NFCL.
4. New urea policy is going to be investor friendly and will ultimately lead towards Decontrol of Urea. Once de-control NFCL will be a real Gold Mine.
5. Due to Demand & supply Mismatch, huge scope for capacity expansion. Having ready market for 2.5 Million Ton of Urea compared to 1.6 Million Ton capacity.
6. One of the best Energy Efficient plant with close proximity of Kakinada Port.
7. More than 71% stake in Nagarjuna Oil, Only Refinary in Tamilnadu, expected to be commissioned during 2011-12.
8. Net Profit of 66 Crore and Cash profit of more than 200 Crore after adjusting loss in imported urea for marketting purpose.
9. Expected profit from the sell of Carbon Credit.
10. Low Promoter`s holding(37%) and most suitable candidate for Takeover by RIL or Jaiprakash Group.

Imagine a situation after 4 years when along with RIL,other players like ONGC and GSPC will start producing Natural Gas from KG basin and that time NFCL will not be dependent on RIL alone and they may start sourcing natural gas from other players for the sake of better price.So to keep such a bulk consumer in it`s fold and to get entry into the Fertilizer sector which is backward integration for RIL towards it`s foray into agri retail sector,it will be beneficial for RIL to consider to take 28% stake(17.2 crore shares on an enhanced equity of 600 crore) in Nagarjuna Fert @ Rs.160/- per share.This move will be beneficial for both the companies.With this fresh infusion of Rs.2750 crore NFCL will be able to retire it`s entire debt of 1050 Crore and balance 1700 crore will be used to expand their capacity from 1.6 to 4.0 million ton in phased manner on their surplus land of 800 acre at Kakinada. This will increase their turnover from present 1900 crore to 6000 crore and netprofit in the range of 1500 crore to 1800 crore giving an EPS of Rs.25/- to 30/-on an equity of 600 crore.Considering the payment of 80% dividend to NFCL share holders,RIL will be entitled to receive an annual tax free return of 137.6 crores(5 %)on an initial investment of 2750 crore with an assured bulk consumer for it`s KG gas. Once Urea will be decontroled then the future of NFCL will be more promising. Expect a price of 800/- within 5 years.

One can Buy at 31/- for Medium Term and Long Term Stock will go 39/- & 45/- and 150/-

Its Risk Free Investment at 28-31/-. Stock is to be accumulated at dips. So divide the total quantity into 3 parts and buy in the range.In future This stock is Gold Mine based on Value of Land and Oil and Gas Aailability.

After Demerging of this Nagarjuna Fertilisers and Chemicals Ltd will List 2 Companies Nagarjuna Fertilisers Ltd and Nagarjuna Oil  Ltd, Stock will go 150/- in Medium term.

As per Oil & gas Business Stock can go to 1000/- levels. 

But remember 

"Although its easy to forget sometimes, a share is not a lottery ticket. It's a part ownership of a business. The stock market is designed to transfer money from the active to the patient."

&

"Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well."

Futures and Options (F&O) – Part 1

There is a whole world of financial securities other than stocks and bonds. One of such securities is Derivatives, which are financial instruments whose "value" are derived from the value of the underlying. Hence, they are called "derivative" i.e. derive from something else. The underlying on which derivative is based could be:
Asset: e.g. stocks, bonds, mortgages, real estate, commodities, real estate properties.
Index: e.g. stock market indices, Consumer Price Index, Foreign Currencies and interest rates
Other items: e.g. Weather (yes- you will find derivatives written on rain!!)

For example – a derivative on a stock derive its value from the value of underlying stock! There are three main types of derivatives: Forwards (similar to Futures), Options and Swaps. Futures are very similar to Forwards except for the fact that Futures are traded on exchange while Forwards are traded over the counter (OTC). In this article I am going to concentrate only on Futures (F) and Options (O). So whenever you come across any article on F&O or any reference to it, remember it means Futures & Options.

Why do we need derivatives?
Derivatives are used to either
1. Hedge the risk i.e. lessen the risk which may arise due to changes in the value of underlying – This is known as "hedging".
2. Increase the profit arising from the changes in the value of underlying in the direction they expect or guess – This is known as "speculation".

Hence, there should not be any misconception that derivatives or F&O are used only by speculators to make money. These are extremely useful financial instruments which are used by corporate or individuals to mitigate their risk. But unfortunately same instruments can be used by speculators to make money. One simple example is nuclear energy. People can use it to generate 1000s of MW of energy for peaceful purpose whereas others can use the same nuclear energy to make nuclear bombs for mass destruction. Is it fair to blame nuclear energy for this? We cannot. So if you want to blame someone, blame speculators and not derivatives.

How hedging works?
Assuming that readers are not speculators, I will focus on how futures or future contracts are used for hedging. Suppose I am a petroleum distributor whose job is to sell petroleum products such as Petrol and Diesel in the market while you are an airline owner, say Mr. Vijay Mallya  I am in the business of selling petroleum while you are a net buyer of petroleum products. I will be concerned with drop in prices of petroleum because that would hurt my revenues and profit margin. This is because I am selling petrol, right? While you, an airline owner, would be concerned with any increase in prices of petroleum because it would increase your costs. Thus we two have a common concern – uncertainty in the price of petroleum products.

To reduce our risk and buy a peace of mind, we will sit together and fix a price of petroleum to be sold in the future. Thus, I have reduced the risk of prices going down while you have reduced the risk of prices going up. This is called hedging.

F&O Market in the US and India
You would be surprised to know that the volume of F&O trade is much more than volume of stocks trade in the world. This shows the sheer popularity of F&O instruments among investors. In the US futures are traded primarily on CME (Chicago Mercantile Exchange), which is the largest financial derivatives exchange in the United States and most diversified in the world. CME's currency market is the world's largest regulated marketplace for foreign exchange (FX) trading. In the US Options are traded on CBOE (Chicago Board Options Exchange).

In India Futures and Options are traded on both BSE and NSE. The market hasn't developed to its potential yet due to lot of political and regulatory issues. Hence, the size of derivatives market is much smaller in India as compared to those in developed worlds.

Forward Contract vs. Futures Contract
While futures and forwards are both contracts to deliver an asset at a fixed (pre-arranged) price on a future date, they are different in following respects:

Features	Forward Contracts	Future Contracts
Operational Mechanism	Traded Over The Counter(OTC) and NOT on exchange	Traded on exchange
Contract Specifications	Extremely customized; differs from trade to trade	Standardized contracts
Counterparty Risk	High because of default risk	Less risky because only margins are settled
Liquidation Profile	Poor liquidity due to customized products	Very high because contracts are customized
Price Discovery	Poor; as markets are fragmented	Better because market is on a common platform of an exchange

Source: Derivatives India

 

Futures
Let us now focus only on Future contracts, which are an agreement between two parties to buy or sell an asset (underlying) at a given point of time in the future. They are standardized contract i.e. an agreement, traded on a futures exchange, to buy or sell a standardized quantity of a specified commodity of standardized quality at a certain date in the future, at a price (the futures price) determined by the parties involved. The future date is called the delivery date or final settlement date. The official price of the futures contract at the end of a day\'s trading session on the exchange is called the settlement price for that day of business on the exchange.

 

I have assumed that no cash settlement was done between the two parties. A futures contract gives the holder the obligation to make or take delivery under the terms of the contract. Also both parties of a futures contract must fulfill the contract on the settlement date – it is legally binding. The seller delivers the underlying asset to the buyer, or, if it is a cash-settled futures contract, then cash is transferred from the futures trader who sustained a loss to the one who made a profit. Money lost and gained by each party on a futures contract are equal and opposite. In other words, a future trading is a zero-sum game.

 

Future prices are not definitive statements of prices in the future. In fact they are not even necessarily predictions of the future. But they are important pieces of information about the current state of a market, and futures contracts are powerful tools for managing risks.

 

Terminology
I will discuss a few terms that are often associated with derivatives. They are following:

 

Underlying: It is the asset or index on which a derivative is written. For example a futures index has the underlying as an index.

Delivery Date: This is the date at which the underlying will be delivered by the seller to the buyer. It is also known as final settlement date.

Future Price:  This is the agreed upon or prearranged price determined by the instantaneous equilibrium between the forces of supply and demand among competing buy and sell orders on the exchange at the time of the purchase or sale of the contract. Simply, the price prearranged between the seller and the buyer.

 

Standardization
Futures contracts ensure their liquidity by being highly standardized, usually by specifying:
• The underlying asset or instrument. This could be anything from a barrel of crude oil to a short term interest rate.
• The type of settlement, either cash settlement or physical settlement.
• The amount and units of the underlying asset per contract. This can be the notional (fictional) amount of bonds, a fixed number of barrels of oil, units of foreign currency, the notional amount of the deposit over which the short term interest rate is traded, etc.
• The currency in which the futures contract is quoted.
• The grade of the deliverable. In the case of bonds, this specifies which bonds can be delivered. In the case of physical commodities, this specifies the quality of the underlying goods
• The delivery month
• The last trading date

 

Types of Futures Contracts
There are a large number of futures contracts trading on future exchanges around the world. I have highlighted characteristics of each major group of contracts:

 

Agricultural Commodities
This category is the oldest group of futures contracts. It includes all widely used grains such as wheat, soybeans, corn and rice. Additionally, futures are traded actively on Cocoa, coffee, orange juice, sugar, cotton, wool, wood, and cattle.

 

Equities
Futures are actively traded on individual stocks as well as index. These are generally cash settled i.e. no exchange of stocks happens between the contracted parties; only the party which loose (prices of stocks move against them) gives money to the party which wins. Stock index futures have been quite popular in the market. These contracts are generally indices of a combination of stocks.

 

Natural Resources
Futures contracts are actively traded on metals and natural resources. Metals include gold, silver, copper, aluminum etc while natural resources include crude.

 

Foreign Currencies
There is a very large market of futures contract traded on foreign currencies because a large number of multinational companies are concerned about the volatility (changes) in the value of currencies of different countries where they sell or buy their products. Most popular currencies are Japanese Yen (¥), British Pound (£), Euro (€) and Swiss Franc (CHF).

 

Disadvantages of futures or derivatives
Remember, I gave you an example of Petroleum distributor (me) and airline owner (you). I will be concerned with the drop in prices of petro products while you will be worried about a rise in the prices. Let's say the current price of petro is Rs. 50 per liter. I think the prices will fall further from Rs. 50 to 40 while you think US might attack Iran and hence prices will go up from Rs. 50 to 60. So you want to fix a price little higher from today's price (but less than what you expect it to be in 3 months) which is favorable to both of us as per our own calculations and predictions. Two of us decide to exchange 100 liters of petro 3 months later on March 24, 2009 at a price of Rs. 55.

 

Now, imagine US didn't attack Iran and global economy sink further. Hence, on May 24, 2009 price of petro products drop to Rs. 45. Here, I, the seller, will sell you petro at a price of Rs. 55 even though the market price is Rs. 45 per liter. Thus, I will make money while you lose it.

Hence, the biggest disadvantage of futures is that one of the parties involved will not be able to take advantage of favorable movement in price i.e. if you have not entered into a futures contract with me, you could have bought petro at Rs. 45 (market price) instead of Rs. 55.

The Reasons behind Ups and Downs of the stock market

We all invested on one or the thing either directly or indirectly. Our investments may be on our children, our dress, our properties, shares, stocks and obviously on ourselves.

I called expenditures for our children as an investment, because we are looking for great results, achievements and returns from our children. Then, investment on our cloths, yes I call it as an investment with a strong reason i.e. if you look good you can grab better opportunities in this competitive economy or else you will miss lot many things in your life. And, investing on properties, shares and stocks everything is with the expectation of making big returns.

But, these investments sometimes yield you good returns and sometimes may not. And of course, there are reasons behind all these. Today I would like to share with you certain reasons behind the ups and downs of stock marketwhich sometimes yield you good returns and sometimes it may leave you bankrupt.

The core reasons are………………………..

Why Stocks prices Go Up

-- The company entered in to a big new contract

-- A great positive news coverage on the company in the media

-- Scientists discovered and opined that the product is good for something important

-- A famous investor is buying shares-- Lots of people are buying shares

-- An analyst upgrades the company, changing her recommendation from, for instance, "buy" to "strong buy"

-- Other stocks in the same industry go up

-- Most of the stock market is up

-- A competitor's factory burns down

-- The company wins a lawsuit

-- More people are buying the product or service

-- The company expands globally, and starts selling in other countries

-- The industry is "hot"

-- people expect big things for good reasons

-- people don't understand much about it, but they're buying anyway

-- Increasing sales and profits

-- A great new executive is hired to run the company

-- An exciting new product or service is introduced

-- The company is bought by another company
-- The company might be bought by another company

-- Additional exciting new products or services are expected

-- The company is going to "spin-off" part of itself as a new company

-- Rumours

-- For no reason at all

Why Stocks prices Go Down

-- Lots of people are selling shares

-- A factory burns down

-- Other stocks in the same industry go down

-- Profits and/or sales are slipping

-- Top executives leave the company

-- A famous investor sells shares of the company

-- An analyst downgrades his recommendation of the stock, maybe from "buy" to "hold"

-- The company loses a major customer

-- Most of the stock market is down

-- perhaps in a temporary recession or bear market

-- Another company introduces a better product

-- There's a supply shortage, so not enough of the product can be made

-- A big lawsuit is filed against the company

-- Scientists discover the product is not safe

-- Fewer people are buying the product

-- The industry used to be "hot," but now another industry is more popular

-- Some new law might hurt sales or profits

-- A powerful company becomes a competitor

-- Rumours

-- For no reason at all

These are the some reasons which creates wave in the market both for and against the company in different situations. But, an intelligent investor has to look at all these fundamentals before taking any reasons regardingbuying and selling of shares and stocks of any companies. Now, I would like to add up one more thing that some of these reasons harm short term oriented investors and some time they harm both. Therefore, an investor with long term vision and patience will always make the most out of any stock market or any stocks. As a financial consultant, my advice is, if you really want to take part in the development of India, be regular in the long run.

Why should You Start Forex Trading...?

Forex trading is the buying and selling of currency. Currencies are traded through an agent or dealer and are traded in pairs. Euro, US dollar, British pound, Japanese Yen are some of the currencies traded in the Forex Market. You are not buying anything physical in Forex market. Currency trading works similar to the stock market. Think of buying a currency as buying a share of a particular country. When you purchase say Japanese Yen, you are in effect buying a share in the Japanese financial system, as the price of the currency is a direct reflection of what the market thinks about the current and future health of the Japanese economy. In common, the exchange rate of a currency versus other currencies is a reflection of the condition of that country's financial system compared to the other countries financial system. Unlike other financial markets like the New York Stock Exchange, the Forex spot market has neither a physical location nor a central exchange. The Forex market is measured an Over-the-Counter (OTC) or Interbank market, due to the fact that the entire market is run electronically within a network of banks continuously over a 24-hour period.

Until the late 1990's only the big guys could play this game. The first requirement was that you could trade only if you had about ten to fifty million bucks to start with Forex. Forex was initially intended to be used by bankers and large institutions and not by small guys. However because of the rise of the Internet, online Forex trading firms are now able to offer trading accounts to 'retail' traders. All you need to get started is a computer, a high-speed Internet connection, and the information.

The Most Common Currencies Traded in the Forex Market

The most popular currencies along with their symbols are shown below:

Currency	Country	Symbol	Nick Name
Dollar	United states	USD	Buck
Euro	Euro member	EUR	Fiber
Yen	Japan	JPY	Yen
Pound	Great Britain	GBP	Cable
Franc	Switzerland	CHF	Swissy
Dollar	Canada Dollar	CAD	Loonie
Dollar	Australia	AUD	Aussie
Dollar	New Zealand	NZD	Kiwi

Forex currency symbols are always three letters where the first two letters identify the name of the country and the third letter identifies the name of that country's currency

 

Market size and liquidity

The foreign exchange market is exclusive because of the following reasons;

 

·         Its trading volumes

·         The tremendous liquidity of the market

·         Its geographical dispersion

·         Its long trading hours

·         The variety of factors that affect exchange rates.

·         The low limits of profit compared with other markets of fixed income but profits can be high due to very great trading volumes

·         The use of leverage

 

Why should you start Forex Trading

Below given are some of the reasons, which make Forex trading an attractive investment;

 

·         The markets are open 24 hours a day

·         Largest and most lucrative market in the world

·         Limited Capital requirement

·         Infrastructure is not a constraint

·         No need to depend on Staffs

·         No Physical stock

·         Free from Theft and Depreciation

·         High Liquidity

·         It is a Paperless Business

 

The markets are open 24 hours a day

Time is not a barrier in Forex market because it will be opened 24 hours a day. This gives the trader an opportunity to trade at any time around the world. This allows you to respond to favourable/unfavourable happenings in the market by trading immediately. From any part of the world you can trade in Forex Market.   

 

Largest and most lucrative market in the world

Forex market is the largest market in the world. If you put together the volume on all the stock exchanges in the world, it would still not get close to the volume on the Forex markets. Volume make sure that a trader will never be stuck in the market, if you want to buy there will be sellers and if you want to sell there will be buyers.

 

Limited Capital requirement

Most of the business needs huge capital to start its operation. But Forex market gives you an opportunity to make money with a limited capital. It doesn't need extra money to grow your investment. You just grow your investment or new plans by locking in profits from your forex trading account.

 

Infrastructure is not a constraint

To trade in Forex market you only need a computer with a proper in addition the necessary training to conduct your business. No offices and other expensive infrastructure is required to do this.

                                                                                           

No need to depend on Staffs

Forex Trading can be done with only you and your computer and you have no staff or labour problems, no salaries and wages, to be worried about.

No Physical Stock involved

No business can operate without stock be it production or even stationery stock, this in itself is a huge expense to keep and protect but Forex trading is 100% online trading so no need of worrying about physical stock or something.

 

Free from Theft and Depreciation

Unlike other investments (Gold, Silver) there is nothing to worry about theft or physical depreciation.

 

High Liquidity

Because of the huge volume and large number of traders involved forex market will always have a buyer when you want to sell your currency. You will never face a liquidity problem. Whenever you want to sell the currency, without much effort you can do it.

 

It is a Paperless Business

All transactions will be done through your computer with the help of trading software. You can see your trading account while locking in profits during your trade. There no paper work included in this as everything in done online.

Multibagger Penny Stock - KILPEST INDIA LTD CMP 10.07- BSE Code : 532067

Kilpest India Ltd is one of India's leading Agri based companies. Kilpest is an ISO certified company and has representation in India in the field of agriculture business comprising Crop Protection Products and Public Health Products, Bio products, Micro-Nutrients and Mix fertilizers.

Moving with a lustrous record of providing quality products to its customers since past many years, the company's management is now shifting its focus towards 'Biotechnology', keeping in view the hazardous effects of chemical pesticides. Since Biotechnology has been described as a "Sunrise sector" by Government of India, the company is now on its adventurous journey towards exploring potentials of Biotechnology in the field of Organic Agriculture, Public Health, Nutraceuticals, industrial enzymes etc.

This Stock has Seen Roller Coaster Ride in Last 2 years.Before Stock market Crash This Scrip was Trading at above Rs 100.Subsequent Bear Market took it to lows of Rs 8.

Now it has just Started Gaining Some Strength and Currently Trading above 20 Days EMA Rs 10.06 which is at 10.07 and 50 days EMA which is at Rs 9.8.

Buy at Current market  Price or best Buy at 1-2 Rs Decline from CMP.

This is the stock to Buy as Technically it is very strong and has the potential to race to any level as it looks like a multibagger.

Caution:Its a low Volume stock so it could be Very Volatile.

All You Must Know about ULIPs.....!!!

Investment is a common activity that everybody is doing. But are you really planning before investing. Taking the right action in investment of your hard earn money is not so easy. Due to wide range of investment options available it is become difficult to decide whether to invest in equity, commodities, insurance, mutual funds or in any other avenues.

Investment in equity gives high returns but there is a high risk factor associated with it. On the other hand investment in traditional insurance plans gives you protection against adverse and unforeseen events but there is no exposure to equity markets. Investment in banking instruments give you fixed returns with lesser risk but it will not help you to multiply your wealth so all the time will be in dilemma to choose the best investment option.
 
One of the best options to overcome all these issues is to put your money is ULIPs which is a hybrid instrument and is a combination of insurance and investment. But before going for ULIP you should get all the details about it and judge accordingly.

What does ULIP means?

ULIP stands for Unit Linked Insurance Policy. ULIP is life insurance policy which provides you with both risk cover and investment. ULIPs are not like traditional plans as it is subject to market risk where the risk is borne by you and investment risk is related to stock markets.

It enables you to secure protection for your family in case on any unfavourable event and at the same time you can get return on your premium invested. In simple words we can say that ULIP are the investment instruments, which tries to fulfill your investment need and saves you from the hassles of managing and tracking a portfolio with coverage for your life.

What type of funds ULIP offer?
You can find a wide range of funds to suit your investments objectives, risk profiles, and time horizon. Different funds have different risk profiles and return potential. Some of the funds are;

• Equity Funds - Medium to high risk
• Income/Bond funds - medium risk
• Cash/Money market funds - low risk
• Balanced Funds - medium risk profile.

What is Unit Fund?
Unit fund is formed by pooling invested portion of the premiums paid by you after deducting all the charges and premium for risk over.

What is NAV?
NAV stands for Net Assest Value. It means the value per unit of fund on the given date. You can easily get the NAV’s of various ULIPs on the website of respective company.
What are the charges associated with ULIPs?

All the benefits come with the cost so here also you have to bear some costs associated with ULIPs. The charge structure varies from insurers to insurers. But some of the common fees and charges are given below-

• Premium Allocation Charges
• Administrative charges
• Fund Management Fees
• Mortality Charges
• Fund Switching Charges
• Surrender Charges

Premium Allocation Charges
The money appropriated from the premium paid by you toward charges before allocating the units under the policy is called Premium Allocation Charges. It normally includes initial, renewal expenses, and commission expenses. This cost worst effects your returns and in initial years you have to more Premium Allocation charges then later years.

Administrative charges
You have to pay some charges out of your premium toward payment to the sale people/insurance agents/banks from whom you bought policy. It also includes the fees for administration of your plan this fee can be fixed or variable.

Fund Management Fees
This is one the most important charge which you have to pay for ULIPs. It is deducted as a percentage from the fund value. The fees levies for management of fund(s) and it is deducted before arriving the Net Present Value of the fund.

Mortality Charges
This is the cost that you bear for your insurance cover. It would vary depending on policyholder's age, sum assured and policy term. For ULIPs which pay higher of sum assured or fund value on death, Mortality Charge falls with time while ULIP which pays both the sum assured and fund value, it remains constant.

Fund Switching Charges
ULIPs give you the option to switch your fund to different equity or debt options which are applicable in your policy. There is a limited number of fund switches are allowed without charge but if you exceed that limits then you will be levied a charge.

Surrender Charges
ULIPs provide you to encash your units before the maturity date. When you go for premature partial or full encashment of units you have to pay Surrender Charges.
What are the benefits you get from ULIPs?

Now you are aware about some of common charges and costs associated with ULIPs, let us look into the main benefits you get by investing in ULIPs. As you know ULIPs gives both risk cover and investment options but in fact the benefits are much more then this, some of them are listed below;

• Flexibility
• Exposure to Markets
• Diversified Investment Portfolio
• Transparency
• Tax benefits

Flexibility
The main benefit you get from ULIPs is that it provides flexibility in your investment. ULIPs give you the flexibility to change your life cover. As you can change the sum assured at the time of policy inception. So you can increase the sum assured as and when you need .ULIPs also gives you a facility to choose the fund for your investment according to your investment preferences and needs.

Exposure to Markets
When you invest in ULIPs you are exposed to the stock markets which other traditional policies like endowment, term policy doesn’t provide. You are given lots of options under ULIPSs to choose from equity, debt and balance funds. You can opt for any of the above on the basis of your risk profile.

Diversified Investment Portfolio
The money you invest in ULIPs will be in turn invested in various securities and it diversifies your portfolio. As you know it gives you a package of investment which relieves you from investing in Insurance and Mutual Funds separately.

Transparency
ULIPs offer complete transparency which makes working of ULIPs clear to you. The portfolio or your fund can be viewed by you whenever you want. Here in ULIPS your can know where and how the money paid by you in form of premium is invested unlike other insurance policies. In most of the ULIPs you are given an option to stop premium payment after 3 years but in other insurance policies failure to pay premium leads to lapse of policy.

Tax benefits
As you know ULIPs have life insurance component attached with it, which gives you income tax benefits against your ULIP premium payment by the way of deduction and exemption both. Investment in ULIP saves Tax under section 80c up to Rs. 100000. The returns you get are also tax free except pension plans.