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  • Benefits Of Trading In Index Futures


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    A futures contract on a sectoral or market-wide index is called an index future. On the NSE, for example, you can buy futures on the Nifty, which is a market-wide index, and liquid futures on the Bank Nifty (which is a sectoral index of liquid banks). Both of these indices are very liquid, and both individual and institutional investors trade them a lot. Why have index futures in India become so popular? Why would you want to trade in index futures? Index futures trading in India grew out of stock futures trading, which was similar to the old Badla system on the BSE. In addition to looking at how to trade index futures, let’s look at how traders can actually benefit from doing so.

    As one of the top brokers in the share market we understand the concerns with brokerage fees and offer lowest brokerage for intraday trading and the best trading accounts for our users.

    1. You can look at the whole and avoid stock risk

    Let’s say you’ve decided to buy banking stocks, but it will be hard to figure out which ones to buy. While NPAs may be a problem for PSU banks, valuations are a problem for private banks. A better idea would be to look at the whole banking industry, which will give you a natural way to diversify. You can do this by buying Bank Nifty Futures and taking part in the rise of banks. The benefit is that you can keep your position open as long as you want by rolling it over each month for a small fee of about 0.50 percent.

    2. You can trade in both long and short directions

    It’s fine if you’re betting that banking stocks will do well. But what if you think banks are bad? If you own banking stocks, you can sell them or sell them short on equity markets. But because Indian markets use rolling settlements, you can only short stocks for one day. The other option is to sell stock futures of certain banks, but this also comes with risks related to those banks. All of these problems can be solved by selling the index futures for Bank Nifty. If you think the Indian markets as a whole will go down, you can just sell Nifty futures.

    3. The margins for trading index futures are lower

    Always keep in mind that trading in futures is all about trading on margins. But the margins on indices like the Nifty and the Bank Nifty tend to be lower than the margins on individual stocks. Because an index is a group of stocks, it offers a natural way to spread out risk. This is shown by the fact that less risk is needed to take a position in index futures. This will make sure that the amount of money that is locked in is also less.

    4. With index futures, you can reduce your risk

    This is a very important part of how you manage your portfolio. Whether you invest on your own or through a company, you may have a large portfolio of stocks. Once the US Fed raises rates, you think the market will fall. At the same time, you are sure that the drop in your stock prices will not last long and that they will go back up in the next few months. You could just keep your portfolio, but it would be better to sell Nifty futures to spread out your risk. When the market goes down, you make money on Nifty futures, and these profits will help you lower your average cost of holding equity. After 3 months, you will definitely be better off.

    5. Very liquid
    There are often problems with the way certain stocks or stock futures trade. On the other hand, index futures rarely face liquidity risk because institutional investors like to use them. Because of this, the bid-ask spreads are also very small. This makes it pretty safe to trade in these index futures, since you won’t get stuck for lack of liquidity. This is one of the main reasons why trading index futures is good.

    6. Index futures can help you diversify

    If you have a portfolio that is mostly geared toward financial stocks and you think there is some risk because RBI is raising interest rates, so you want to add safety by investing in non-cyclical sectors like FMCG and IT. Buying these stocks is one option, but it will cost money and lock up funds if the opportunity is only for a short time. A better way is to add index futures for the FMCG index and the IT index to your portfolio. This will help you diversify your portfolio’s structure with little risk and money.

    7. It costs much less to trade index futures.

    Index futures have much lower commission rates and STT rates than equities or even stock futures. In fact, most brokers will also offer you fixed brokerage packages on indices, which makes them cheaper than stock futures as well. Make the most of the fact that index futures cost less. This is why index futures are a great way to trade with less risk and a higher chance of making money.

    As we mentioned earlier as one of the top brokers in the share market we understand the concerns with brokerage fees and offer lowest brokerage for intraday trading and the best trading accounts for our users.

  • The Features Of Futures Market

    Here are some of the most interesting things about futures contracts:

    Let’s start off by saying that the Indian derivative market is the largest in the world in terms of turnover and market participation!

    Before we get on to understanding more about the Futures market, we wanted to inform you that as an online trading company we offer lowest brokerage for intraday trading for our customers
    A futures contract can be used for exchanges, commodities, currencies, and indices. It can also be used for many different types of asset classes.

    A futures contract is not flexible like a forward contract. For example, if a contract says it applies to 1000 barrels of oil, the price must be locked in per barrel or in multiples of 1000 barrels. To lock in a price, someone would have to sell or buy a hundred different contracts. To lock in the price of a million barrels of oil, you would have to buy or sell a thousand of these contracts. Traders also get a good idea of what the futures price of a stock or the value of its index is likely to be.

    Future contracts are mostly used to figure out how many shares will be bought and sold in the future based on their current future price.

    Futures are traded on margin, which means that people who don’t have enough money can still trade and take part. To do this, one can pay a smaller margin instead of the full value of the physical holdings.

    There are two types of people who use future contracts: speculators and hedgers. Producers or hedgers are the people who make or buy an underlying asset hedge. The price at which the good will be bought or sold is also guaranteed by these people. On the other hand, speculators are people who use futures to bet on how the price of the underlying asset will change.

    Futures Contract Example

    Here’s an example of a futures contract to help you get a better idea of what it is:

    Let’s say that a person who makes oil wants to sell it but worries that oil prices will go down in the future. A futures contract can be used to make sure that the oil producer gets a set price and doesn’t lose money. With the help of future contracts, the oil producer can lock in the price at which the oil will sell, and once the future contract is up, the oil will be sent to the buyer.

    On the other hand, a company that makes things might need oil to make widgets. Since this company plans ahead and likes to get oil every month, they may also use a future contract. So, based on the price set in their future contract, the company knows how much oil they will get. They know that once their contract is up, they will have to take delivery of that oil.

    Conclusion
    Futures contracts are a great way to spread out your investments and make sure you make good money by using what you know and making guesses about future prices. Since you can trade Futures based on many different types of underlying assets, you can use a futures contract to protect yourself from losses in other asset classes and take delivery of the underlying asset before the contract expires.

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  • What Are Futures Contracts And How Do They Work?

    Investors who want to diversify their portfolios by investing in other types of assets have found that derivative trading has been very profitable. Some people like to trade options, while others like to trade Futures. But because futures contracts are so complicated, you need to know everything there is to know about them.

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    What is trading in the futures?

    A Futures contract is a legal agreement to sell and buy a certain commodity, asset, or security at a certain price and date in the future. Futures contracts are standardized to make it easier for people to trade on the futures exchange. This is done to check for quantity and quality.

    The person who buys the futures contract has to buy or receive the underlying asset before the futures contract ends. The seller of this contract is responsible for giving the buyer the asset that the futures contract is based on when the buyer decides to use the futures contract.

    Future contracts let an investor guess which way a commodity, security, or financial instrument, which is the underlying asset, will move. When these contracts are bought, they are often done so to protect against losses from price changes in the underlying asset that are not good.

    Futures Contract

    Futures contracts are derivative financial contracts in which both parties agree to buy or sell an asset at a certain date and price in the future. Futures Trading is the process of trading with Futures Contracts.

    To follow the rules of futures trading, a buyer must buy the underlying asset while a seller sells it at a set price, no matter what the current market price is or when it expires. Future contracts also list the standard amount of the underlying asset, which makes trading on a futures exchange easier.

    People talk about the same thing when they say “futures” or “future contract.” For example, someone may say that they bought oil futures, which is the same as saying they bought an oil futures contract. When someone talks about a “future contract,” they are usually talking about gold, bonds, oil, or Nifty 50 index futures.

    Futures and forwards contracts

    Futures is a very broad term that is often used to talk about the whole market. Futures contracts are standardised, which is different from forward contracts. Forwards and forward contracts are both ways to lock in a price for the future in the present. Forward contracts are bought and sold over-the-counter (OTC) and have terms that can be changed. On the other hand, a futures contract will have the same terms for selling and buying, no matter who it is with.

    In the following blogs, we will look at futures trading in greater detail.

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  • The Market Participants Of Derivative Trading

    Investing is one of the most effective methods to spend your money. When you first begin investing, however, it is always advisable to stick with investment methods that provide great security and assured returns. The majority of early investments are based on a low-risk profile. Their risk appetite increases as they obtain more investment expertise and understanding of the financial market. It helps investors to diversify their assets and invest in financial instruments with higher returns if they have a high risk profile.

    While investing can be one of the most effective methods to spend your money, there is a certain amount of risk involved – especially if you don’t use the right tools. At Zebu, a share broker company, we offer the best online trading platform for our investors, while also giving them an added advantage of lowest brokerage for intraday trading.

    What Exactly Is a Derivative?

    Derivatives are financial contracts between two or more parties that are based on an underlying asset like stocks, commodities, currencies, etc. The value of the derivative is based on the price or value changes of the underlying asset. You can use derivatives to protect a position, guess which way an underlying asset will move, or increase the value of your holdings.

    In order to trade derivatives, you must use an exchange or trade over the counter (OTC). Over-the-counter trade is conducted between two private parties without the involvement of a centralised authority. Furthermore, because the contract is signed by two private individuals, it is vulnerable to counterparty risk. The chance, or rather the danger, of one of the parties defaulting on the derivative contract, is referred to as this risk.

    The Benefits of Derivatives:

    1. Hedging

    The greatest approach to protect yourself from a disastrous investment is to use a derivative contract. When you trade derivatives in the stock market, you’re effectively betting on whether the price of a certain stock will rise or decline. As a result, if you suspect that the stocks in which you have invested are losing value, you could get into a derivative contract in which you precisely predict the stock’s value decline. You can profit from your derivatives contract by hedging your stock market losses as the stock price begins to fall.

    2. Arbitrage

    A commodity or asset is purchased at a low price in one market and then sold at a much higher price in another market in arbitrage trading. Derivatives trading provides an advantage in terms of arbitrage trading, allowing you to profit from price disparities between markets.

    3. Managing Market Volatility

    You can insulate yourself from the volatility of other asset classes by investing in derivatives. You can, for example, invest in stocks and then get into a derivatives contract with the same underlying asset. It can protect the health of your portfolio because either of the assets can offset the losses of the other.

    4. Excellent investment opportunity

    While most traders enter the derivatives market to speculate and profit, it is also an excellent place to put any extra money. Without affecting any of your existing underlying equities, your funds will earn additional returns.

    Derivatives Market Participants

    1. Hedgers

    They are the creators, manufacturers, and distributors of the underlying asset, and they typically sign into a derivative contract to reduce their risk. Simply defined, hedgers guarantee that they will receive a preset price for their assets and will not lose money if values fall in the future.

    For example, if you own shares in a company that is currently trading at Rs. 1000 and plan to sell them in three months, you don’t want a drop in market prices to depreciate the value of your investment. You also don’t want to miss out on profits if the market increases in value. You can assure that you are profitable regardless of whether the stock price falls or rises by taking a hedging position and paying a small premium.

    2. Speculators

    These are real traders that try to forecast the future price of commodities based on a variety of criteria and keep track of their prices on a regular basis. If they believe the price of a certain item will rise, they will purchase a derivatives contract for that asset and sell it at expiration to profit. A speculator, for example, will wager that the stock price will not fall in the above example when you got into a derivatives contract to protect yourself against the stock price decreasing. The speculator will earn if the stock price does not decline during the specified period.

    3. Margin Traders

    Margin traders are investors that trade on a daily basis and make profits and losses solely based on market moves that day. The margin refers to the minimum amount paid by the investor to the broker in order to participate in the derivatives market. These traders don’t purchase and sell with their own money; instead, they borrow the money from a stockbroker as a margin.

    4. Arbitrage Traders

    Arbitrageurs are traders who acquire securities at a cheaper price in one market and then sell them at a higher price in another. They can essentially profit from pricing differences because they are low-risk.

    Conclusion
    Investing in derivatives, like all other investment tools, demands a thorough grasp of the market and the ability to make decisions only after gaining sufficient knowledge. You can make good money using derivatives if you invest based on knowledge.

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  • Key Monetary Policy Terms That Every Investor Should Know – Part 2

    In the previous article, we learned about 4 key monetary policy terms like LAF, CRR, Repo rate and reverse repo rate. Here are a few more important terms that you should know to understand MPC policies. Want to track your trades and investments smoothly? Then Zebu’s online trading platform is the answer to it. As the best Indian stock broker company we not only have the best technology but also have the lowest brokerage for intraday trading.

    5. Statutory Liquidity Ratio (SLR) The statutory liquidity ratio is the amount of money that banks must keep in liquid assets at all times. But banks can’t keep these funds in cash. Instead, they need to keep them in government securities, bonds, or precious metals. The CRR and the SLR both affect how much money commercial banks can lend to people who want to borrow it. If the RBI keeps these two rates too high for too long, banks will be less likely to lend money. It would be hard for people who want to borrow money and are in this situation.

    6. Base Rate This is the lowest interest rate that a bank will charge a customer when they lend them money. It is up to the bank’s management, and RBI has no say in the matter. But banks don’t usually lend money at that interest rate to people who want to borrow money. When lending money, banks usually charge an extra amount on top of this base rate.

    7. Long-Term Repo Operations (LTRO) In 2020, RBI took a revolutionary step by putting the LTRO tool on the market to control the repo operations. In LTRO, RBI lends money to banks for a set period of time, usually between 1 and 3 years, at the current Repo Rate. In return, banks offer Government Securities with the same or longer maturity period. In 2019, RBI’s six monetary policies have lowered rates by almost 135 basis points (bps), but banks haven’t even given customers half of the benefit. In the LTRO system, the RBI thinks that giving banks stable, longer-term cash at the repo rate can help them lower the rates they charge for loans to consumers and businesses while keeping their margins. LTRO is used to add money to the market and make sure that credit keeps flowing to the economy.

    8. Targeted Long-Term Repo Operations (TLTRO) This is the same as LTRO, but the main difference is that TLTRO uses the money borrowed from RBI to buy investment-grade corporate bonds, commercial paper, and non-convertible debentures. 9. Marginal Standing Facility (MSF) Marginal Standing Facility is a Liquidity Adjustment Facility (LAF) window that RBI opened in May 2011. It is the rate at which banks can borrow money from the RBI for one night in exchange for approved government securities. The question is: If banks can already borrow from the RBI through the Repo Rate, why do they need MSF? This window was made so that commercial banks could borrow money from the RBI in times of emergency, like when inter-bank liquidity runs out and overnight interest rates change a lot. So, the main goal of the MSF is to keep the overnight inter-bank rates from being too unstable.

    Now that you have a deep understanding of these MPC terms, the next time the RBI releases an update, you can see how the stock market is affected with some extra context. Zebu’s online trading platform is the answer to all your bad tech problems. As the best Indian stock broker company we not only have the best technology but also have the lowest brokerage for intraday trading.

  • Key Monetary Policy Terms That Every Investor Should Know – Part 1

    The Reserve Bank of India sets the rules for how the economy works as a whole. It is the demand-side economic policy used by the government of a country to reach macroeconomic goals like inflation, consumption, growth, and liquidity. It involves managing the amount of money in circulation and the interest rate.

    In India, the Reserve Bank of India’s monetary policy is meant to control the amount of money in order to meet the needs of different parts of the economy and speed up the rate of economic growth.

    The RBI uses open market operations, the bank rate policy, the reserve system, the credit control policy, moral persuasion, and many other tools to carry out the monetary policy. If any of these are used, the interest rate or the amount of money in the economy will change. Monetary policy can either make the economy grow or shrink. An expansionary policy involves making more money available and lowering interest rates. A monetary policy that makes money tighter is the opposite of this. For example, for an economy to grow, liquidity is important. The RBI depends on the monetary policy to keep enough cash on hand. By buying bonds on the open market, the RBI adds money to the economy and brings down the interest rate.

    Here are some important terms you should know if you want to understand how monetary policies work. Before we get on to understanding monetary policies there is one of the few things such as — technology that plays a huge part in investments. As an online trading company we offer the best trading accounts and the best stock trading platform to make your investment journey smooth.

    1. The Liquidity Adjustment Facility (LAF)

    It is a tool used by the Reserve Bank of India (RBI) to manage liquidity and keep the economy stable. LAF covers both Repo and Reverse Repo Operations. It was made by RBI after the Narasimham Committee on Banking Sector Reforms suggested it (1998). It helps keep inflation from getting out of hand.

    2. Repo Rate

    Repo Rate is the rate at which commercial banks borrow money from the Reserve Bank of India (RBI), usually against Government Securities. So, to keep things simple, if the RBI wants more money to flow into the economy, it lowers the Repo Rate, and vice versa. So, when banks borrow money at a lower rate of interest, they also lend money at a lower rate, and the opposite is true when RBI raises the Repo Rate. For example, if RBI lowers the Repo Rate by 25 bps, which stands for “25 basis points,” this means that RBI has lowered the rate by 0.25 percent. So, 1 bps = 0.01 percent . In most Repo operations, banks borrow money from RBI for one day at a time. Most believe that banks haven’t cut interest rates by the same amount that the RBI has done for banks. So, the answer is that the banks don’t have to all cut by the same bps. Even so, it’s up to the banks to decide whether or not to lower them, and if they do, by how much bps. The reason for this is that banks take into account different factors, such as their interest rate on other sources of funding, their NPAs (Non-Performing Assets) for the same period, their operational cost, and their cost of customer acquisition, the target segment they are lending to, etc.


    3. Reverse Repo Rate

    The Reverse Repo Rate is the rate at which RBI borrows money from banks for a short time and pays interest to banks for the same. When banks have more cash on hand than they need, they sometimes leave it with the RBI so they can earn interest on it. So, when the RBI wants to slow the flow of money through the system, it raises the Reverse Repo Rate. This makes it more profitable for banks to invest in Government-backed securities instead of lending money to risky market borrowers. The equation basically says that if the Reverse Repo Rate goes up, the interest rate on all loans goes up, and if the Reverse Repo Rate goes down, the interest rate on most loans goes down.

    4. Cash Reserve Ratio (CRR)

    Banks have to put a certain percentage of their Net Demand and Time Liabilities (NDTL) in the form of cash with RBI. This is called the Cash Reserve Ratio. This CRR has to be kept up-to-date with RBI every day. If it isn’t, the banks at that time will have to pay a fine and interest. RBI requires banks to keep this ratio in order to control the flow of credit in the market. By lowering the CRR, RBI makes more money flow into the economy. If it wants to stop the flow of money, it lowers the CRR. The interest rate that banks charge on loans has nothing to do with whether or not the CRR rate goes up or down. But if CRR goes up, the flow of money in the market goes down, and if the demand for credit doesn’t go down at the same rate, interest rates will have to go up.

    These are a few of the important terms that you should know about during MPC meetings. In the next article, we will share a few more of the MPS terms for your reference.

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  • What Is A Stock Buyback And How Does It Affect A Stock’s Price

    Over the last few years, a number of companies have said they will buy back their own shares. Before we get into the details of buybacks in India, let’s look at how they work around the world. There are two ways for a company to buy back its own shares around the world. First, you can buy back the shares and keep them as “treasury stock” on the company’s balance sheet. The company uses this for treasury operations. Second, you can buy back the shares and get rid of them, which will reduce the number of shares that are still outstanding by that amount. In India, the first way isn’t allowed. Instead, shares can only be brought back to get rid of them.

    So, why do companies buy back their own shares? Why does a company buy back its own shares? One needs to know what the benefits are for the company and the shareholders. The most important question is what shareholders can get out of buying back their own shares.

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    1. Have a lot of money but not many projects to invest in

    This is one of the main reasons why companies want to buy back their own shares. Indian IT companies like Infosys, TCS, Wipro, and HCL Tech had billions of dollars in cash on hand most of the time. Now, keeping money in the bank costs money, so it’s better to give it back to shareholders. A company like Reliance Industries may have billions of dollars in cash, but it also has huge investments in the telecom industry. Most IT companies use business models that have been around for a while, and there aren’t a lot of new projects to work on. One of the main reasons for buying back shares is that there is too much cash on the books and not enough investment opportunities.

    2. Buybacks are a better way to reward shareholders because they save on taxes

    This advantage became clearer in India after the 2016 Union Budget, when the government said that shareholders would have to pay a 10% tax if their annual dividends were more than Rs. 10 lakhs. Now, companies are taxed almost three times on the dividends they pay out. First, dividends are paid out after taxes have been taken out. Second, there is a dividend distribution tax (DDT) of 15% when the company pays out the dividend. Third, shareholders pay a 10% tax. Most of the 10 percent tax went to promoters and big shareholders. Even with the 10% tax on long-term capital gains that was added in the 2018 budget, buybacks are still a good tax deal.

    3. In theory, buybacks tend to raise the value of a company

    When a company buys back its own shares, the number of shares out in the market and the capital base go down. In this way, it makes the company’s EPS and ROE better. If the P/E stays the same, when the EPS goes up, the stock price should also go up. But in real life, it doesn’t happen very often. When a company buys back its own shares, it is seen as a business with few chances to grow and invest in the future. Since P/E ratios are usually based on growth, these companies tend to have lower P/E ratios. So, even though EPS goes up, the effect on valuation is usually about the same because P/E goes down.

    4. The company can send a message that the stock price is too low

    This may be the most important message that companies want to send when they buy back their own shares. The fact that the company is sure enough of itself to use its reserves to buy back its own shares suggests that the company’s leaders think it is undervalued. This is more important for stocks that have dropped sharply but don’t seem to have any major problems. In this situation, it might be a good idea for the company to buy back the shares to show that prices have hit rock bottom. Even though the stock may not rise sharply, it usually helps the stock find a bottom.

    6. It can help the company’s founders get a bigger share of the business

    There are times when the people who started a business may worry that their stake in it will fall below a certain level. A buyback is an offer, and it’s up to the shareholders to decide if they want to take it. If the promoters agree to the buyback, it keeps their stake in the business and gives them cash. On the other hand, if they don’t take the buyback, they can increase their stake in the company. This is very important if the company is afraid that another company will try to take it over.

    In India, the only way to buy back shares is to get rid of them. Even though the effect on stock prices is still up for debate, there is no doubt that buybacks are a tax-efficient way to give cash back to shareholders.

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  • Understanding Stock Splits And Its Impact On The Share Price


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    Every investor looks to the stock market for shares that will make him money. But sometimes investors can’t buy shares of a popular company. The reason is that the share price is so high. Companies decide to split their shares when this happens.

    Stock split, as the name suggests, is when the face value of a stock goes down and the number of outstanding shares goes up at the same time. The main goal of a stock split is to make the stock easier to buy and sell, so that investors can buy more of it. Companies do stock splits when they realise that the price of their shares is too high or is higher than the prices of their peers.

    For example, if a company does a 1:10 stock split, a stock with a face value of INR 1000 is split into 10 shares with a face value of INR 100. But keep in mind that the company’s share capital doesn’t change. This means that a stock split is nothing more than a cosmetic change, and that the news of a stock split won’t affect the price of the stock in a way that will lead to unusually high returns. Even if there is information in the announcement, it is most likely to show up as unusual returns on the day of the announcement, which is called the record date.

    There are some ideas about why companies split their stocks:
    Signaling: a stock split is a sign that the company will grow in the future. This is because real-world studies of stock splits in developed economies have shown that the day after the announcement of a stock split, returns are often unusual.

    Optimal trading range:

    On every stock market, stocks tend to trade in a certain range. As we’ve already said, stock splits are done to get the price of the stock back into the normal trading range. This lets more investors buy shares.

    According to this theory, the goal of bringing the stock price back to the usual trading range is to improve liquidity, which will lead to investors making more money.

    This is a way for small or ignored firms to get the attention of the market. This is done by a company that feels it has been undervalued in the market because market participants haven’t shown much interest. So, companies use stock splits to get more attention and make sure that more investors can get information about the company. This is more important for small businesses than for big businesses.

    What do investors get out of a stock split?

    In a stock split, the number of shares goes up, but the value of each share goes down. This makes it easier for new investors to get interested in the company’s stock and buy some. In other words, the number of shareholders could grow if more investors bought at lower prices.

    It looks like investors who bought the split share at a lower price may not benefit from the stock split. But if the share price goes up, it could be because of a stock split. This tells the market that the share price of the company has been going up before the split, so investors think that the growth will continue in the future.

    So, after a stock split, should you buy a share?
    Before 1999, SEBI only let INR 10 and INR 100 be used as face values. Today, the split ratio can be 2:1, 10:1, 5:1, or any other number.

    A few reports suggest that the trading range theory is wrong because most stock splits are announced for stocks that were already trading at low prices.

    So, market experts have seen that the price of a share after a stock split depends on how the market is doing and how well the company is doing. Before investing in a share after a stock split, make sure you keep the above two points in mind. There’s no need to say that the market will always have mixed feelings about stock splits. Also, one last thing: don’t confuse a bonus with a stock split. Bonus shares only change the company’s issued share capital. A stock split, on the other hand, changes the company’s authorised share capital.

  • What You Can Know About The Market With The Put-Call Ratio

    Market emotion can be gauged using a derivative indicator known as the Put-Call Ratio (PCR). Both a “call option” and a “put option” provide buyers the right to buy or sell a specific asset at a specific price, respectively.

    On any given day, the open interest in both a put contract and a call contract is combined to calculate the PCR.

    PCR = Put Open Interest/ Call Open Interest

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    Interpretation:

    A rising Put-Call Ratio, also known as a PCR, indicates that put contracts have a bigger open interest than call contracts. Traders are either negative on the market or using put options to protect their holdings from potential losses.

    There is greater open interest in call contracts than put contracts if the Put-Call Ratio or PCR falls below 0.5. This is a sign that investors are bullish on the market as a whole.

    A Put-Call Ratio of 1 shows that there are as many people interested in purchasing put options as there are in purchasing call options.

    Considerations that should be taken into account
    Investors can use the put-call ratio to get a sense of market sentiment before a market shifts. Aside from this consideration, it’s vital to examine demand for both numerator and denominator (puts and calls).

    The denominator of the ratio contains the number of call options. In other words, a decrease in the number of calls exchanged will raise the ratio’s value. Reduced call purchases without an increase in puts can raise the ratio. This is significant. To put it another way, the ratio doesn’t have to climb dramatically in order for it to do so.

    As more bullish traders remain on the sidelines, the market becomes more negative as a result. However, this does not necessarily mean that the market is bearish, but rather that the market’s bullish traders are waiting for a future event, such as the impending elections or RBI meetings.

    A Sign of Unpredictability:

    In India, the Put-Call Ratio is a common Contrarian Indicator. The market is due for a trend reversal if the readings are excessively high or low.

    Market players are overly pessimistic, and the market trend is likely to turn around soon. Similarly, exceptionally low levels signal that market participants are overconfident, and the market could turn red shortly if this trend continues.

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  • An Overview of Volume vs. Open Interest

    Volume and open interest are two of the most important technical metrics for understanding options and the broader market. The amount of contracts exchanged in a given period is referred to as “volume,” whereas “open interest” refers to the number of contracts that are active, or not settled. We’ll look at these two variables and give you some pointers on how to utilise them to better understand trade activity in the derivatives markets. But before we get into that, there is one thing you will require: the best Indian trading platform with a wide range of features. With Zebu, one of the best stock brokers in the country, your online stock trading journey will be drastically enhanced.


    Volume

    In the stock market, volume refers to the number of times shares are traded between buyers and sellers. The volume metric for options markets gives the number of options contracts bought and sold in a given trading day, as well as the degree of activity for a specific contract.

    Every transaction counts against the daily volume, whether it’s an opening or closing transaction.

    The higher the volume, the more people are concerned about security. Volume is often used by investors to determine the strength of a price movement. More volume also suggests that the contract has more liquidity; this is advantageous in short-term trading because it means that there are more buyers and sellers in the market.

    Assume that the volume in call option ABC with a strike price of Rs 1000 and a three-week expiration date did not trade any contracts on a given day. As a result, the trade volume is zero. An investor buys 15 call option contracts the next session, and there are no other trades that day, thus the volume is now 15 contracts.

    The volume and open interest measurements reveal the amount of buying and selling that supports a prospective price change. In technical analysis, however, it is also necessary to determine whether the open interest is in calls or puts, as well as whether the contracts are being purchased or sold.

    Open Interest

    The quantity of options or futures contracts owned by active traders and investors is known as open interest. These positions have been created, but they haven’t been filled, expired, or exercised yet. When buyers and sellers (or writers) of contracts close off more positions than were opened that day, open interest declines.

    A trader must take an offsetting position or exercise their option to close out a position. When investors and traders open additional new long positions or sellers take on new short positions in an amount bigger than the number of contracts that were closed that day, open interest rises once more.


    Assume that the open interest in the ABC call option is 0 for example. The next day, an investor opens a new position by purchasing 10 option contracts. The number of people who have expressed interest in this particular call option has now reached ten. Five contracts were closed the next day, ten were opened, and open interest grew by five to 15.

    Open interest, along with other variables, is used by technical analysts to determine the strength of a market trend. Increased open interest signals the entry of new traders into the market and can be used to corroborate a current market trend. The current trend may be deteriorating as open interest declines, indicating that traders are closing their positions.

    Particular Points to Consider

    We’ve listed a few situations that include the volume and open interest indicators, as well as some possible interpretations.

    Rising prices during an uptrend, combined with rising open interest, can indicate that new money is entering the market (reflecting new positions). If long positions are fueling the growth in open interest, this might be an indication of a bullish mood.
    If, on the other hand, open interest falls while prices rise during an advance, this could imply that money is leaving the market, which is a bearish indicator.
    If, on the other hand, open interest falls while prices rise during an advance, this could imply that money is leaving the market, which is a bearish indicator.
    Prices falling in a downtrend while open interest rises could indicate that new money is entering the market on the short side. This scenario is negative since it is consistent with a continuous downtrend. However, falling prices in a downtrend with declining open interest may imply that holders are being compelled to liquidate their positions, which is a bearish indicator.

    If open interest is high as prices are falling sharply during a market peak, it could be a bearish indicator if those who bought near the top are suddenly losing money; this could also create a panic selling scenario.

    Option Chain And Its Working

    An option chain is a table that lists all of the available options for a certain security. An option chain displays all of the published calls and puts for a given expiry date, organised by characteristics such as strike price, expiration date, volume, and pricing.

    How much open interest and volume should an option have?
    In general, a high volume and open interest both indicate a liquid market with a large number of buyers and sellers for a specific option. Market mood can also be confirmed by changes in open interest and volume. A rising price with increasing volume and open interest, for example, indicates a robust market, whereas a rising price with declining volume and open interest indicates a weak market.

    When the Volume Exceeds the Open Interest, What Does It Mean?

    If an option has a high volume but a low open interest, it has a limited secondary market, which means it may have low liquidity. A trader trying to sell that option might have trouble finding a buyer, or they might face a wider bid-ask spread than usual.

    What Does a High Open Interest Indicator Indicate?

    A huge number of traders have taken active positions in an options or futures contract with a high open interest. If open interest rises over time, it indicates that new traders are taking positions in the market and that money is flowing in. When open interest decreases over time, it indicates that traders are beginning to close positions.