Investment Basics

Monday, July 27, 2009

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Some basic terminologies…

• What is a share….?
• IPO and Rights issue
• Market Capitalization
• EPS (basic and diluted)
• P/E
• Bonus shares, Stock splits
• Book value and Market value

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Some basic terminologies

• Mutual funds
• Fund of funds
• Hedge funds
• ETF(Exchange traded funds)
• ADR and GDR
• Index Calculation
• Bond Market

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Some basic terminologies…

• Going long
• Going short
• Covering up of positions
• Derivatives – Futures & Options
• Put & Call
• PCR (Put-Call ratio)
• Rollover

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Explanations

• Going long – When you buy something with the

view that you’ll First
sellBUY,
it then
onceSELL
the price appreciates.

• Going short – When you short-sell something

with the view that you’ll buy it once the price
depreciates. First SELL, then BUY

• Covering of positions – When you close an

open position.
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Short sell, How it happens ?

• Short price = 3500; cover price = 3250

RIL @ 3500
SELL HERE

PROFIT
= (3500 – 3250)
* No of units

RIL @ 3250
BUY HERE

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Derivatives – Futures

• Contracts – two parties:

o One goes long
o The other goes short

• Have lot sizes, for example – NIFTY futures has a

lot size of 50.

• Two scenarios: Example

• Leverage is high.
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 Two scenarios
You go long on NIFTY futures 2 lots. You go long on NIFTY futures 2 lots.
You have bought 50*2 = 100 You have bought 50*2 = 100
quantities. quantities.
Total amount @ stake = 100 *4500 Total amount @ stake = 100 *4500
= 450,000 = 450,000
You need to pay only 12% of this or You need to pay only 12% of this or
54,000/- as margin requirements. 54,000/- as margin requirements.

Price goes UP to 4650. You cover your Price goes DOWN to 4350. You cover
position. up your position.

Total profit = (4650 - 4500) *100 Total loss = (4500 - 4350) *100
= Rs 15,000 = Rs 15,000

Your total investment = Rs 54,000 Your total investment = Rs 54,000

Your ROI = 15,000/54,000= 28% Your loss% = 15000 /54000= 28%
 Two scenarios
You buy one lot of NFTY call of 4600
when spot price is 4520 for a
premium of Rs150
Total amount @ stake = 150 *50
= 7,500/-
Suppose NIFTY goes up to 4650 and
the premium increases to Rs 220 and
you square off your position.
Total profit = (220 - 150) *50
= Rs 3,500
Taking transaction charges into
consideration which is approx 220/-
Net profit Rs 3,280
Your total investment = Rs 7,500
Your ROI = 3280/7500= 44%
You buy one lot of NFTY call of 4600
when spot price is 4520 for a
premium of Rs150
.
Total amount @ stake = 150 *50
= 7,500/-
Suppose NIFTY goes up to 4390 and
the premium decreases to Rs 80 and
you square off your position.
Total loss = (150 - 80) *50
= Rs 3500
Taking transaction charges into
consideration which is approx 220/-
Net loss 3720/-
Your total investment = Rs 7500
Your loss% = 3720/7500 = 49%
Derivatives - Options

• Almost same as futures:

 Contract between two parties.
 BUYER and SELLER involved.
 Play in lots. Lot size involved.

• Strike price:
 Price which buyer/seller is willing to buy/sell after certain
time.

• Two scenarios : Example

SPOT Price = 3050

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Put & Call

• CALL option – Similar to going LONG.

• PUT option – Similar to going SHORT.

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Trends

HPH

HIGHER
PIVOT LPH
HIGH
HPL
PIVOT LPH
HIGH
HIGHER
PIVOT
LOW LPL

PIVOT
LOW

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Trends

HPH
BUY at this
level, above the
prev. Pivot High LPH

HPH
HPL
LPH
HPH HPL

LPL
PH
HPL
SELL at this
PL level, below the
prev. Pivot Low

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BUY on this
day @ 3010.

SELL on this day @ 4730.

TOTAL PROFIT = 4730 – 3010

(per share) = 1720

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Thank you !

…???

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