A Presentation on Equities and Derivatives

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What is Equity/Share?
Equity/Share = Ownership in a company
Simply put, acquiring equity shares of a company signifies ownership in that company to the extent of shares that you have acquired. For instance, if you hold 500 shares of ABC company, which has totally issued 10 lakh shares, your ownership in ABC company is 0.05% (500/10 Lakh Shares x 100)

Returns from Equity

You earn income in two ways
Capital Appreciation Over the longer term, with growth of a companys business, its share price increases in value. This, in turn, increases the value of your holding in this company. Dividend Income The profits made by a company in a given financial year are sometimes partly distributed to its shareholders. This pay out is termed as dividend. The quantum of dividend that you are entitled to, will depend on the number of shares you hold.

Equity Investing A Long Term Exercise

Equity, as an asset class, provides returns only if the investment horizon is long term. Over the short term, the market experiences significant upward and downward price movements called volatility, which does not allow you to build wealth over the short term.

Risk Involved
Though equity is one of the most rewarding investments, it has the inherent risk of capital loss. The risks associated with equity investing are: Company Specific Risks Investing in a company which does not have good business prospects or is owned and run by promoters with a questionable reputation or is in a sector which is currently on a downward trend, will result in capital loss. Sector Specific Risks Investing in a fundamentally strong company at the wrong time I.e. when the sector in which it si a player, is on a downward trend., will result in a capital loss. Global Risks For export oriented companies, adverse changes in exchange rates, reduction in import quotas of countries where goods are exported to, etc. will reduce business potential leading to fall in stock prices. General Market Risks An economic downturn, political upheaval, a global increase in oil prices etc. will adversely affect the stock market, leading to fall in prices of equity shares.

Selecting Shares
Fundamental and Technical analysis gives indications as to which stock to buy and sell Investing in equity is not gambling. It involves in-depth study and analysis of the prospective company which share you want to buy. This study is called Fundamental Analysis. Equity selection also involves studying the price-movement of the stock over an extended period of time in the past, to judge the trend of the future price movement. This study is called Technical Analysis.

Rules for Equity Investing

Golden rule of Equity Investing: Dont buy on tips Buy shares of companies whose business you understand. Undertake thorough research before investing Hold for the long-term Dont Make hasty decision Diversify your portfolio Do not make a panic sell Do not borrow money to invest in Equity

Investing in Equities
Equities can be purchased from either the primary market or the secondary market. Primary Market - In the primary market, shares are offered to public for subscription for the purpose of raising capital or fund. Secondary market is an equity trading avenue in which already existing/pre-issued shares are traded amongst investors through Stock Brokers/Sub Brokers registered with Stock Exchange.

A broker is a member of a recognized stock exchange, who is permitted to do trades on the screen-based trading system of different stock exchanges. He is enrolled as a member with the concerned exchange and is registered with SEBI. A sub broker is a person who is registered with SEBI as such and is affiliated to a member of a recognized stock exchange.

Trading in Equities
How to Trade in Secondary Market In India you can invest in secondary market through National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) Before Trading in Equities you need to have a broking, Bank and De-mat account Broking Account Since equities can be bought and sold only through a stock broker, opening a broker account is a must. For primary market investment (IPO) you dont need a broking account. Bank Account You will need a bank account to transfer funds to your broker for your share purchases and deposit cheques received from you broker when you sell shares De-mat Account For trading shares and for applying for IPO a De-mat account is a must. Most companies shares are electronically traded on the stock exchanges. This means that there are no paper share certificates issued. Shares are traded in the dematerialised form. You need a dematerialisation account, called De-mat account in short, to have shares deposited into, and withdrawn from the account when you buy and sell respectively.

Derivatives?
The term derivative refers to an asset that has no independent value, but derives its value from that of an underlying asset. The underlying asset could be securities, commodities, bullion, currency, livestock or anything else. A very simple example of a derivative is petrol, which is derived from oil. The price of petrol depends upon the price of oil, which in turn depends upon the demand and supply of oil.

Benefits of Trading in Derivatives

Trading in derivatives offers 4 advantages: It allows you to speculate: If you have a view on where the market or stock will move, you can cash in on this view by using derivatives. It allows you to hedge Derivatives are very efficient risk management instruments. You can use derivatives to cap your potential losses in the underlying asset. It allows you to undertake arbitrage activities You can use derivatives to take advantage of the differences in prices of the derivative product and the underlying asset. It allows you to buy on margin When you purchase a derivative product, you simply have to pay a fraction of the price of the traded value. In other words, you dont have to pay up the full value of the asset at the time of the transaction.

Types of Derivatives
There are broadly 2 types of actively traded equity derivative instruments: Options An option is a type of derivate contract that gives the buyer the right to buy or sell a specified quantity of the underlying stock at an agreed price (strike/exercise price) on or before the specified future date (expiration date). The price to pay for purchasing an option is termed as premium. Futures Futures are derivative contracts that require you to sell or buy a specified quantity asset on a specified date (expiration date) at the spot price of the underlying asset prevailing on the expiration date. Futures can have a validity of 1 months, 2 months or 3 months. These contracts do not have as strike price. In other words, when the contract expires, the holder gains or incurs a loss depending on the prevailing spot price of the underlying asset in the cash market on the expiration date.

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