CHAPTER 4B : Trading Fundamentals - Trading Modes

Types of Trading

The trading style can be broadly classified into 2 categories:

On the basis of Holding period - Investors/ Traders according to their trading capacity of their analysis either trade and square off their positions Intraday or take a Delivery of the stock.

Intraday Trade - When a trader squares off (closes the transaction) his position during the same trading session, it is known as Intraday trading. Here the trader would get an intraday trading limit/ leverage / exposure on his deposited amount.

Delivery Trade - A trade where the investor does not square off his trading position intraday and carries over his trade for the next trading session, is known as Delivery trading. Normally the client needs to pay full amount of the transaction value and no leveraging benefit is available here. The brokerage too is more than that of Intraday.

On the basis of Trend - Traders can buy or sell the shares and then square off their positions gradually on the basis of trend they perceive on a stock.

Buy/ Long - A trader with a bullish (upward movement) view on the stock buys the share first and then sells. Ex: A trader is bullish on Reliance Industries trading @ 1000, he buys 200 shares at 10:30 am @ 1000 and then sells 200 shares @ 02:00 pm at 1010 (remember it is not always that a client can sell his shares on a profit).

Short Sell - This is a very unique concept, where a trader sells a share first (without having that share in his demat account) and then buys it back. The trader has a bearish view on the stock here. Ex: A trader is bearish on DLF limited, which is currently trading at 250; he sold 800 shares @ 250 at 10:30 am and bought back 800 shares @225 at around 03:00 pm, making a profit of Rs 5000. Here the trader has to take huge care that he squares off his trading position before the close of the market.

Modes of Trading

Online Trading - Brokers have now developed their in-house Online trading software, which allows the traders to trade from their home, office, travelling etc via a normal computer and internet connection.

Mobile Trading - Now traders who have a mobility access and WAP facility can trade online via their hand held devices like mobile, tablets etc. Every Trading system is connected to Exchange servers via broker's internal server and Risk Management System. Exchanges have clearly prescribed for a dual password mechanism which has a login and a trading password which expires every 14 days.

Offline Trading - Traders who don’t wish to trade online or cannot operate computers, visit their broker’s dealing room or calls their broker for trading, where a Dealer punches orders for them.

Difference b/w Online and Offline Trading accounts Points of Difference	Online	Offline
Trade execution	Self	Dealer
Trade mode	Desktop/ laptop/Mobile	Phone/ physical visit
Options available	Trading, reports, fund transfer etc	Only trading
Time saving	Huge	Later order punching

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About DreamGains

DreamGains Financials India Private Limited formed in 2004 as an independent and privately owned company is build upon the principles of teamwork and partnership.It is a trusted name in the financial service arena and provides you with an entire gamut of services under one roof. It today has emerged as a premium Indian stock consultancy, with an absolute focus on business and a commitment to provide “Real value for money” to all its clients.

CHAPTER 2A : Market Fundamentals - Participants of Market

I. Regulator is a body which regulates and overlook to the smooth Functioning of Financial Market Systems, they do recognize, allow, dis-allow other financial intermediaries for working in financial markets, redresal for the Investors, Creates / Modifies rules and regulations in financial markets.

A. SEBI: Securities Exchange Board of India is the Big Boss of Financial markets and the main regulator in the Capital Markets, SEBI regulates Equity Markets and Currency Derivative segments, came into power in 1992

B. RBI: Reserve Bank of India mainly controls the Banking and monetary systems in the Country making Monetary policies, looking after the working of Banks. They regulate Currency Derivative Segment along with SEBI

C. FMC: Forward Market Commission is the regulator for Commodity Derivatives in India

II. Exchanges provide a facility for Traders to exchange (Buy/ Sell) Securities, Commodity, Currency via an electronically driven platform.

A. Equity Exchanges

NSE- National Stock Exchange

BSE- Bombay Stock Exchange

B. Commodity Exchanges

MCX-Multi Commodity Exchange

NCDEX- National Commodity and Derivative Exchange

C. Currency Exchanges

MCX- SX

NSE Currency Derivative USE

III. Brokers/ Intermediaries are the body which acts as a interface between the Client and the Financial System and facilitates the proper trading in Financial Products like India Infoline, JM Financial, Sharekhan, Religare, ICICI Direct, Angel Broking, SMC Global Reliance Money to name a few.

Sub Broker: A sub broker is like a ' Franchisee' of a stock broker registered with SEBI and can act like and on behalf of a Broker i. e. Open Trading account and service clients, in turn he gets a sharing out of the total brokerage earned from the clients trading under the Sub Broker.

IV. Investors and Traders: These are the makers of the market, the real end client for whom the whole system exists. All the products and systems in Financial Markets are designed keeping in mind these real Investors and Traders of the System. These comprise of all the Indian Retail, HNIs, Institutional and Foreign Direct and Institutional Clients (FII) trading in the Indian Financial Markets for this Category of Participant in the Markets.

About DreamGains

DreamGains Financials India Private Limited formed in 2004 as an independent and privately owned company is build upon the principles of teamwork and partnership.It is a trusted name in the financial service arena and provides you with an entire gamut of services under one roof. It today has emerged as a premium Indian stock consultancy, with an absolute focus on business and a commitment to provide “Real value for money” to all its clients.

CHAPTER 1 : An Introduction to Indian Financial Market

What is a Financial Market?

A Financial Market like any other market is a System where Trading in Financial Instruments takes place. This System is now completely automated through Electronic Interfaces and consists of Many Buyers and Sellers with their individual objective of Entering in Financial Markets. This System is a Government Recognized System. It is a place where you give your money to a financial asset which can fetch you more returns or sometimes more safety than a conventional Bank account.

Capital Market operates through recognized exchanges whereas Money Market operates through phone lines, computers and internet.

Instruments for Capital Market - Equities, Bonds, Mutual Funds, Derivatives, Commodities, Currencies

Instruments for Money Market – Call Money, Repo (Reverse-Repo), T-Bills, Commercial Paper, Certificate of Deposit, Inter Corporate Deposits

Both money market and capital market have their own importance and benefits as one is primarily designed for long term planning and the other one for meeting short term commitments.

About DreamGains

DreamGains Financials India Private Limited formed in 2004 as an independent and privately owned company is build upon the principles of teamwork and partnership.It is a trusted name in the financial service arena and provides you with an entire gamut of services under one roof. It today has emerged as a premium Indian stock consultancy, with an absolute focus on business and a commitment to provide “Real value for money” to all its clients.

Play It The Jhunjhunwala Way!!

Rakesh Jhunjhunwala, born 5^th July 1960, a qualified Chartered Accountant, manages his own portfolio as a partner in his asset management firm, Rare Enterprises.

He made his first big profit of Rs 0.5 million in 1986 when he sold 5,000 shares of Tata Tea at a price of Rs 143 which he had purchased for Rs 43 a share just 3 months prior. Between 1986 and 1989 he earned Rs 2–2.5 million. His first major successful bet was iron mining company Sesa Goa (now Sesa Sterlite). He bought 400,000 shares of Sesa Goa in forward trading, worth Rs 10 million and sold about 2-250,000 shares at Rs 60–65 and another 100,000 at Rs 150–175. The price rose to Rs 2200 and he sold some shares.

Jhunjhunwala is the chairman of Aptech Limited and Hungama Digital Entertainment Pvt. Ltd. and sits on the board of directors of various Indian companies such as Prime Focus Limited, Geojit BNP Paribas Financial Services Ltd., Bilcare Limited, Praj Industries Limited, Provogue India Ltd., Concord Biotech Limited, Innovasynth Technologies (I) Limited, Mid Day Multimedia Limited, Nagarjuna Construction Company Limited, Viceroy Hotels Limited and Tops Security Limited.

Below is the list of stocks held as of October 2014 by Rakesh Jhunjhunwala, Rekha Jhunjhunwala or Rare Enterprise Equity:

Titan Company, Lupin, CRISIL, Rallis India, Delta Corp, Aptech, Geometric, NCC, Praj Industries, Firstsource Solutions, Escorts, TV18 Broadcast, Kesoram Industries, Pipavav Defense and Offshore, Prime Focus, Geojit BNP Paribas Financial, Anant Raj, Sterling Holiday Resorts, SpiceJet, A2Z Maintenance and Engineering, DB Realty, Viceroy Hotels, Autoline Industries, Bilcare, Ion Exchange (India), Hindustan Oil Exploration Company, Mcnally Bharat Engineering, Prozone Capital Shopping Centres, and, Adinath Exim Resources.

About DreamGains

DreamGains Financials India Private Limited formed in 2004 as an independent and privately owned company is build upon the principles of teamwork and partnership.It is a trusted name in the financial service arena and provides you with an entire gamut of services under one roof. It today has emerged as a premium Indian stock consultancy, with an absolute focus on business and a commitment to provide “Real value for money” to all its clients.

Different Types of Stock Trading

Based on duration of stock holding, the different types of stock trading can be classified as:

• Day Trading: It is a type of stock trading where both buying and selling of a financial instrument is done on the same day and all the tradings are closed before the market close for the day. Traders who participate in day trading are called active traders or day traders. Day trading demands fast decision and fast action. This type of stock trading is not advisable for a beginner.
  Some of the methods of day trading are:

1. Arbitrage: Arbitrage a kind of hedged investment meant to capture slight differences in price. When there is a difference in the price of something on two different markets the arbitrageur simultaneously buys at the lower price and sells at the higher price.
2. Market making: Market Makers are appointed by stock exchanges like The New York Stock Exchange (NYSE) and American Stock Exchange (AMEX), NASDAQ Stock Exchange and London Stock Exchange (LSE) to continuously provide ask and bid rates for the brokers to buy and sell the stock in these exchanges.
3. Momentum Day trading: It is a method of stock trading, where in a trade is made, when the stock is making a trending movement and the trade is closed at the end of the day.
4. Pattern trading: As the stock prices move up and down, they tend to form recognizable recurring designs or figurative diagrams, called chart patterns. Trading these patterns gives us more consistent profitable trades.
5. Scalping: It is a technique of trading and profiting in stock market. It is a day trading strategy and focuses on taking very small profits from hundreds of trades. It involves taking quick and small profits, using the ask and bid differences.
6. Rebate trading: It is a technique of day trading and profiting in stock market. Here instead of trader paying the commission for buying and selling, he is being paid by the service provider. ECN rebate is the primary source of profit.
7. Price action trading: It is a technique of stock trading and profiting in stock market. This is a simplistic and minimalistic approach to trading. This approach considers action of price only, that is open, high, low and close of a time period. The time period can be a minute, five minute, thirty or sixty minute. Some traders consider volume also for decision making, though it is optional. The trade is closed on the same day of opening.
8. Swing trading: It is a technique of stock Trading. The trade is taken at the beginning of the price swings and closing at the end of the price swing and on the same day of opening the trade.
9. Trading the news (news playing): It is a technique to trade any financial instruments, profiting on price fluctuation, that follows a sensitive news release. The trade is closed on the same day of opening the trade.

• Short Term Trading:A trade period of more than one day to a few weeks is considered as short term trade. A stock is bought and held in position from one day to a few weeks. A short trade is entered by creating a sell position, which is covered by buying after one day or in a few weeks.
  
  
  Swing trading and pattern trading are examples of short term trading.

• Medium Term Trading: A trade period from a few weeks to a few months is considered as medium term trade. A trend is followed with tailoring stop loss.
  
  
  Swing trading with higher time period (for example using weekly bars) and Elliot wave trading are the methods suitable for this types of stock trading.

• Long Term Trading: In this type of stock trading, stock is held for many months to many years. Investment decision is made by fundamental analysis of a stock. Profit from growth of the company, dividends and bonuses attracts this type of stock trading.

About DreamGains

Dreamgains Financials India Private Limited formed in 2004 as an independent and privately owned company is build upon the principles of teamwork and partnership.It is a trusted name in the financial service arena and provides you with an entire gamut of services under one roof. It today has emerged as a premium Indian stock consultancy, with an absolute focus on business and a commitment to provide "Real value for money" to all its clients.

Stocks vs Futures

There are plenty of differences between the cash segment of the capital market and the futures segment. Here are few of the easy to understand differences.

1) Ownership

When you buy shares in the cash market and take delivery, you are the owner of these shares or you are a shareholder, until you sell the shares. You can never be a shareholder when you trade in the derivatives segment of the capital market.

2) Holding period

When you buy shares in the cash segment, you can hold the shares for life. This is not true in the case of the futures market, where you have to settle the contract within three months at the very maximum.

3) Dividends

When you buy shares in the cash segment, you normally take delivery and are a owner. Hence, you are entitled to dividends that companies pay. No such luck when you buy any derivatives contract.

4) Risk

Both, cash and futures markets pose risk, but the risk in the case of futures can be higher, because you have to settle the contract within a specified period and book losses. In the case of shares bought in the cash market, you can hold onto them for an indefinite period and can hence sell when prices are higher.

5) Investment objective differs

You buy a contract in the derivatives market to hedge risk or to speculate. Individuals buying shares in the cash market are investors.

6) Lots vs shares

In the derivatives segment you buy a lot, while in the cash segment you buy shares.

About DreamGains

Dreamgains Financials India Private Limited formed in 2004 as an independent and privately owned company is build upon the principles of teamwork and partnership.It is a trusted name in the financial service arena and provides you with an entire gamut of services under one roof. It today has emerged as a premium Indian stock consultancy, with an absolute focus on business and a commitment to provide “Real value for money” to all its clients. 

Comparison - BULL & BEAR Market

A bull market is a rising market. In a bull market, investors are positive. The economy tends to be strong. Unemployment is low. Consumers are spending money, which increases business profits. When businesses profit, investors demand to share a piece of the pie -- they buy stocks and hang on tight to watch the money roll in. The supply of shares, then, is low -- no one wants to give up their piece of the widget pie. The competition to acquire those much-coveted shares becomes fierce, which drives the prices up even higher. Investors take risks because they feel good about their chances of making the big bucks.

A bull market is when the market appears to be in a long-term climb. Bull markets tend to develop when the economy is strong, the unemployment rate is low, and inflation is under control. The emotional and psychological state of investors also affects the market. For example, if investors have faith that the upward trend in stock prices will continue, they are likely to buy more stocks. If there are more buyers interested in buying shares at a given price than there are sellers who are willing to part with their shares at that price, stock prices will continue to rise.

A bear market is a declining market. It tends to begin with a sharp drop in stock prices across the board. There is usually an eye in the storm, during which stock prices increase. But the storm returns, of course, and the bear market falls and falls and falls. History has shown that a bear market tends to level out at 40 percent lower than when it began. Particularly bloodthirsty bears, like the one that ravaged the U.S. during the Great Depression, might level out at about 90 percent lower.

 
In a bear market, the economy tends to be weak. Unemployment increases. Consumers spend less, which results in lower business profits. As we've seen, this devalues a given company's stock. Investors tend to sell their stocks before the value decreases too much. Investors don't want to take risks because they don't feel good about their chances.

A bear market describes a market that appears to be in a long-term decline. Bear markets tend to develop when the economy enters a recession, unemployment is high, and inflation is rising. Investors lose faith in the market as a whole, which in turn decreases the demand for stocks. Keep in mind that a sustained bear market is something that you should expect to occur from time to time, and that, in the past, the stock market has risen more than it has declined.

About DreamGains

DreamGains Financials India Private Limited formed in 2004 as an independent and privately owned company is build upon the principles of teamwork and partnership.It is a trusted name in the financial service arena and provides you with an entire gamut of services under one roof. It today has emerged as a premium Indian stock consultancy, with an absolute focus on business and a commitment to provide “Real value for money” to all its clients.