FREQUENTLY ASKED QUESTIONS
- Difference Between Spot & Futures Pricing?Futures are derivative products whose value depends largely on the price of the underlying stocks or indices. However, the pricing is not that direct. There remains a difference between the prices of the underlying asset in the cash segment and in the derivatives segment. This difference can be understood through two simple pricing models for futures contracts. These will allow you to estimate how the price of a stock futures or index futures contract might behave. These are:
- The Cost of Carry Model
- The Expectancy Model
- WHAT ARE DERIVATIVES?Derivatives are financial contracts that derive their value from an underlying asset. These could be stocks, indices, commodities, currencies, exchange rates, or the rate of interest. These financial instruments help trader to make profits by betting on the future value of the underlying asset. So, their value is derived from that of the underlying asset. This is why they are called ‘Derivatives’.
- How does NIFTY 50 work?NIFTY 50 is based upon solid economic research. A trillion calculations were expended to evolve the rules inside the NIFTY 50 index. The results of this work are remarkably simple: (a) the correct size to use is 50, (b) stocks considered for the NIFTY 50 must be liquid by the 'impact cost' criterion, (c) the largest 50 stocks that meet the criterion go into the index. NIFTY 50 is a contrast to the adhoc methods that have gone into index construction in the preceding years, where indices were made out of intuition and lacked a scientific basis. The research that led up to NIFTY 50 is well-respected internationally as a pioneering effort in better understanding how to make a stock market index.
- Why are indices important?
Indices are used as information sources. By looking at an index we know how the market is faring. This information aspect also figures in myriad applications of stock market indices in economic research. This is particularly valuable when an index reflects highly up to date information and the portfolio of an investor contains illiquid securities - in this case, the index is a lead indicator of how the overall portfolio will fare.
- HOW CAN YOU QUALIFY THE MARKET AS BULL OR BEAR?Bull and bear markets show relatively long-term movements of significant proportion. Hence, these runs can be gauged only when the market has been moving in its current direction (by about 20% of its value) for a sustained period. One does not consider small, short-term movements that last for a few days, as they may only indicate corrections or short-lived movements.
- CAN I OWN MORE THAN ONE DEMAT OR TRADING ACCOUNT?Yes, you can own more than one demat account. However, these may be with multiple brokers and firms. While you have the freedom to open many accounts, it is not a viable option. This is because you would have to pay maintenance charges for each of these accounts, which may turn out to be costly affair in the long run.
- What does the stock market index represent?
A stock market index captures the behaviour of the overall equity market. Movements of the index represent the returns obtained by "typical" portfolios in the country.
- WHY SHOULD YOU CHOOSE STOCKS?Stocks are one of the most effective tools for building wealth, as stocks are a share of ownership of a company. You thus have great potential to receive monetary benefits when you own stock shares. Owning stocks of fundamentally strong companies simply lets your money work harder for you since they appreciate in value over a period of time while also offering rich dividends on a periodic basis.
- WHAT INSTRUMENTS ARE TRADED IN THE STOCK MARKETS?There are various types of instruments traded in the stock market. They include shares, mutual funds, IPOs, futures and options.
- WHERE DO I BUY STOCKS?Stock trading happens on stock exchanges. However, you cannot buy directly at the exchange. To buy stocks, you need to open a demat account with a suitable broker who will understand your needs and buy stocks on your behalf. You can think of them as agents who will conduct transactions for you without actually owning any of the securities themselves. In exchange for facilitating or executing a trade, brokers will charge you a commission.
- WHAT ARE ADVANCES AND DECLINES?Advances and declines give you an indication of how the overall market is performing. We get a good overview of the general market direction. As the name suggest 'advances' inform you how the market has progressed. In contrast, 'declines' signal if the market has not performed as per expectations. The Advance-Decline ratio is a technical analysis tool that indicates market movement.
- CAN I TRADE WHEN MARKETS ARE SHUT?No, you cannot trade when the markets are shut but you can place orders . Such orders are called After-Market Orders. AMO is for those traders/investors who are busy during market hours but wish to participate. When you place an AMO, you have to keep in mind the closing price of the stock. You can choose a price which is 5% higher or lower than the closing price. That said, your order will be processed as soon as the market opens the next day at the opening price if it falls within this 5% range. AMOs come handy when you need time to plan your orders after conducting research. During market hours, you need to actively track the price as it is constantly fluctuating. This is not the case for AMOs.