TYPES OF TRADING
At the end of this section, you will be familiar with terms like Cash market, Margin trading, Futures & Options and Commodity trading.
Cash Segment
Cash market trading is meant for the people who wish to buy shares with an intention of taking delivery of shares. They need to allocate full amount towards the purchase of the shares at the time of placing order. That means the trading account must have sufficient funds to take care of the total cost of the purchase of the shares, brokerage and other charges. The shares get delivered to the investor's DP account after the settlement process. The investor may the sell the shares on the next trading day, provided the shares are not trade to trade segment (T2T). In such cases, the shares can be sold only after the receipt of the same.
Margin Trading
In margin trading, the broker allows the investor to buy shares worth up to 4 times the available balance in his trading account. But, not all the shares can be traded in the margin segment. The investor has to square off the trades within the same day. That means, if an investor buys 500 shares of xyz company at a total cost of Rs.50,000.00, he has to sell it before the stipulated time on the same day. If the market moves against the investor's position then he has to take delivery of the shares. If the shares have to be taken for delivery, brokerage will be charged more and the investor should settle the balance amount as per the agreement with the broker. If investor has done a short sell, he has to buy the shares. Short sell can not be carried forward to the next day. If it is not squared off, then he will be forced to pay penalty charges. Margin trading is also referred as Day trading or Intra day trading by some people. Stop loss trigger may be used to minimize the loss if the market moves contrary to the expectation of the investor. Assuming that after buying the share prices goes down, the investor can minimize the loss by putting the stop loss trigger price and a limit price. When the stock price hits the stop loss trigger price, the system starts selling the shares, it is sold till the limit price of the sell order. In general the limit price is set 5% lower than the stop loss price for selling.
Futures and Options
Future represents a contract between a buyer and seller on a specific quantity of financial instrument like currency, stock market index or stocks, or even a commodity, at a specified price with a defined delivery or settlement period. Futures are traded in “lots” of underlying assets like stocks. Buying a contract is known as long position and selling a contract is called as short position. Future contracts have two types of settlements, one is a physical delivery and the other one is settling in cash. Physical delivery part may be exercised in a commodity future contract. Last Thursday of the month is the due date for delivery or settlement of all F&O contracts.
However there is no need to wait till the last day of the settlement of the future contract. The contract can be squared off even before the expiry date.
In F&O segment, both the buyer and seller face equal risks. So, we can say that the risk factor is symmetrical.
The operators or investors of Future & Options segment can be classified as Hedgers - who have positions in long and short in F&O segments, so that any market fluctuation will not affect them. Speculators - Risk savvy people, who speculate and take their positions in F&O and the leave the rest to the market. The speculators get in to highest degree of exposure to risks. Same time speculators make big profits, if the market condition is in favor to them. Third category is known as Arbitrageurs operate in various markets simultaneously to protect their interests, they may take a short position in F&O and long position in cash segment.
Futures & Options trading is also known as derivative trading. The major difference between equity trading and derivative trading is, in case of futures, the short positions can be carried forward until the expiry of the contract, where as in cash segment, the short positions have to be squared off on the same day, failing which the investor has to pay the penalty charges. F & O segment is actively traded by the Foreign Institutional Investors and the turnover is 4 times higher than cash segment.
An option is a contract giving the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a specified date. The underlying assets of options can be a stock option or an index option.
Options are traded similarly like stocks, but the buyer pays the premium amount only, instead of the value of the entire contract. Strike price of the underlying assets determines the premium for the Options. The buyer may exercise his option to buy or sell or if the market is contrary to his positions, he may forgo the premium amount.
There are two option types known as Call option and Put option.
A Call option is an option to buy and the Put option is an option to sell a stock or index at a specific price on or before a expiry date.
Commodity futures also known as commodity derivatives are traded at the commodity exchanges. There are currently 2 major commodity exchanges NCDEX (National Commodity and Derivative Exchange) and MCX (Multi-Commodity Exchange).
Commodities can be classified as Agri and non-Agri commodities. Examples of few commodities are as follows,
Metals: Precious metals like Gold and Silver and Base metals like - Steel, Nickel, Tin, Iron, Copper, Zinc and Lead
Energy Products: Crude Oil, Furnace Oil, Natural Gas
Plastics & Petrochemicals: Polypropylene (PP), High Density Polyethylene (HDPE)
The following are the Agricultural Commodities:
Cereals - Maize, Rice and Wheat
Pulses - Chana (Gram), Urad , Lemon Tur, Masoor, Field Peas, etc.
Oil Complex - Soyabeans, Soy Oil and Soy Meal, Mustard Seed and Oil, Crude Palm Oil, etc
Spices - Cumin, Cardamom, Turmeric, Chilli, Black Pepper etc
Plantation Crops - Coffee, Cashew, Rubber
Fibres - Cotton, Jute, Mulberry
Others - Sugar, Gur (Jaggery), Mentha Oil, Potato.
The active traders can be classified as commodity futures trading. They are:
Arbitrageurs
Farmers and producers
Investors
Manufacturers
Physical Market Traders
Speculators
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