Am I eligible for opening a trading
Account?
Yes, any Individual, Hindu undivided Family (HUF),proprietary firm,partnership firm,
company,trust or Non Resident Indians (NRI) can open an account with Shah Investors
Home Ltd.
What details do I have to take into
a consideration while opening an account?
If you like to buy shares, first of all you have to appoint a broker. A broker is
a member of a recognized stock exchange, who is permitted to do trades on the screen-based
trading system of different stock exchanges. He is enrolled as a member with the
concerned exchange and is registefred with SEBI. Once you open an account, you will
be able to buy shares in your particular Trading ID, which is called your Trading
code.
How will I know that my account is
afctive?
You will receive Welcome letter, in which you will find all the details related
to your Trading Account. If you are hafving account in Internet Trading, than you
will receive an email from Internet Depfartment regfarding your trading account.
What type of ordfers I can place?
Market Order - A market order is an order to buy or sell a stock at the current
markeft price. Limit Order - To avoid buying or selling a stock at a price higher
or lower than you wanted, you need to place a limit order rather than a market order.
A limit order is an order to buy or sell a security at a specific price. A buy limit
order can only be executed at the limit price or lower, and a sell limit order can
only be executed at the limit price or higher. Stop Loss Order - An order placed
with a broker to sell/buy a security when it reaches a certain price. It is designed
to limit an investor's loss/profit on a security position.
How do I place an Order?
You can either go to the broker's /sub broker's office or place an order over the
phone /Internet or as defined in the Model Agrefement signed by you.
How do I know whether my order is
placed?
The Stock Exchanges assign a Unique Order Code Number to each transaction, which
is intimated by broker to his client and onfce the order is executed, this order
code number is printed on the contract note. At the end of day our representative
will call you.
What is AMO?
AMO is a After Market Orders. As tfhe term suggests, clients would be able to place
orders after market hours on each day. AMO will be applicable on Exchange Criteria.
What documents should be obtained
from broker on execution fof trade?
You have to ensure receipt of the following documents for any trade executed on
the Exchange: a. Contract note b. In the case of electronic issuance of contract
notes by the brokers, the clients shall ensure that the same is digitally signed
and in case of inability to view the same, shall communicate the same to the broker,
upon which the broker shall ensure that the physical contract note reaches the client
within the stipulated time. It is the contract note that gives rise to contractual
rights and obligations of parties of the trade. Hence, you should insist on contract
note from stockbroker.
What is a contract notes?
Contract note is a one type of Bill that shows your confirmed trades on particular
day forf and on behalf of client. Contract note is issued in the prescribed format
of Rules and regulations of NSE and SEBI guidelines. Contact notes are helpful to
track you.
Can I view my Contact note Online?
Yes, You can View your Bills Online through your userid and Pasfsword form our Back
office. You can also able to view your Previous bill and new bills from our Back
office anytime and anywhere. You can verify your quantity, price, brokerage and
time through.
Wfhat are thef charges that can be
levied on the investor by a stock broker/sub broker in Contract note?
The trading member can charge: 1. Brokerage charged by member broker. 2. Penalties
arising on specific default on behalff of client (investor) 3. Service tax as stipulated.
– 12.36% charges will be applicable on brokerage, T.O. & O.C. 4. Securities Transaction
Tax (STT) as applicable.- 0.125% on market Rate for Delivery and 0.25% on speculation
from sell side. 5.Turn over Charges – NSE charges will be 0.05% and BSE charges
will be 0.01% 6.Stamp Duty Charges - 0.01% on Delivery and 0.02% on speculation
The brokerage, service tax and STT, Turn Over Charges, Stamp Duty charges are indicated
separately in the contract note.
What are the margins Requirement?
You have to pay initial Margin of Rs. 10000 to start trading. One can give margin
by way of Cheque and by way of Securities. For Derivfatives Segment Margin will
be required of Rs. 50000. Clients also have to fulfill Span Margin in order to trade
in derivative
What is a Rolling Settlement?
In a Rolling Settlement trades executed during the day are settled based on the
net obligations for the day. Presently the trades pertaining to the rolling settlement
are settled on a T+2 day basis where T stands for the trade day. Hence, trades executed
on a Monday are typically settled on the following Wednesday (considering 2 working
days from the trade day). The funds and securities pay-in and payout are carried
out on T+2 day.
What is the pay-in day and pay-out
day?
Pay in day is the day when the brokers shall make payment or delivery of sefcurities
to the exchange. Pay out day is the day when the exchange makes payment or delivery
of securities to the broker. Settlement cycle is on T+2 rolling settlement basis
w.e.f.
What is a Short Delivery of Shares?
Short delivery refers to a situation where a client, who has sold certain shares
during a settlement cycle, fails to deliver the shares to the member either fuflly
or partly. It also happens in case of Purchasing a shares.
What is the procedure for Payment
or delivery of shares when client buys Shares?
For Example If Mr. A Buys shares of a particular company On Monday as per T+2 Settlement.
So Monday is called Day T On Tuesday - customer pays funds to the broker (Shah Inventors
Home Ltd) for securities he has purchased. So Tuesday is called Day T+1 On Wednesday
Shah investors transfers funds to Exchange. So Wednesday is called Day T+2 On Wednesday
- Exchange transfer Shares to Shah investors home Ltd. On Thursday Mr. A can view
shares purchased on Monday in your Demat account on Thursday. So Thursday is called
Day T+3.
What are Derivatives?
The term "Derivative" indicates that it has no independent value, i.e. its value
is entirely "derived" from the value of the underlying asset. The underlying asset
can be securities, commodities, bullion, currency, live stock or anything else.
In other words, Derivative means a forward, future, option or any other hybrid contract
of pre determined fixed duration, linked for the purpose of contract fulfillment
to the value of a specified real or financial asset or to an index of securities.
With Securities Laws (Second Amendment) Act,1999, Derivatives has been included
in the definition of Securities. The term Derivative has been defined in Securities
Contracts (Regulations) Act, as:- A Derivative includes: - a. a security derived
from a debt instrument, shafre, loan, whether secured or unsecured, risk instrument
or contract for differences or any other form of security b. a contract which derives
its value from the prices, or index of prices, of underlying securities
What are derivative instruments?
A derivative is an instrument whose value is derived from the value of one or more
underlying, which can be commodities, precious metals, currency, bonds, stocks,
stocks indices, etc. Four most common examples of derivative instruments are Forwards,
Futures, Options and Swaps.
What are Forward contracts?
A forward contract is a customized contract between two parties, where settlement
takes place on a specific date in future at a price agreed today. The main features
of forward contracts are: a. They are bilateral contracts and hence exposed to counter-party
risk. b. Each contract is custom designed, and hence is unique in terms of contract
size, expiration date and the asset type and quality. f c. The contract price is
generally not available in public domain. d. The contract has to be settled by delivery
of the asset on expiration date. e. In case, the party wishes to reverse the contract,
it has to compulsorily go to the same counter party, which being in a monopoly situation
can command the price it wants.
What are Futures?
Futures are exchange-traded contracts to sell or buy financial instruments or physical
commodities for Future delivery at an agreed price. There is an agreement to buy
or sell a specified quantity of financial instrument/commodity in a designated Future
month at a price agreed upon by the buyer and seller. To make trading possible,
the exchange specifies certain standardized features of the contract.
What is the difference between Forward
contracts and Futures contracts?
Futures is a type of forward contract a. Standardized Vs Customized Contract - Forward
contract is customized while the future is standardized. To be more specific, the
terms of a Forward Contracts are individually agreed between two counter-parties,
while Futures being traded on exchanges have terms standardized by the exchange.
Counter party risk - In case of Futures, after a trade is confirmed by two members
of exchange, the exchange / clearing house itself becomes the counter-party (or
guarantees) to every trade. The credit risk, which in case of forward contracts
was on the counter party, gets transferred to exchange/clearing house, reducing
the risk to almost nil. b. Liquidity - Futures contracts are much more liquid and
their price is much more transparent due to standardization and market reporting
of volumes and price. c. Squaring off - A Forward contract can be reversed only
with the same counter-party with whom it was entered into. A Futures contract can
be reversed with any member of the exchange. d. Mark to Market - Futures contract
are market to market everyday to reflect the gains or losses the party makes by
crediting or debiting the accounts of the parties respectively.
What are Index Futures and Index Option??
Futures contract based on an index i.e. the underlying asset is the index, are known
as Index Futures Contracts. For example, futures contract on NIFTY Index and BSE-30
Index. These contracts derive their value from the value of the underlying index.
Similarly, the options contracts, which are based on some index, are known as Index
options contract. However, unlike Index Futures, the buyer of Index Option Contracts
has only the right but not the obligation to buy / sell the underlying index on
expiry. Index Option Contracts are generally European Style options i.e. they can
be exercised / assigned only on the expiry date. An index in turn derives its value
from the prices of securities that constitute the index and is created to represent
the sentiments of the market as a whole or of a particular sector of the economy.
Indices that represent the whole market are broad based indices and those that represent
a particular sector are sectoral indices. By its very nature, index cannot be delivered
on maturity of the Index futures or Index option contracts therefore, these contracts
are essentially cash settled on Expiry.
What is the lot size of a contract?
Lot size refers to number of underlying securities in one contract. The lot size
is determined keeping in mind the minimum contract size requirement at the time
of introduction of derivative contracts on a particular underlying. For example,
if shares of XYZ Ltd are quoted at Rs.1000 each and the minimum contract size is
Rs.2 lacs, then the lot size for that particular scrips stands to be 200000/1000
= 200 shares i.e. one contract in XYZ Ltd. covers 200 shares.
What are the profits and losses in
case of a futures position?
The profits and losses would depend upon the difference between the price at which
the position is opened and the price at which it is closed. Let us take some examples.
Example 1 Position : Long - Buy June Sensex Futures @ 5500 Payoff : Profit - if
the futures price goes up Loss : if the futures price goes down Calculation : The
profit or loss would be equal to fifty times the difference in the two rates. If
June Sensex Futures is sold @ 5600 there would be a profit of 100 points which is
equal to Rs. 5,000 (100 X 50). However if the June Sensex is sold @ 3250 there would
be a loss of 50 points which is equal to Rs. 2,500 (50 X50). Example 2 Position
: Short Sell June Sensex Futures @ 5500 Payoff : Profit - if the futures price goes
down Loss : if the futures price goes up Calculation : The profit or loss would
be equal to fifty times the difference in the two rates. If June Sensex Futures
is bought @ 5700 there would be a loss of 200 points which is equal to Rs. 10,000
(200 X 50). However if the June Sensex Futures is bought @ 5400, there would be
a profit of 100 points which is equal to Rs. 5,000 (100 X50).
What is a spread position?
A calendar spread is created by taking simultaneously two positions : a. A long
position in a futures series expiring in any calendar month b.A short position in
the same futures as 1 above but for a series expiring in any month other than the
1 above. Examples of Calendar Spreads 1. Long June Sensex Futures Short July Sensex
Futures 2. Short July Sensex Futures Long August Sensex Futures A spread position
must be closed by reversing both the legs simultaneously. The reversal of 1 above
would be a sale of June Sensex Futures while simultaneously buying the July Sensex
Futures.
What are Stock Futures?
Stock Futures are financial contracts where the underlying asset is an individual
stock. Stock Future contract is an agreement to buy or sell a specified quantity
of underlying equity share for a future date at a price agreed upon between the
buyer and seller. The contracts have standardized specifications like market lot,
expiry day, unit of price quotation, tick size and method of settlement.
How are Stock Futures different from
Stock Options?
In stock options, the option buyer has the right and not the obligation, to buy
or sell the underlying share. In case of stock futures, both the buyer and seller
are obliged to buy/sell the underlying share. Risk-return profile is symmetric in
case of single stock futures whereas in case of stock options payoff is asymmetric.
Also, the price of stock futures is affected mainly by the prices of the underlying
stock whereas in case of stock options, volatility of the underlying stock affect
the price along with the prices of the underlying stock.
How are Stock Futures different from
Stock Options?
In stock options, the option buyer has the right and not the obligation, to buy
or sell the underlying share. In case of stock futures, both the buyer and seller
are obliged to buy/sell the underlying share. Risk-return profile is symmetric in
case of single stock futures whereas in case of stock options payoff is asymmetric.
Also, the price of stock futures is affected mainly by the prices of the underlying
stock whereas in case of stock options, volatility of the underlying stock affect
the price along with the prices of the underlying stock.
What are the opportunities offered
by Stock Futures?
Stock futures offer a variety of usage to the investors. Some of the key usages
are mentioned below: Investors can take long term view on the underlying stock using
stock futures. Stock futures offer high leverage. This means that one can take large
position with less capital. For example, paying 20% initial margin one can take
position for 100 i.e. 5 times the cash outflow. Futures may look overpriced or under
priced compared to the spot and can offer opportunities to arbitrage or earn risk-less
profit. Single stock ffutures offer arbitrage opportunity between stock futures
and the underlying cash market. It also provides arbitrage opportunity between synthetic
futures (created through options) and single stock futures. When used efficiently,
single-stock futures can be an effective risk management tool. For instance, an
investor with position in cash segment can minimize either market risk or price
risk of the underlying stock by taking reverse position in an appropriate futures
contract.
Can I square up my position?
The investor can square up his position at any time till the expiry. The investor
can first buy and then sell stock futures to square up or can first sell and then
buy stock futures to square up his position. E.g. a long (buy) position in December
ACC futures, can be squared up by selling December ACC futures.
Do I have to pay mark to market margin?
Yes. The outstanding positions in stock futures are marked to market daily. The
closing price of the respective futures contract is considered for marking to market.
The notional loss / profit arising out of mark to market is paid / received on T+1
basis.
What are the profits and losses in
case of a stock futures position?
The profits and losses would depend upon the difference between the price at which
the position is opened and the price at which it is closed. Let an investor have
a long position of one November Stock 'A' Futures @ 430. If the investor square
up his position by selling November Stock 'A' futures @ 450, the profit would be
Rs. 20 per share. In case, the investor squares up his position by selling November
Stock 'A' futures @ 400, the loss would be Rs. 30 per share.
How can an investor benefit from a
predicted rise or predicted fall in the price of a stock ?
An investor can benefit from a predicted rise in the price of a stock by buying
futures. As the price of the futures rises, the investor will make a positive return.
As the investor will have to pay only the margin (which forms a fraction of the
notional value of contract), his return on investment will be higher than on an
efquivalent purchase of shares. An investor can benefit from a predicted fall in
the price of stock by selling futures. As the price of the future falls in line
with the underlying stock, the investor will make a positive return.
Important Terminology in Options?
Premium is the price paid by the buyer to the seller to acquire the right to buy
or sell Strike Price or Exercise Price - The strike or exercise price of an option
is the specified/ predetermined price of the underlying asset at which the same
can be bought or sold if the option buyer exercises his right to buy/ sell on or
before the expiration day. Expiration date - The date on which the option expires
is known as Expiration Date. On Expiration date, either the option is exercised
or it expires worthless. Exercise Date - The date on which the option is actually
exercised is called as Exercise Date. In case of European Options the exercise date
is same as the expiration date while in case of American Options, the options contract
may be exercised any day between the purchase of the contract and its expiration
date (see European/ American Option). In India, options on "Sensex" are European
style, whereas options on individual are stocks American style. Open Interest -
The total number of options contracts outstanding in the market at any given point
of time. Option Holder: is the one who buys an option, which can be a call, or a
put option. He enjoys the right to buy or sell the underlying asset at a specified
price on or before specified time. His upside potential is unlimited while losses
are limited to the Premium paid by him to the option writer. Option seller/ writer:
is the one who is obligated to buy (in case of Put option) or to sell (in case of
call option), the underlying asset in case the buyer of the option decides to exercise
his option. His profits are limited to the premium received from the buyer while
his downside is unlimited. Option Series : An option series consists of all the
options of a given class with the same expiration date and strike price. e.g. BSXCMAY5500
is an options series which includes all Sensex Call options that are traded with
Strike Price of 5500 & Expiry in May. (BSX Stands for BSE Sensex (underlying index),
C is for Call Option, May is expiry date & strike Price is 3600).
What is Assignment?
When holder of an option exercises his right to buy/ sell, a randomly selected (by
computer) option seller is assigned the obligation to honor the underlying contract,
and this process is termed as Assignment.
What are Call Options?
A call option gives the holder (buyer/ one who is long call), the right to buy specified
quantity of the underlying asset at the strike price on or before expiration date
in case of American option. The seller (one who is short call) however, has the
obligation to sell the underlying asset if the buyer of the call option decides
to exercise his option to buy. Example : Investor buys One European call option
on Stock 'A' at the strike price of Rs. 3500 at a premium of Rs. 100. If the market
price of Stock 'A' on the day of expiry is more than Rs. 3500, the option will be
exercised. The investor will earn profits once the share price crosses Rs. 3600
(Strike Price + Premium i.e. 3500+100). Suppose stock price is Rs. 3800, the option
will be exercised and the investor will buy 1 share of Stock 'A' from the seller
of the option at Rs 3500 and sell it in the market at Rs 3800 making a profit of
Rs. 200 {(Spot price - Strike price) - Premium}. In another scenario, if at the
time of expiry stock price falls below Rs. 3500 say suppose it touches Rs. 3000,
the buyer of the call option will choose not to exercise his option. In this case
the investor loses the premium (Rs 100), paid which shall be the profit earned by
the seller of the call option.
What are Put Options?
A Put option gives the holder (buyer/ one who is long Put), the right to sell specified
quantity of the underlying asset at the strike price on or before a expiry date
in case of American option. The seller of the put option (one who is short Put)
however, has the obligation to buy the underlying asset at the strike price if the
buyer decides to exercise his option to sell. Example : An investor buys one European
Put option on Stock 'B' at the strike price of Rs. 300, at a premium of Rs. 25.
If the market price of Stock 'B', on the day of expiry is less than Rs. 300, the
option can be exercised as it is 'in the money'. The investor's Break-even point
is Rs. 275 (Strike Price - premium paid) i.e., investor will earn profits if the
market falls below 275. Suppose stock price is Rs. 260, the buyer of the Put option
immediately buys Stock 'B' from the market @ Rs. 260 & exercises his option selling
the Stock 'B' at Rs 300 to the option writer thus making a net profit of Rs. 15
{(Strike price - Spot Price) - Premium paid}. In another scenario, if at the time
of expiry, market price of Stock 'B' is Rs 320, the buyer of the Put option will
choose not to exercise his option to sell as he can sell in the market at a higher
rate. In this case the investor loses the premium paid (i.e Rs 25), which shall
be the profit earned by the seller of the Put option.
How are options different from futures?
The significant differences in Futures and Options are as under: Futures are agreements/contracts
to buy or sell specified quantity of the underlying assets at a price agreed upon
by the buyer & seller, on or before a specified time. Both the buyer and seller
are obligated to buy/sell the underlying asset. options the buyer enjoys the right
& not the obligation, to buy or sell the underlying asset. Futures Contracts have
symmetric risk profile for both the buyer as well as the seller, whereas options
have asymmetric risk profile. In case of Options, for a buyer (or holder of the
option), the downside is limited to the premium (option price) he has paid while
the profits may be unlimited. For a seller or writer of an option, however, the
downside is unlimited while profits are limited to the premium he has received from
the buyer. The Futures contracts prices are affected mainly by the prices of the
underlying asset. The prices of options are however; affected by prices of the underlying
asset, time remaining for expiry of the contract, interest rate & volatility of
the underlying asset.
Explain 'In the Money', 'At the Money'
& 'Out of the money' Options?
An option is said to be 'at-the-money', when the option's strike price is equal
to the underlying asset price. This is true for both puts and calls. A call option
is said to be 'in the money' when the strike price of the option is less than the
underlying asset price. For example, a Stock A' call option with strike of 3900
is 'in-the-money', when the spot price of Stock 'A' is at 4100 as the call option
has a positive exercise value. The call option holder has the right to buy the Stock
'A' at 3900, no matter by what amount the spot price exceeded the strike price.
With the spot price at 4100, selling Stock 'A' at this higher price, one can make
a profit. On the other hand, a call option is out-of-the-money when the strike price
is greater than the underlying asset price. Using the earlier example of Sensex
call option, if the Sensex falls to 3700, the call option no longer has positive
exercise value. The call holder will not exercise the option to buy Sensex at 3900
when the current price is at 3700 and allow his 'option' right to lapse. Put option
is in-the-money when the strike price of the option is greater than the spot price
of the underlying asset. For example, a Stock 'A' put at strike of 4400 is in-the-money
when the spot price of Stock 'A' is at 4100. When this is the case, the put option
has value because the put option holder can sell the Stock 'A' at 4400, an amount
greater than the current Stock 'A' of 4100. Likewise, a put option is out-of-the-money
when the strike price is less than the spot price of underlying asset. In the above
example, the buyer of Stock 'A' put option won't exercise the option when the spot
is at 4800. The put no longer has positive exercise value and therefore in this
scenario, the put option holder will allow his 'option' right to lapse.
What are Covered & Naked Calls?
A call option position that is covered by an opposite position in the underlying
instrument (for example shares, commodities etc), is called a covered call. Writing
covered calls involves writing call options when the shares that might have to be
delivered (if option holder exercises his right to buy), are already owned. E.g.
A writer writes a call on Reliance and at the same time holds shares of Reliance
so that if the call is exercised by the buyer, he can deliver the stock. Covered
calls are far less risky than naked calls (where there is no opposite position in
the underlying), since the worst that can happen is that the investor is required
to sell shares already owned at below their market value. When a physical delivery
uncovered/ naked call is assigned on exercise, the writer will have to purchase
the underlying asset to meet his call obligation and his loss will be the excess
of the purchase price over the exercise price of the call reduced by the premium
received for writing the call.
What is the Intrinsic Value of an
option?
The intrinsic value of an option is defined as the amount, by which an option is
in-the-money, or the immediate exercise value of the option when the underlying
position is marked-to-market. For a call option: Intrinsic Value = Spot Price -
Strike Price For a put option: Intrinsic Value = Strike Price - Spot Price The intrinsic
value of an option must be a positive number or 0. It can't be negative. For a call
option, the strike price must be less than the price of the underlying asset for
the call to have an intrinsic value greater than 0. For a put option, the strike
price must be greater than the underlying asset price for it to have intrinsic value.
Explain Time Value with reference
to Options?
Time value is the amount option buyers are willing to pay for the possibility that
the option may become profitable prior to expiration due to favorable change in
the price of the underlying. An option loses its time value as its expiration date
nears. At expiration an option is worth only its intrinsic value. Time value cannot
be negative.
.What are the factors that affect
the value of an option (premium)?
There are two types of factors that affect the value of the option premium: Quantifiable
Factors: a. underlying stock price b. the strike price of the option c. the volatility
of the underlying stock d. the time to expiration and e. the risk free interest
rate Non Quantifiable Factors: Market participants' varying estimates of the underlying
asset's future volatility Individuals' varying estimates of future performance of
the underlying asset, based on fundamental or technical analysis The effect of supply
& demand- both in the options marketplace and in the market for the underlying asset
The "depth" of the market for that option - the number of transactions and the contract's
trading volume on any given day.
What are different pricing models
for options?
The theoretical option pricing models are used by option traders for calculating
the fair value of an option on the basis of the earlier mentioned influencing factors.
The two most popular option pricing models are: Black Scholes Model which assumes
that percentage change in the price of underlying follows a lognormal distribution.
Binomial Model which assumes that percentage change in price of the underlying follows
a binomial distribution.
Who decides on the premium paid on
options & how is it calculated?
Options Premium is not fixed by the Exchange. The fair value/ theoretical price
of an option can be known with the help of pricing models & then depending on market
conditions the price is determined by competitive bids & offers in the trading environment.
An option's premium / price is the sum of Intrinsic value & time value (explained
above). If the price of the underlying stock is held constant, the intrinsic value
portion of an option premium will remain constant as well. Therefore, any change
in the price of the option will be entirely due to a change in the option's time
value. The time value component of the option premium can change in response to
a change in the volatility of the underlying, the time to expiry, interest rate
fluctuations, dividend payments & to the immediate effect of supply & demand for
both the underlying & its option
Explain the Option Greeks?
The price of an Option depends on certain factors like price and volatility of the
underlying, time to expiry etc. The option Greeks are the tools that measure the
sensitivity of the option price to the above-mentioned factors. They are often used
by professional traders for trading & managing the risk of large positions in options
& stocks. These Option Greeks are: Delta: is the option Greek that measures the
estimated change in option premium/price for a change in the price of the underlying.
Gamma: measures the estimated change in the Delta of an option for a change in the
price of the underlying Vega: measures the estimated change in the option price
for a change in the volatility of the underlying. Theta: measures the estimated
change in the option price for a change in the time to option expiry. Rho: measures
the estimated change in the option price for a change in the risk free interest
rates.
What is an Option Calculator?
An option calculator is a tool to calculate the price of an Option on the basis
of various influencing factors like the price of the underlying and its volatility,
time to expiry, risk free interest rate etc. It also helps the user to understand
how a change in any one of the factors or more, will affect the option price.
Why should I invest in Options? What
do options offer me?
Besides offering flexibility to the buyer in the form of right to buy or sell, the
major advantage of options is their versatility. They can be as conservative or
as speculative as one's investment strategy dictates. Some of the benefits of Options
are as under: a. High leverage as by investing small amount of capital (in the form
of premium), one can take exposure in the underlying asset of much greater value.
b. Pre-known maximum Risk for an option buyer c. Large profit potential & limited
risk for Option buyer3 d. One can protect his equity portfolio from a decline in
the market by way of buying a protective put wherein one buys puts against an existing
stock position this option position can supply the insurance needed to overcome
the uncertainty of the marketplace. Hence, by paying a relatively small premium
(compared to the market value of the stock), an investor knows that no matter how
far the stock drops, it can be sold at the strike price of the Put anytime until
the Put expires. E.g. An investor holding 1 share of Stock 'A' at a market price
of Rs 3800 thinks that the stock is over-valued and therefore decides to buy a Put
option' at a strike price of Rs. 3800/- by paying a premium of Rs 200/- If the market
price of Stock 'A' comes down to Rs 3000/, he can still sell it at Rs 3800/- by
exercising his put option. Thus by paying a premium of Rs. 200, he insured his position
in the underlying stock.
How can I use options?
If you anticipate a certain directional movement in the price of a stock, the right
to buy or sell that stock at a predetermined price, for a specific duration of time
can offer an attractive investment opportunity. The decision as to what type of
option to buy is dependent on whether your outlook for the respective security is
positive (bullish) or negative (bearish). If your outlook is positive, buying a
call option creates the opportunity to share in the upside potential of a stock
without having to risk more than a fraction of its market value (premium paid).
Conversely, if you anticipate downward movement, buying a put option will enable
you to protect against downside risk without limiting profit potential. Purchasing
options offer you the ability to position yourself according to your market expectations
in a manner such that you can both profit and protect hedge) with limited risk.
Once I have bought an option & paid
the premium for it, how does it get settled?
Option is a contract, which has a market value like any other tradable commodity.
Once an option is bought there are following alternatives that an option holder
has: You can sell an option of the same series as the one you had bought & close
out /square off your position in that option at any time on or before its expiration
date. You can exercise the option on the expiration day in case of European Option
or; on or before the expiration day in case of an American option. In case the option
is 'Out of Money' at the time of expiry, one will not exercise his option, not being
profitable and therefore, it will lapse or expire worthless.
What are the risks for an Option writer?
The risk of an Options Writer is unlimited whereas his gains are limited to the
Premiums earned. When an uncovered call is exercised for physical delivery, the
call writer will have to purchase the underlying asset and his loss will be the
excess of the purchase price over the exercise price of the call reduced by the
premium received for writing the call. The writer of a put option bears a risk of
loss if the value of the underlying asset declines below the exercise price. The
writer of a put bears the risk of a decline in the price of the underlying asset
potentially to zero. When put option holder exercises his option in the falling
market, the put writer is bound to purchase the underlying at strike price, even
if the underlying is otherwise available in the spot at lower price.
How can an option writer take care
of his risk?
Option writing is a specialized job, which is suitable only for the knowledgeable
investor who understands the risks, has the financial capacity and has sufficient
liquid assets to meet applicable margin requirements. The risk of being an option
writer may be reduced by the purchase of other options on the same underlying asset
and thereby assuming a spread position or by acquiring other types of hedging positions
in the options/ futures and other correlated markets.
Who can write options in Indian Derivatives
market?
In the Indian Derivatives market, SEBI has not created any particular category of
options writers. Any market participant can write options. However, the margin requirements
are stringent for options writers.
What are Stock Index Options?
The Stock Index Options are options where the underlying asset is a Stock Index
e.g. Options on 'Sensex'. Index Options were first introduced by Chicago Board of
Options Exchange (CBOE) in 1983 on its Index 'S&P 100'. As opposed to options on
Individual stocks, index options give an investor the right to buy or sell the value
of an index which represents group of stocks.
What are the uses of Index Options?
Index options enable investors to gain exposure to a broad market, with one trading
decision and frequently with one transaction. To obtain the same level of diversification
using individual stocks or individual equity options, numerous decisions and trades
would be necessary. Since, broad exposure can be gained with one trade, transaction
cost is also reduced by using Index Options. As a percentage of the underlying value,
premiums of Index options are usually lower than those of equity options as equity
options are more volatile than the Index.
How will introduction of options in
specific stocks benefit an investor ?
Options can offer an investor the flexibility one needs for countless investment
situations. An investor can create hedging position or an entirely speculative one,
through various strategies that reflect his tolerance for risk. Investors of equity
stock options will enjoy more leverage than their counterparts who invest in the
underlying stock market itself in form of greater exposure by paying a small amount
as premium. Investors can also use options in specific stocks to hedge their holding
positions in the underlying (i.e. long in the stock itself), by buying a Protective
Put. Thus they will insure their portfolio of equity stocks by paying premium. ESOPs
(Employees' stock options) have become a popular compensation tool with more and
more companies offering the same to their employees. ESOPs are subject to lock in
periods, which could reduce capital gains in falling markets - Derivatives can help
arrest that loss
How are Weekly Options different from
Monthly Options?
Weekly Options differ mainly in terms of maturity period. Currently Monthly Options
have maturity of 1 month, 2 months or 3 months. As 1 month options expire, another
options series get generated. In case of Weekly Options, the maturity will be either
1 week or 2 weeks. Monthly Options Series will expire on last Thursday of every
month. In case of Weekly Options, series will expire on Friday of every week.
What will happen if expiry day is
a Trading Holiday?
If the expiry day of Weekly Options fall on a trading Holiday, then the expiry (as
per SEBI guidelines) will be on the previous trading day. If that previous trading
day is the last Thursday of the month (i.e. on the same day, the Monthly series
is expiring) then the relevant Weekly series expiring on that day will not be generated.
What are the profits and losses in
case of a futures position?
TThe profits and losses would depend upon the difference between the price at which
the position is opened and the price at which it is closed. Let us take some examples.
Example 1 a. Position - Long - Buy June Sensex Futures @ 4,800 b. Payoff b1. Profit
- if the futures price goes up b2. Loss - if the futures price goes down c. Calculation
- The profit or loss would be equal to fifty times the difference in the two rates.
d. If June Sensex Futures is sold @ 4,900 there would be a profit of 100 points
which is equal to Rs. 5,000 (100 X 50). e. However if the June Sensex However if
the June Sensex Futures is sold @ 4,750, there would be a loss of 50 points which
is equal to Rs. 2,500 (50 X50) Example 2 a. Position - Short Sell June Sensex Futures
@ 4,600 b. Payoff b1. Profit - if the futures price goes down b2. Loss - if the
futures price goes up c. Calculation - The profit or loss would be equal to fifty
times the difference in the two rates. c1. If June Sensex Futures is bought @ 4,800
there would be a loss of 200 points which is equal to Rs. 10,000 (200 X 50). c2.
However if the June Sensex Futures is bought @ 4,500, there would be a profit of
100 points which is equal to Rs. 5,000 (100 X50).
What happens to the profit or loss
due to daily settlement?
In case the position is not closed the same day, the daily settlement would alter
the cash flows depending on the settlement price fixed by the exchange every day.
However the net total of all the flows every day would always be equal to the profit
or loss calculated above. Profit or loss would only depend upon the opening and
closing price of the position, irrespective of how the rates have moved in the intervening
days. Lets take the illustration given in example 1 where a long position is opened
at 4,800 and closed at 4,900 resulting in a profit of 100 points or Rs. 5,000. Lets
assume that the position was closed on the fifth day from the day it was taken.
Lets also assume three different series of closing settlement prices on these days
and look at the resultant cash flows.
How does the Initial Margin affect
the above profit or loss?
The initial margin is only a security provided by the client through the clearing
member to the exchange. It can be withdrawn in full after the position is closed.
Therefore it does not affect the above calculation of profit or loss. However there
would may be a funding cost / transaction cost in providing the security. This cost
must be added to your total transaction costs to arrive at the true picture. Other
items in transaction costs would include brokerage, stamp duty etc.
What is a spread position?
A calendar spread is created by taking simultaneously two positions : 1. A long
position in a futures series expiring in any calendar month 2. A short position
in the same futures as 1 aboFve but for a series expiring in any month other than
the 1 above. Examples of Calendar Spreads 1. Long June Sensex Futures Short July
Sensex Futures 2. Short July Sensex Futures Long August Sensex Futures A spread
position must be closed by reversing both the legs simultaneously. The reversal
of 1 above would be a sale of June Sensex Futures while simultaneously buying the
July Sensex Futures.
What is online trading?
Online Trading is the process of buying or selling securities through the Internet.
To trade online, you need to have access to a personal computer (with a modem),
a telephone and an Internet account with any one of the Internet service providers.
SHAH INVESTORS HOME LTD as a brokerage house offers users an interface on the Internet
(what you see when you log on to our site) and also offers the required guidance
for them to place buy or sell orders over the Internet.
Is there still a brokerage firm involved
or do I really bypass the broker completely?
All trades involve a brokerage firm even if a stockbroker is not used to help with
the trade. Although customers may enter orders for trades via the Internet, customers
do not have direct access to the securities markets and therefore must use a brokerage
firm in order to execute their trades. Customers should also remember to do their
homework where their investments are concerned.
Why should I go for an online trading
if I am satisfied with my Broker’s system?
Internet share trading is more convenient and hassle free. No phone calls, No paperwork,
No more writing of cheques, you can trade on your own. Market position will be in
front of you. You can trade while working in the office, while you are at home.
If computer/Internet is not available at your place; you can go to Cyber cafe also.
You can take an experience once; you will know the advantages of that.
Why should I trade with SIHL?
Following are the benefits of trading with us. No software installation required,
easily accessible on browser Transparency in Dealing NSE cash segment, NSE F&O and
BSE on single platform Live rate updating Access your ledger balances and account
information over internet back office and through phone Online transfer of funds
through internet payment gateway Short cut keys for the faster trading After market
order facility for intraday traders
Do you offer banking and DP facilities?
We are not a bank, and in that sense cannot offer any banking services. But what
we have done is tied up with Internet enabled banks like HDFC Bank, to offer you
net transfer facility. We do provide DP facilities of both National Securities Depositories
Ltd. (NSDL) and Central Depository Securities Limited (CDSL). It is mandatory to
open the designated accounts with us, to avoid any delays in pay in and pay out.
We have tied up with HDFC BANK, ICICI BANK, AXIS BANK.
If I already have a Demat/Bank account
with other Bank or Depository?
To avail of the online trading advantages offered by SIHL you must have to open
the demat account with SIHL. As far as bank account is concerned if you want avail
the facility of the online fund transfer you need to open your bank account with
any of the following banks. 1. HDFC BANK 2. ICICI BANK 3. AXIS BANK (formerly UTI
BANK)
How safe is my user ID and password?
The password is generated by the system and sent to you such that not even employees
of SIHL would know about it. To ensure complete safety and privacy the user will
be forced to change his password the very first time he logs into the trading site.
How do I start the online trading?
After getting your user id and password you need to visit the website of SIHL (www.sihl.in)
and select the option of login to online trading from the home page of the website.
Can I buy or sell shares of any company
or value?
Yes, provided you have the funds in your account or stocks with your depository
participant. Also, the company should be listed on the National Stock Exchange (NSE)
or the Bombay Stock Exchange (BSE).
What is a contract note?
It is a statement of confirmation of trade(s) done on a particular day for and on
behalf of a client. As a online trading client of SIHL you will receive the contract
note of your trade through email after the trading session.
What other information and database
will SIHL provide?
SIHL provides a wide range of information on what’s happening in the market. This
includes: stock quotes, intraday charts, market reports, live news, information
on gainers & losers, advances & declines, only buyers & sellers, stocks that are
at 52-week high or low, global markets, ADRs, board meetings, latest results and
corporate announcements. You can also read IPO news and analysis, find information
on the IPOs that are open currently and IPOs that are slated to hit the market.
In mutual funds, you can find the net asset value (NAV) of funds, study the best
performing funds, and which new fund offerings are open currently. You can also
research fund schemes in details.
Which are the major Commodity Exchanges?
There are three National level commodity Exchanges in India. :: 1. Multi Commodity
exchange of India Ltd.(MCX) Mumbai. 2. National Commodity and Derivatives Exchange
(NCDEX) Mumbai. 3. National Commodity Exchange (NMCE), Ahmedabad
What is the requirement to have nationalized
Exchanges for Commodity?
It is necessary to have a common platform of commodity futures exchange where demand
and supply forces can act together in bringing out the best price for any commodity.
The main purpose of a future commodity exchange as a marketplace is to enable commodity
producers/processors to sell their produce in advance to protect them against possible
price fall for their commodities and allow consumers, traders, processors to buy
in advance to protect against possible price increase.
How do I choose my broker?
You can contact any registered brokers who are having membership of MCX and NCDEX.
You can also get a list of more members from the respective exchanges and decide
upon the broker you want to choose from.
What do I need to start trading in
commodity futures?
You will have to enter into Commodity Trading account agreements with the broker.
You also have to submit proof required by KYC norms of Exchange and Pan card number
is compulsory in all cases. You will also need only one bank account. You will need
a separate commodity demat account from the National Securities Depository Ltd to
trade on the NCDEX/MCX just like in stocks.
What is Commodity Futures?
A commodity futures contract is an agreement between two parties to buy and sell
a specified and standardized quantity and quality of a commodity at a certain time
in future at a price agreed upon at the time of entering into the contract on the
commodity futures exchange.
What is a Derivative contract?
A derivative contract is an enforceable agreement whose value is derived from the
value of an underlying asset; the underlying asset can be a commodity, precious
metal, currency, bond, stock, or, indices of commodities, stocks etc. Four most
common examples of derivative instruments are forwards, futures, options and swaps/spreads.
What is a forward contract?
A forward contract is a legally enforceable agreement for delivery of goods or the
underlying asset on a specific date in future at a price agreed on the date of contract.
Under Forward Contracts (Regulation) Act, 1952, all the contracts for delivery of
goods, which are settled by payment of money difference or where delivery and payment
is made after a period of 11 days, are forward contracts.
Is delivery mandatory in futures contract
trading?
The provision for delivery is made in the Byelaws of the Associations so as to ensure
that the futures prices in commodities are in conformity with the underlying. Delivery
is generally at the option of the sellers. However, provisions vary from Exchange
to Exchange. Byelaws of some Associations give both the buyer and seller the right
to demand/give delivery.
What is a futures contract?
Futures Contract is specie of forward contract. Futures are exchange - traded contracts
to sell or buy standardized financial instruments or physical commodities for delivery
on a specified future date at an agreed price. Futures contracts are used generally
for protecting against rich of adverse price fluctuation (hedging). As the terms
of the contracts are standardized, these are generally not used for merchandizing
propose.
How professionals predict prices in
futures?
Two methods generally used for predicting futures prices are fundamental analysis
and technical analysis. The fundamental analysis is concerned with basic supply
and demand information, such as, weather patterns, carryover supplies, relevant
policies of the Government and agricultural reports. Technical analysis includes
analysis of movement of prices in the past. Many participants use fundamental analysis
to determine the direction of the market, and technical analysis to time their entry
and exist.
Who is hedger?
Hedger is a user of the market, who enters into futures contract to manage the risk
of adverse price fluctuation in respect of his existing or future asset.
What is arbitrage?
Arbitrage refers to the simultaneous purchase and sale in two markets so that the
selling price is higher than the buying price by more than the transaction cost,
so that the arbitrageur makes risk-less profit.
Who are day-traders?
Day traders are speculators who take positions in futures or options contracts and
liquidate them prior to the close of the same trading day.
What is hedging?
Hedging is simply an Investment strategy that is designed to offset investment risk.
When hedger is going to buy a commodity in the cash market at a future date, he
buys the futures contract now and when he buys the commodity in the cash market,
the future contract is squared off to reduce or limit the risk of the purchase price.
What are the trading timings of MCX
The exchange operates on all days except Sundays and exchange specified Holidays...
Monday to Friday - 10:00 am to 5:00 pm (for all commodities). Monday to Friday –
5:00 pm to 11:30 pm (All commodities except agri commodities and sponge Iron). Saturday
– 10:00 am to 2:00 pm All commodities
What is the settlement period?
Settlement period is the cycle, which includes trade execution to settlement of
that trade. Commodity trading has a monthly cycle. In all commodities last 5 days
of a month are delivery period. If you do not like to give or take delivery than
one has to do settlement before 5 days of delivery period.
When does pay-in and Pay-out Occur?
Pay in and pay out of funds for mark to market settlement is affected on T+1 basis.
It means that any booked losses or profit of the members are debited or credited
in their bank settlement account on the next day of its trading. Pay in and pay
out of funds for delivery –based settlement is effected on E+2 /E+3 (E Stands for
expiry of contract) basis for delivery of good delivery by the seller or a prescribed
in the contract settlement.
Are there physical deliveries in commodity
futures exchanges?
YES, the exchanges, have made available provisions of settlement of contracts by
physical delivery Do we have to pay sales tax for commodity futures transactions?
If the trade is squared off before expiry of the contracts, do not have to pay sales
Tax. Because selling a futures contract means a commitment to sale. Which is different
from actual sale. If the seller does not square off the position and intends to
deliver goods in respect of his sale position, than only he is required to pay sales
tax.
What is a Depository?
A depository is an organisation, which holds securities of investors in electronic
form at the request of the investors through a registered Depository Participant.
It also provides services related to transactions in securities.
How is a depository similar to a bank?
It can be compared with a bank, which holds the funds for depositors. A Bank – Depository
Analogy is given in the following table: BANK-DEPOSITORY – AN ANALOGY - BANK Holds
funds in an account. DEPOSITORY Hold securities in an account. - BANK Transfers
funds between accounts on the instruction of the account holder. DEPOSITORY Transfers
securities between accounts on the instruction of the account holder. - BANK Facilitates
transfer without having to handle money, DEPOSITORY Facilitates transfer of ownership
without having to handle securities. - BANK Facilitates safekeeping of money, DEPOSITORY
Facilitates safekeeping of securities.
Who is a Depository Participant?
A Depository Participant (DP) is an agent of the depository through which it interfaces
with the investor. A DP can offer depository services only after it gets proper
registration from SEBI. Banking services can be availed through a branch whereas
depository services can be availed through a DP.
Account Opening : What is dematerialisation?
Dematerialisation is the process by which physical certificates of an investor are
converted to an equivalent number of securities in electronic form and credited
into the investor's account with his/her DP.
Account Opening : How can one convert
physical holding into electronic holding i.e how can one dematerialise securities?
In order to dematerialise physical securities one has to fill in a DRF (Demat Request
Form) which is available with the DP and submit the same along with physical certificates
one wishes to dematerialise. Separate DRF has to be filled for each ISIN Number.
The complete process of dematerialisation is outlined below: • Surrender certificates
for dematerialisation to your depository participant. • Depository participant intimates
Depository of the request through the system. • Depository participant submits the
certificates to the registrar of the Issuer Company. Registrar confirms the dematerialisation
request from depository. • After dematerialising the certificates, Registrar updates
accounts and informs depository of the completion of dematerialisation. • Depository
updates its accounts and informs the depository participant. • Depository participant
updates the demat account of the investor.
Account Opening : Can electronic holdings
be converted back into Physical Certificates?
Yes. The process is called rematerialisation. If one wishes to get back his securities
in the physical form one has to fill in the RRF (Remat Request Form) and request
his DP for rematerialisation of the balances in his securities account. The process
of rematerialisation is outlined below: • One makes a request for rematerialisation.
• Depository participant intimates depository of the request through the system.
• Depository confirms rematerialisation request to the registrar. • Registrar updates
accounts and prints certificates. • Depository updates accounts and downloads details
to depository participant. • Registrar dispatches certificates to investor.
Trading/Settlement : What is the procedure
for selling dematerialised securities?
The procedure for buying and selling dematerialised securities is similar to the
procedure for buying and selling physical securities. The difference lies in the
process of delivery (in case of sale) and receipt (in case of purchase) of securities.
In case of purchase:- • The broker will receive the securities in his account on
the payout day • The broker will give instruction to its DP to debit his account
and credit investor's account • Investor will give ‘Receipt Instruction to DP for
receiving credit by filling appropriate form. However one can give standing instruction
for credit in to ones account that will obviate the need of giving Receipt Instruction
every time. In case of sale:- The investor will give delivery instruction to DP
to debit his account and credit the broker’s account. Such instruction should reach
the DP’s office at least 24 hours before the pay-in as other wise DP will accept
the instruction only at the investor’s risk.
Trading/Settlement : What is 'Standing
Instruction' given in the account opening form?
In a bank account, credit to the account is given only when a 'pay in' slip is submitted
together with cash/cheque. Similarly, in a depository account 'Receipt in' form
has to be submitted to receive securities in the account. However, for the convenience
of investors, facility of 'standing instruction' is given. If you say 'Yes' for
standing instruction, you need not submit 'Receipt in' slip everytime you buy securities.
If you are particular that securities can be credited to your account only with
your consent, then do not say 'yes' [or tick ] to standing instruction in the application
form.
Trading/Settlement : What is delivery
instruction slip (DIS)? What precautions do one need to observe with respect to
Delivery Instruction Slips?
To give the delivery one has to fill a form called Delivery Instruction Slip (DIS).
DIS may be compared to cheque book of a bank account. The following precautions
are to be taken in respect of DIS:- • Ensure and insist with DP to issue DIS book.
• Ensure that DIS numbers are pre-printed and DP takes acknowledgment for the DIS
booklet issued to investor. • Ensure that your account number [client id] is pre-stamped.
• If the account is a joint account, all the joint holders have to sign the instruction
slips. Instruction cannot be executed if all joint holders have not signed. • Avoid
using loose slips • Do not leave signed blank DIS with anyone viz., broker/sub-broker.
• Keep the DIS book under lock and key when not in use. • If only one entry is made
in the DIS book, strike out remaining space to prevent misuse by any one. • Investor
should personally fill in target account -id and all details in the DIS.
Trading/Settlement : Why should BO
mention “Reason” & “Consideration” while carrying out “Off- Market” Trade?
It is a requirement from NSDL and Mandatory to mention in DIS. It is categorically
mentioned by them that while one carry out “Off Market” transaction (I.e. a transaction
not carried out through official market process.) the BO should mention reason why
he has transferred this shares to other account. Reason can be in mode of Gift,
Donation, transfer from one account to another account with a same client or transfer
to family member a/c, closing of Account and Transferring to Other Dp’s Account
Etc.
Corporate Benefits : How are cash
corporate benefit such as dividend / interest received?
The concerned company obtains the details of beneficiary holders and their holdings
as on the date of the book closure / record date from Depositories. The payment
to the investors will be made by the company through the ECS (Electronic Clearing
Service) facility, wherever available. Thus the dividend / interest will be credited
to your bank account directly. Where ECS facility is not available dividend / interest
will be given by issuing warrants on which your bank account details are printed.
The bank account details will be those which you would have mentioned in your account
opening form or changed thereafter.
Pledging : What should one do to pledge
electronic securities?
The procedure to pledge electronic securities is as follows: • Both investor (pledgor)
as well as the lender (pledgee) must have depository accounts with the same depository;
• Investor has to initiate the pledge by submitting to DP the details of the securities
to be pledged in a standard format ; • The pledgee has to confirm the request through
his/her DP; • Once this is done, securities are pledged. • All financial transactions
between the pledgor and the pledgee are handled as per usual practice outside the
depository system.
Pledging : Can lending and borrowing
be done directly between two persons?
No. Lending and borrowing has to be done through an 'Approved Intermediary' registered
with SEBI. The approved intermediary would borrow the securities for further lending
to borrowers. Lenders of the securities and borrowers of the securities enter into
separate agreements with the approved intermediary for lending and borrowing the
securities. Lending and borrowing is effected through the depository system.
Nomination : Who can nominate?
Nomination can be made only by individuals holding beneficiary accounts either singly
or jointly. Non-individuals including society, trust, body corporate, karta of Hindu
Undivided Family, holder of power of attorney cannot nominate.
Nomination : Who can be a nominee?
Only an individual can be a nominee. A nominee shall not be a society, trust, body
corporate, partnership firm, Karta of Hindu Undivided Family or a power of attorney
holder.
Nomination : Why I/We should nominate?
It is in the interest of the BO to make nomination. This will help his/her from
legal heirs to approach court of law, Obtaining of Succession certificate, Save
Expenses In absence or deceased of a BO.
Transmission of demat securities :
What is transmission of demat securities?
Transmission is the process by which securities of a deceased account holder are
of dematerialised holdings is more convenient as the transmission formalities for
all securities held in a demat account can be completed by submitting documents
to the DP, whereas in case of physical securities the legal heirs/nominee/surviving
joint holder has to independently correspond with each company in which securities
are held.
Transmission of demat securities :
In the event of death of the sole holder, how the successors should claim the securities
lying in the demat account?
The claimant should submit to the concerned DP an application Transmission Request
Form (TRF) along with the following supporting documents 1. In case of death of
sole holder where the sole holder has appointed a nominee Notarised copy of the
death certificate 2. In case of death of the sole holder, where the sole holder
has not appointed a nominee Notarised copy of the death certificate Any one of the
below mentioned documents - Succession certificate Copy of probated will Letter
of Administration The DP, after ensuring that the application is genuine, will transfer
securities to the account of the claimant. The major advantage in case of dematerialised
holdings is that the transmission formalities for all securities held with a DP
can be completed by interaction with the DP alone, unlike in the case of physical
share certificates, where the claimant will have to interact with each Issuing company
or its Registrar separately.
What is a Mutual Fund?
Mutual fund is a mechanism for pooling the resources by issuing units to the investors
and investing funds in securities in accordance with objectives as disclosed in
offer document. Investments in securities are spread across a wide cross-section
of industries and sectors and thus the risk is reduced. Diversification reduces
the risk because all stocks may not move in the same direction in the same proportion
at the same time. Mutual fund issues units to the investors in accordance with quantum
of money invested by them. Investors of mutual funds are known as unitholders. The
profits or losses are shared by the investors in proportion to their investments.
The mutual funds normally come out with a number of schemes with different investment
objectives which are launched from time to time. A mutual fund is required to be
registered with Securities and Exchange Board of India (SEBI) which regulates securities
markets before it can collect funds from the public.
How is a mutual fund set up?
A mutual fund is set up in the form of a trust, which has sponsor, trustees, asset
management company (AMC) and custodian. The trust is established by a sponsor or
more than one sponsor who is like promoter of a company. The trustees of the mutual
fund hold its property for the benefit of the unitholders. Asset Management Company
(AMC) approved by SEBI manages the funds by making investments in various types
of securities. Custodian, who is registered with SEBI, holds the securities of various
schemes of the fund in its custody. The trustees are vested with the general power
of superintendence and direction over AMC. They monitor the performance and compliance
of SEBI Regulations by the mutual fund. SEBI Regulations require that at least two
thirds of the directors of trustee company or board of trustees must be independent
i.e. they should not be associated with the sponsors. Also, 50% of the directors
of AMC must be independent. All mutual funds are required to be registered with
SEBI before they launch any scheme. However, Unit Trust of India (UTI) is not registered
with SEBI (as on January 15, 2002).
What is Net Asset Value (NAV) of a
scheme?
The performance of a particular scheme of a mutual fund is denoted by Net Asset
Value (NAV). Mutual funds invest the money collected from the investors in securities
markets. In simple words, Net Asset Value is the market value of the securities
held by the scheme. Since market value of securities changes every day, NAV of a
scheme also varies on day to day basis. The NAV per unit is the market value of
securities of a scheme divided by the total number of units of the scheme on any
particular date. For example, if the market value of securities of a mutual fund
scheme is Rs 200 lakhs and the mutual fund has issued 10 lakhs units of Rs. 10 each
to the investors, then the NAV per unit of the fund is Rs.20. NAV is required to
be disclosed by the mutual funds on a regular basis - daily or weekly - depending
on the type of scheme. Net asset value on a particular date reflects the realisable
value that the investor will get for each unit that he his holding if the scheme
is liquidated on that date. It is calculated by deducting all liabilities (except
unit capital) of the fund from the realisable value of all assets and dividing by
number of units outstanding.
What are the different types of mutual
fund schemes?
Schemes according to Maturity Period: A mutual fund scheme can be classified into
open-ended scheme or close-ended scheme depending on its maturity period. Open-ended
Fund/ Scheme: An open-ended fund or scheme is one that is available for subscription
and repurchase on a continuous basis. These schemes do not have a fixed maturity
period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related
prices which are declared on a daily basis. The key feature of open-end schemes
is liquidity. Close-ended Fund/ Scheme : A close-ended fund or scheme has a stipulated
maturity period e.g. 5-7 years. The fund is open for subscription only during a
specified period at the time of launch of the scheme. Investors can invest in the
scheme at the time of the initial public issue and thereafter they can buy or sell
the units of the scheme on the stock exchanges where the units are listed. In order
to provide an exit route to the investors, some close-ended funds give an option
of selling back the units to the mutual fund through periodic repurchase at NAV
related prices. SEBI Regulations stipulate that at least one of the two exit routes
is provided to the investor i.e. either repurchase facility or through listing on
stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis.
Schemes according to Investment Objective: A scheme can also be classified as growth
scheme, income scheme, or balanced scheme considering its investment objective.
Such schemes may be open-ended or close-ended schemes as described earlier. Such
schemes may be classified mainly as follows: Growth / Equity Oriented Scheme: The
aim of growth funds is to provide capital appreciation over the medium to long-
term. Such schemes normally invest a major part of their corpus in equities. Such
funds have comparatively high risks. These schemes provide different options to
the investors like dividend option, capital appreciation, etc. and the investors
may choose an option depending on their preferences. The investors must indicate
the option in the application form. The mutual funds also allow the investors to
change the options at a later date. Growth schemes are good for investors having
a long-term outlook seeking appreciation over a period of time. Income / Debt Oriented
Scheme : The aim of income funds is to provide regular and steady income to investors.
Such schemes generally invest in fixed income securities such as bonds, corporate
debentures, Government securities and money market instruments. Such funds are less
risky compared to equity schemes. These funds are not affected because of fluctuations
in equity markets. However, opportunities of capital appreciation are also limited
in such funds. The NAVs of such funds are affected because of change in interest
rates in the country. If the interest rates fall, NAVs of such funds are likely
to increase in the short run and vice versa. However, long term investors may not
bother about these fluctuations. Balanced Fund : The aim of balanced funds is to
provide both growth and regular income as such schemes invest both in equities and
fixed income securities in the proportion indicated in their offer documents. These
are appropriate for investors looking for moderate growth. They generally invest
40-60% in equity and debt instruments. These funds are also affected because of
fluctuations in share prices in the stock markets. However, NAVs of such funds are
likely to be less volatile compared to pure equity funds. Money Market or Liquid
Fund : These funds are also income funds and their aim is to provide easy liquidity,
preservation of capital and moderate income. These schemes invest exclusively in
safer short-term instruments such as treasury bills, certificates of deposit, commercial
paper and inter-bank call money, government securities, etc. Returns on these schemes
fluctuate much less compared to other funds. These funds are appropriate for corporate
and individual investors as a means to park their surplus funds for short periods.
Gilt Fund : These funds invest exclusively in government securities. Government
securities have no default risk. NAVs of these schemes also fluctuate due to change
in interest rates and other economic factors as is the case with income or debt
oriented schemes. Index Funds : Index Funds replicate the portfolio of a particular
index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc These schemes
invest in the securities in the same weightage comprising of an index. NAVs of such
schemes would rise or fall in accordance with the rise or fall in the index, though
not exactly by the same percentage due to some factors known as "tracking error"
in technical terms. Necessary disclosures in this regard are made in the offer document
of the mutual fund scheme. There are also exchange traded index funds launched by
the mutual funds which are traded on the stock exchanges.
Why should I choose to invest in a
mutual fund?
For retail investor who does not have the time and expertise to analyze and invest
in stocks and bonds, mutual funds offer a viable investment alternative. This is
because: Mutual Funds provide the benefit of cheap access to expensive stocks. Mutual
funds diversify the risk of the investor by investing in a basket of assets. A team
of professional fund managers manages them with in-depth research inputs from investment
analysts. Being institutions with good bargaining power in markets, mutual funds
have access to crucial corporate information which individual investors cannot access.
What are the risks involved in investing
in mutual funds?
A very important risk involved in mutual fund investments is the market risk. When
the market is in doldrums, most of the equity funds will also experience a downturn.
However, the company specific risks are largely eliminated due to professional fund
management.
How do mutual funds diversify their
risks?
Financial theory states that an investor can reduce his total risk by holding a
portfolio of assets instead of only one asset. This is because by holding all your
money in just one asset, the entire fortunes of your portfolio depend on this one
asset. By creating a portfolio of a variety of assets, this risk is substantially
reduced.
How are mutual funds different from
portfolio management schemes?
In case of mutual funds, the investments of different investors are pooled to form
a common investible corpus and gain/loss to all investors during a given period
are same for all investors while in case of portfolio management scheme, the investments
of a particular investor remains identifiable to him. Here the gain or loss of all
the investors will be different from each other.
What are sector specific funds/schemes?
These are the funds/schemes which invest in the securities of only those sectors
or industries as specified in the offer documents. e.g. Pharmaceuticals, Software,
Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds
are dependent on the performance of the respective sectors/industries. While these
funds may give higher returns, they are more risky compared to diversified funds.
Investors need to keep a watch on the performance of those sectors/industries and
must exit at an appropriate time. They may also seek advice of an expert.
Which plan should I choose?
It depends on your investment object, which again depends on your income, age, financial
responsibilities, risk taking capacity and tax status. For example a retired government
employee is most likely to opt for monthly income plan while a high-income youngster
is most likely to opt for growth plan.
What are Tax Saving Schemes?
These schemes offer tax rebates to the investors under specific provisions of the
Income Tax Act, 1961 as the Government offers tax incentives for investment in specified
avenues. e.g. Equity Linked Savings Schemes (ELSS). Pension schemes launched by
the mutual funds also offer tax benefits. These schemes are growth oriented and
invest pre-dominantly in equities. Their growth opportunities and risks associated
are like any equity-oriented scheme.
What is a Load or no-load Fund?
A Load Fund is one that charges a percentage of NAV for entry or exit. That is,
each time one buys or sells units in the fund, a charge will be payable. This charge
is used by the mutual fund for marketing and distribution expenses. Suppose the
NAV per unit is Rs.10. If the entry as well as exit load charged is 1%, then the
investors who buy would be required to pay Rs.10.10 and those who offer their units
for repurchase to the mutual fund will get only Rs.9.90 per unit. The investors
should take the loads into consideration while making investment as these affect
their yields/returns. However, the investors should also consider the performance
track record and service standards of the mutual fund which are more important.
Efficient funds may give higher returns in spite of loads. A no-load fund is one
that does not charge for entry or exit. It means the investors can enter the fund/scheme
at NAV and no additional charges are payable on purchase or sale of units.
What is a sales or repurchase/redemption
price?
The price or NAV a unitholder is charged while investing in an open-ended scheme
is called sales price. It may include sales load, if applicable. Repurchase or redemption
price is the price or NAV at which an open-ended scheme purchases or redeems its
units from the unitholders. It may include exit load, if applicable.
What is an assured return scheme?
Assured return schemes are those schemes that assure a specific return to the unitholders
irrespective of performance of the scheme. A scheme cannot promise returns unless
such returns are fully guaranteed by the sponsor or AMC and this is required to
be disclosed in the offer document. Investors should carefully read the offer document
whether return is assured for the entire period of the scheme or only for a certain
period. Some schemes assure returns one year at a time and they review and change
it at the beginning of the next year.
Can a mutual fund change the asset
allocation while deploying funds of investors?
Considering the market trends, any prudent fund managers can change the asset allocation
i.e. he can invest higher or lower percentage of the fund in equity or debt instruments
compared to what is disclosed in the offer document. It can be done on a short term
basis on defensive considerations i.e. to protect the NAV. Hence the fund managers
are allowed certain flexibility in altering the asset allocation considering the
interest of the investors. In case the mutual fund wants to change the asset allocation
on a permanent basis, they are required to inform the unitholders and giving them
option to exit the scheme at prevailing NAV without any load.
How much should one invest in debt
or equity oriented schemes?
An investor should take into account his risk taking capacity, age factor, financial
position, etc. As already mentioned, the schemes invest in different type of securities
as disclosed in the offer documents and offer different returns and risks. Investors
may also consult financial experts before taking decisions. Agents and distributors
may also help in this regard.
How to fill up the application form
of a mutual fund scheme?
An investor must mention clearly his name, address, number of units applied for
and such other information as required in the application form. He must give his
bank account number so as to avoid any fraudulent encashment of any cheque/draft
issued by the mutual fund at a later date for the purpose of dividend or repurchase.
Any changes in the address, bank account number, etc at a later date should be informed
to the mutual fund immediately.
What should an investor look into
an offer document?
An abridged offer document, which contains very useful information, is required
to be given to the prospective investor by the mutual fund. The application form
for subscription to a scheme is an integral part of the offer document. SEBI has
prescribed minimum disclosures in the offer document. An investor, before investing
in a scheme, should carefully read the offer document. Due care must be given to
portions relating to main features of the scheme, risk factors, initial issue expenses
and recurring expenses to be charged to the scheme, entry or exit loads, sponsor’s
track record, educational qualification and work experience of key personnel including
fund managers, performance of other schemes launched by the mutual fund in the past,
pending litigations and penalties imposed, etc.
When will the investor get certificate
or statement of account after investing in a mutual fund?
Mutual funds are required to despatch certificates or statements of accounts within
six weeks from the date of closure of the initial subscription of the scheme. In
case of close-ended schemes, the investors would get either a demat account statement
or unit certificates as these are traded in the stock exchanges. In case of open-ended
schemes, a statement of account is issued by the mutual fund within 30 days from
the date of closure of initial public offer of the scheme. The procedure of repurchase
is mentioned in the offer document.
As a unitholder, how much time will
it take to receive dividends/repurchase proceeds?
A mutual fund is required to despatch to the unitholders the dividend warrants within
30 days of the declaration of the dividend and the redemption or repurchase proceeds
within 10 working days from the date of redemption or repurchase request made by
the unitholder. In case of failures to despatch the redemption/repurchase proceeds
within the stipulated time period, Asset Management Company is liable to pay interest
as specified by SEBI from time to time (15% at present).
Can a mutual fund change the nature
of the scheme from the one specified in the offer document?
Yes. However, no change in the nature or terms of the scheme, known as fundamental
attributes of the scheme e.g.structure, investment pattern, etc. can be carried
out unless a written communication is sent to each unitholder and an advertisement
is given in one English daily having nationwide circulation and in a newspaper published
in the language of the region where the head office of the mutual fund is situated.
The unitholders have the right to exit the scheme at the prevailing NAV without
any exit load if they do not want to continue with the scheme. The mutual funds
are also required to follow similar procedure while converting the scheme form close-ended
to open-ended scheme and in case of change in sponsor.
How will an investor come to know
about the changes, if any, which may occur in the mutual fund?
There may be changes from time to time in a mutual fund. The mutual funds are required
to inform any material changes to their unitholders. Apart from it, many mutual
funds send quarterly newsletters to their investors. At present, offer documents
are required to be revised and updated at least once in two years. In the meantime,
new investors are informed about the material changes by way of addendum to the
offer document till the time offer document is revised and reprinted.
How to know the performance of a mutual
fund scheme?
The performance of a scheme is reflected in its net asset value (NAV) which is disclosed
on daily basis in case of open-ended schemes and on weekly basis in case of close-ended
schemes. The NAVs of mutual funds are required to be published in newspapers. The
NAVs are also available on the web sites of mutual funds. All mutual funds are also
required to put their NAVs on the web site of Association of Mutual Funds in India
(AMFI) www.amfiindia.com and thus the investors can access NAVs of all mutual funds
at one place. The mutual funds are also required to publish their performance in
the form of half-yearly results which also include their returns/yields over a period
of time i.e. last six months, 1 year, 3 years, 5 years and since inception of schemes.
Investors can also look into other details like percentage of expenses of total
assets as these have an affect on the yield and other useful information in the
same half-yearly format. The mutual funds are also required to send annual report
or abridged annual report to the unitholders at the end of the year. Various studies
on mutual fund schemes including yields of different schemes are being published
by the financial newspapers on a weekly basis. Apart from these, many research agencies
also publish research reports on performance of mutual funds including the ranking
of various schemes in terms of their performance. Investors should study these reports
and keep themselves informed about the performance of various schemes of different
mutual funds. Investors can compare the performance of their schemes with those
of other mutual funds under the same category. They can also compare the performance
of equity oriented schemes with the benchmarks like BSE Sensitive Index, S&P CNX
Nifty, etc.
How to know where the mutual fund
scheme has invested money mobilised from the investors?
The mutual funds are required to disclose full portfolios of all of their schemes
on half-yearly basis which are published in the newspapers. Some mutual funds send
the portfolios to their unitholders. The scheme portfolio shows investment made
in each security i.e. equity, debentures, money market instruments, government securities,
etc. and their quantity, market value and % to NAV. These portfolio statements also
required to disclose illiquid securities in the portfolio, investment made in rated
and unrated debt securities, non-performing assets (NPAs), etc. Some of the mutual
funds send newsletters to the unitholders on quarterly basis which also contain
portfolios of the schemes.
If schemes in the same category of
different mutual funds are available, should one choose a scheme with lower NAV?
Some of the investors have the tendency to prefer a scheme that is available at
lower NAV compared to the one available at higher NAV. Sometimes, they prefer a
new scheme which is issuing units at Rs. 10 whereas the existing schemes in the
same category are available at much higher NAVs. Investors may please note that
in case of mutual funds schemes, lower or higher NAVs of similar type schemes of
different mutual funds have no relevance. On the other hand, investors should choose
a scheme based on its merit considering performance track record of the mutual fund,
service standards, professional management, etc. This is explained in an example
given below. Suppose scheme A is available at a NAV of Rs.15 and another scheme
B at Rs.90. Both schemes are diversified equity oriented schemes. Investor has put
Rs. 9,000 in each of the two schemes. He would get 600 units (9000/15) in scheme
A and 100 units (9000/90) in scheme B. Assuming that the markets go up by 10 per
cent and both the schemes perform equally good and it is reflected in their NAVs.
NAV of scheme A would go up to Rs. 16.50 and that of scheme B to Rs. 99. Thus, the
market value of investments would be Rs. 9,900 (600* 16.50) in scheme A and it would
be the same amount of Rs. 9900 in scheme B (100*99). The investor would get the
same return of 10% on his investment in each of the schemes. Thus, lower or higher
NAV of the schemes and allotment of higher or lower number of units within the amount
an investor is willing to invest, should not be the factors for making investment
decision. Likewise, if a new equity oriented scheme is being offered at Rs.10 and
an existing scheme is available for Rs. 90, should not be a factor for decision
making by the investor. Similar is the case with income or debt-oriented schemes.
On the other hand, it is likely that the better managed scheme with higher NAV may
give higher returns compared to a scheme which is available at lower NAV but is
not managed efficiently. Similar is the case of fall in NAVs. Efficiently managed
scheme at higher NAV may not fall as much as inefficiently managed scheme with lower
NAV. Therefore, the investor should give more weightage to the professional management
of a scheme instead of lower NAV of any scheme. He may get much higher number of
units at lower NAV, but the scheme may not give higher returns if it is not managed
efficiently.
How to choose a scheme for investment
from a number of schemes available?
As already mentioned, the investors must read the offer document of the mutual fund
scheme very carefully. They may also look into the past track record of performance
of the scheme or other schemes of the same mutual fund. They may also compare the
performance with other schemes having similar investment objectives. Though past
performance of a scheme is not an indicator of its future performance and good performance
in the past may or may not be sustained in the future, this is one of the important
factors for making investment decision. In case of debt oriented schemes, apart
from looking into past returns, the investors should also see the quality of debt
instruments which is reflected in their rating. A scheme with lower rate of return
but having investments in better rated instruments may be safer. Similarly, in equities
schemes also, investors may look for quality of portfolio. They may also seek advice
of experts.
Is the higher net worth of the sponsor
a guarantee for better returns?
In the offer document of any mutual fund scheme, financial performance including
the net worth of the sponsor for a period of three years is required to be given.
The only purpose is that the investors should know the track record of the company
which has sponsored the mutual fund. However, higher net worth of the sponsor does
not mean that the scheme would give better returns or the sponsor would compensate
in case the NAV falls.
Where can an investor look out for
information on mutual funds?
Almost all the mutual funds have their own web sites. Investors can also access
the NAVs, half-yearly results and portfolios of all mutual funds at the web site
of Association of mutual funds in India (AMFI) www.amfiindia.com. AMFI has also
published useful literature for the investors. Investors can log on to the web site
of SEBI www.sebi.gov.in and go to "Mutual Funds" section for information on SEBI
regulations and guidelines, data on mutual funds, draft offer documents filed by
mutual funds, addresses of mutual funds, etc. Also, in the annual reports of SEBI
available on the web site, a lot of information on mutual funds is given. There
are a number of other web sites which give a lot of information of various schemes
of mutual funds including yields over a period of time. Many newspapers also publish
useful information on mutual funds on daily and weekly basis. Investors may approach
their agents and distributors to guide them in this regard.
What is IPO?
Initial Public Offering is when an unlisted company makes either a fresh issue of
securities or an offer for sale of its existing securities or both for the first
time to the public. It is a way for a company to raise money from investors for
its future projects and get listed to Stock Exchange. Or An Initial Public Offer
(IPO) is the selling of securities to the public in the primary stock market.
What is FPO?
A further public offering (FPO) is when an already listed company makes either a
fresh issue of securities to the public or an offer to sale to the public, through
an offer document. An offer for sale in such scenario is allowed only if it is made
to satisfy listing or continuous listing obligations.
What is Right Issue?
Rights issue (RI) is when a listed company which proposes to issue fresh securities
to its existing shareholders as on a record date.
What is Offer Document?
Offer documents means Prospectus in case of a public issue or offer for sale and
letter of offer in case of a rights issue, which is filed Registrar of Companies
and Stock Exchanges. Offer Document covers all the relevant information to help
an investor to make his/her investment decision.
What is Draft Offer Document?
Draft Offer Document means the offer document in draft stage. The draft offer documents
are filed with SEBI, atleast 21 days prior to the filling of the offer Document
with ROC/Ses. SEBI may specifies changes, if any, in the draft offer Document and
the issuer or the lead marchant banker shall carry out such changes in the draft
offer document before filing the offer document with ROC/Ses. The Draft Offer document
is available on the SEBI website for public comments for a period of 21 days from
the filling of the draft Offer Documents with SEBI.
What is Red Herring Prospectus?
Red Herring Prospectus is a prospectus which does not have details of either price
or number of shares being offered or the amount of issue. This means that in case
price is not disclosed , the number of shares and the upper and lower price bands
are disclosed. On the other hand, an issuer can state the issue size and the number
of shares are determined later. An RHP for an FPO can be filed with the RoC without
the price band and the issuer, in such a case will notify the floor price band by
way of an advertisement one day prior to the opening of the issue. In the case of
book-built issues, it is a process of price discovery and the price cannot be determined
until the bidding process is completed. Hence, such details are not shown in the
Red Herring prospectus filed with ROC in terms of the provisions of the companies
Act. Only on completion of the bidding process, the details of the final price are
included in the offer document. The offer document filed thereafter with ROC is
called a prospectus.
What is Fixed Price Offer?
An issuer company is allowed to freely price the issue. The basis of issue price
of disclosed in the offer document where the issuer discloses in detail about the
qualitative and quantitative factors justifying the issue price. The issuer company
can mention a price band of 20% (cap in the price band should not be more than 20%
of the floor price) in the Draft offer documents filed with SEBI and actual price
can be determined at a later date before filling of the final offer documents with
SEBI/ROCs
What is the difference between Book
Building Issue and Fixed Price Issue?
Initial Public Offering can be made through the fixed price method, book building
method or a combination of both. Fixed Price process ? Price at which the securities
are offered/allotted is known in advance to the investor. ? Demand for the securities
offered is known only after the closure of the issue. ? Payment if made at the time
of subscription wherein refund is given after allocation. Book building process
? Price at which securities will be offered/allotted is not known in advance to
the investor. Only an indicative price range is known. ? Demand for the securities
offered can be known everyday as the book is built. ? Payment only after allocation
What is the difference between Floor
Price and Cut-Off Price for a Book Building Issue?
Floor Price is the minimum price (lower level) at which bids can be made for an
IPO. Cut-off price means the investor is ready to pay whatever price is decided
by the company at the end of the book building process. Retail investor has to pay
the highest price while placing the bid at Cut-Off price. If company decides the
final price lower then the highest price asked for IPO, the remaining amount is
return to the retail investor
How does Book Building Work?
Book building is a process of price discovery. Hence, the Red Herring prospectus
does not contain a price. Instead, the red hearing prospectus contains either the
floor price of the securities offered through it or a price band along with the
range within which the bids can move. The applicants bid for the shares quoting
the price and the quantity that they would like to bid at . Only the retail investors
have the option of bidding at “cut-off: After the bidding process is complete, the
“cut-off” price is arrived at on the lines of Dutch auction. The basis of allotment
is then finalized and letters allotment/refund is undertaken. The final prospectus
with all the details including the final issue price and the issue size is filed
with ROC, thus completing the issue process
Who decided the price band?
Company decides on the price band in consultation with Merchant Bankers. The basis
of issue price is disclosed in the offer document. The issuer is required to disclose
in detail about the qualitative and quantitative factors justifying the issue price.
How can you classify Retail Investor?
Retail Individual investor means an investor who applies or bids for securities
of or for a value of not more than Rs. 1,00,000. NRI's who apply with less then
Rs 1,00,000 /- are also considered as RII category.
How can you classify Non- institutional
bidders?
Individual investors, NRI's, companies, trusts etc who bid for more then Rs 1 lakhs
are known as Non-institutional bidders. They need not to register with SEBI like
RII's. Non-institutional bidders have an allocation of 15% of shares of the total
issue size in Book Build IPO's.
Who are Qualified Institutional Bidders
(QIB's)
Financial Institutions, Banks, FII's and Mutual Funds who are registered with SEBI
are called QIB's. They usually apply in very high quantities. QIBs are mostly representatives
of small investors who invest through mutual funds, ULIP schemes of insurance companies
and pension schemes. QIB's have an allocation of 50% of shares of the total issue
size in Book Build IPO's.
Is it compulsory for me to have a
Demat Account?
As per the requirement, all the issues of size in excess of Rs.10 crores, are to
made compulsorily in the demat more. Thus, if an investor chooses to apply for an
issue that is being made in a compulsory demat mode, he ha to have a demat account
and has the responsibility to put the correct DP ID and Client ID details in the
bid/application forms.
How many days the issue open?
As per Clause 8.8.1, Subscription list for public issues shall be kept open for
at least 3 working days and not more than 10 working days. In case of Book built
issues, the minimum and maximum period for which bidding will be open is 3 – 7 working
days extendable by 3 days in case of a revision in the price band. The public issue
made by an infrastructure company, satisfying the requirements in Clause 2.4.1 (iii)
of Chapter II may be kept open for a maximum period of 21 working days. As per clause
8.8.2., Rights issues shall be kept open for at least 30 days and not more than
60 days.
Can I know the number of shares that
would be allotted to me?
In case of fixed price issues, the investor is intimated about the CAN/Refund order
within 30 days of the closure of the issue. In case of book built issues, the basis
of allotment is finalized by the Book Running lead Managers within 2 weeks from
the date of closure of the issue. The registrar then ensures that the demat credit
or refund as applicable is completed within 15 days of the closure of the issue.
The listing on the stock exchange is done within 7 days form the finalization of
the issue.
Who is a ‘person of Indian origin’?
‘Person of Indian Origin’ (PIO) means a citizen of any country other than Bangladesh
or Pakistan, if a. He at any time held Indian passport; or b. He or either of his
parents or any of his grandparents was a citizen of India by virtue of the Constitution
of India or the Citizenship Act, 1955; or c. The person is a spouse of an Indian
citizen or a person referred to in sub-clause [a] or [b]. Investment by PIO in Indian
Securities is treated the same as the investment by non-resident Indians and requires
same approvals and enjoys the same exemptions.
What is Repatriation and Non-Repatriation?
Repatriation Means you can take back your capital, profits, and dividends in foreign
exchange, which you invested originally in foreign exchange. NRIs are permitted
to invest in shares/convertible debentures of Indian companies by Reserve Bank of
India, under Portfolio Investment Scheme (PIS). It means that, if you are a NRI
living in the USA, you can convert the sale proceeds of your investments in US dollars
and can transfer to your bank account in USA without any restrictions. Non-repatriation
Means you can get back the proceeds only in Indian rupees, irrespective of the currency
you used to invest in the same. Normal procedures for investing in shares/debentures
of a company and mutual fund units are applicable here .You cannot repatriate your
investment/capital in foreign exchange. The investment made can be in new issues
of companies or listed shares in Stock Exchanges. Investment on non-repatriation
basis can be made from NRE / FCNR / NRO accounts. It means that If your investment
is on Non-Repatriation Basis, you cannot convert your rupees in any foreign currency.
Being an NRI, what are the prerequisites
to start investing in the Indian stock market?
To trade on Indian Stock Exchanges in the capacity of an NRI, you would need to:
• Open a bank account with a RBI (Reserve Bank of India) approved designated bank
branch. • Take RBI approval for investment in the Indian Stock Market. (Portfolio
Investment Scheme) • Open a Demat Account with a Depository Participant. • Appoint
a broker to execute trades on your behalf on the Exchange.
What is a designated bank/branch?
RBI has authorized a few branches of each bank to conduct business under Portfolio
Investment Scheme (PIS) on behalf of NRIs/OCBs. These are the main branches of major
commercial banks located close to the stock exchanges. NRIs/OCBs will have to route
their applications through any of the designated bank branches that have authorization
from RBI. You can have as many NRI/NRO accounts in India but you should have only
one designated bank for sale/purchase of shares under the Direct/Portfolio Investment
Schemes. RBI guidelines permit NRI investors to designate only one bank authorized
by RBI to undertake purchase/sale of shares/debentures through the stock exchange
.The client has to give a declaration that he has not obtained RBI permission for
sale/purchase of shares under the Direct/Portfolio Investment Schemes through any
other bank.
How do I apply for PIS?
The application is to be submitted to a designated branch of an authorized dealer
in India with the prescribed form. Reserve Bank has authorized a few branches of
each authorized dealer to conduct the business under Portfolio Investment Scheme
on behalf of NRIs. These branches are the main branches of major commercial banks.
NRIs will have to route their applications through any of the designated authorized
dealer branches that have authorization from Reserve Bank. You can open as many
NRE/NRO account but one can have only One PIS permission
If I already have a NRE/NRO account,
then how do I apply for a PIS account?
If you have a NRE/NRO account with any of the above named authorized dealers, then
all you need to do is submit an application form for a PIS account. If you however
have a NRE/NRO account with a bank other than, you will need to approach any of
the authorized banks and provide them details of your account and then apply for
the PIS through them.
New Qs: Why RBI gives PIS permission
to NRIs?
RBI needs to track each and every transaction of NRI from secondary market for the
Taxation purpose. All transactions of NRI routes through PIS Account maintain by
the authorized bank. RBI views these transactions regularly.
Which Transactions are excluded from
the ambit of PIS?
All transaction form primary market is excluded from ambit of PIS.Securities purchased
as a resident individual are not covered under this scheme. Derivative segment transactions
or Mutual fund unit purchases are not within the ambit of the PIS scheme. Shares
purchased through IPO's (Initial public offers)
Can I apply for IPO’s? If YES, then
how?
Yes. The issuing company is required to issue shares to NRI on the basis of specific
or general permission from GoI/RBI. Therefore, individual NRI need not obtain any
permission.
How will I know that my account is
active?
You will receive Welcome letter, in which you will find all the details related
to your Trading Account. If you are having account in Internet Trading, than you
will receive an email from Internet Department regarding your trading account.
How do I know whether my order is
placed?
The Stock Exchanges assign a Unique Order Code Number to each transaction, which
is intimated by broker to his client and once the order is executed, this order
code number is printed on the contract note. At the end of day our representative
will email you and confirm your trade.
What is a contract notes?
Contract note is a one type of Bill that shows your confirmed trades on particular
day for and on behalf of client. Contract note is issued in the prescribed format
of Rules and regulations of NSE and SEBI guidelines. Contact notes are helpful to
track your transaction and also for tax purpose. Clients can collect bills from
office on same day of transaction. The contract notes will be delivered to you by
post.
Can I view my Contact note Online?
Yes, You can View your Bills Online through your user id and Password form our Back
office. You can also able to view your Previous bill and new bills from our back
office anytime and anywhere. You can verify your quantity, price, brokerage and
time through your Contact note.
What are the charges that can be levied
on the investor by a stock broker/sub broker in Contract note?
The trading member can charge: 1. Brokerage charged by member broker. 2. Penalties
arising on specific default on behalf of client (investor) 3. Service tax as stipulated.
– 12.36% charges will be applicable on brokerage, T.O. & O.C. 4. Securities Transaction
Tax (STT) as applicable.- 0.125% on market Rate for Delivery and 0.25% on speculation
from sell side. 5.Turn over Charges – NSE charges will be 0.05% and BSE charges
will be 0.01% 6.Stamp Duty Charges - 0.01% on Delivery and 0.02% on speculation
The brokerage, service tax and STT, Turn Over Charges, Stamp Duty charges are indicated
separately in the contract note
What is a Rolling Settlement?
In a Rolling Settlement trades executed during the day are settled based on the
net obligations for the day. Presently the trades pertaining to the rolling settlement
are settled on a T+2 day basis where T stands for the trade day. Hence, trades executed
on a Monday are typically settled on the following Wednesday (considering 2 working
days from the trade day). The funds and securities pay-in and payout are carried
out on T+2 day.
What is the pay-in day and pay- out
day?
Pay in day is the day when the brokers shall make payment or delivery of securities
to the exchange. Pay out day is the day when the exchange makes payment or delivery
of securities to the broker. Settlement cycle is on T+2 rolling settlement basis
w.e.f. April 01, 2003. The exchanges have to ensure that the broker does the pay
out of funds and securities to the clients within 24 hours of the payout. The Exchanges
will have to issue press release immediately after pay out.
What is a Short Delivery of Shares?
Short delivery refers to a situation where a client, who has sold certain shares
during a settlement cycle, fails to deliver the shares to the member either fully
or partly. It also happens in case of Purchasing a shares. If you have purchased
a shares and you will not receive fully or partly shares from exchange than it is
also called a Short delivery of purchased shares.
What is an Auction?
When there is no specific company’s share in clients Demat account and by mistake
if he/ she sell the same than Auction happens. Auction Process: You sold the shares
and those shares has been bought buy some one in the market. As there are no shares
in your Demat Account exchange have to buy those shares from the market on behalf
of you and delivered the same to the buyer.
What is an Auction Charge?
The Exchange purchases the requisite quantity in the Auction Market and gives them
to the buying trading member. The shortages are met through auction process and
the difference in price indicated in contract note and member pays price received
through auction to the Exchange, which is then liable to be recovered from the client.
Is there any limit for purchase of
shares convertible debentures by NRIs under the Portfolio Investment Scheme?
Yes. An NRI can purchase up to a maximum of 5% of the aggregate paid up capital
of the company (equity as well as preference capital) or the aggregate paid up value
of each series of convertible debentures as the case may be. For the purpose of
this ceiling, investment under the Portfolio Investment Scheme on repatriation as
well as non-repatriation basis will be clubbed together. There is an overall ceiling
of 10% of paid-up equity share capital of the company/paid-up value of each series
of convertible debentures for purchase by all NRIs/OCBs put together. The overall
ceiling can be raised to 30% if the company concerned passes a special resolution
to that effect in its general body meeting. Shares/convertible debentures acquired
through IPO/Private Placement are excluded for the purpose of above limits.
What are the permissions required
for the transfer of securities by NRI/ PIO through off-market trade?
The table given below summarizes the permissions required for the off-market transfer:
From To Transaction Permissions Required NRI NRI Sale or Gift General permission,
no specific permission to be taken* NRI Resident Indian Gift Prior approval of RBI
required. NRI Resident Indian Sale under private arrangement General permission
already available. Resident Indian NRI Gift Prior approval of RBI/FIPB should be
obtained. Resident Indian NRI Sale under private arrangement General permission
is already available provided the shares being transferred are not of the companies
engaged in financial service sectors, such transfer does not attract SEBI takeover
code and the activity of the company should be eligible for FDI. * Provided that
the person to whom the shares are being transferred has obtained prior permission
of Central Government to acquire the shares, if he has previous venture or tie up
in India through investment in shares or debentures or a technical collaboration
or a trade mark agreement or investment by whatever name called in the same field
or allied filed in which the Indian company whose shares are being transferred is
engaged.
Who monitors these ceilings on the
holdings by NRIs? What is RBI’s Restrict List/Watch List?
While the respective designated bank branch monitors limits of individual holdings
by NRIs, RBI monitors the holding limits by NRIs in aggregate. Once the aggregate
holding of NRIs builds up/ about to build up to the maximum prescribed ceiling,
RBI puts the concerned stock under the Restrict List/Watch List, which is published
by RBI from time to time. What happens if an NRI purchases a stock in excess of
the prescribed limit? An NRI will have to immediately off load such portion of the
holding, which is in excess of the prescribed limit. So if NRI gets profit from
it then that Profit will go into their NRO account.
What are the tax obligations applicable
to NRIs?
Income on investments (capital gains) forming part of sales proceeds is subject
to Capital Gains tax. The rate of tax depends upon the period of holding. Currently
the tax rate applicable for short-term capital gains is 15% and there is no long-term
capital.
How is amount of capital gain determined?
Capital gain is the calculated based on the difference between the net sale consideration
(sell price less brokerage) and the cost of acquisition (purchase price plus brokerage)
of the concerned holding. Value of holding is calculated on FIFO (First In First
Out) basis.
What are the different taxes on NRI
profits?
Short term Capital gain, Long term Capital gain & Speculative Gains Short term capital
gain: Any capital gain arising out of sell of shares/debentures held for a period
not more than 12 months from the date of its acquisition shall be a short term capital
gain. . Short Term Capital Gain (held for less than 12 months) from sale of shares
is taxable @ 15% + SC + EC (if STT is paid). Long-term capital gain: Any capital
gain arising out of sell of shares/debentures held for more than 12 months from
the date of its acquisition shall be a long term capital gain. Presently the long-term
capital gain is totally free of any Tax. The period of holding is defined as the
period from the date of purchase to the date of sale. Long Term Capital Gain (held
for more than 12 months) from Sale of Shares is exempt from Income Tax (if STT is
paid). For example if the sale transaction date is 01-01-2005, all those purchases,
which are affected up to 01-01-2004, are eligible as long term capital gain tax.
Purchase made on 02-01-2004 and thereafter will be subjected to short term capital
gain tax. Speculative Profits are not eligible for taxation under these special
provisions. Speculative profits are taxable at normal rates as applicable to any
resident individual. Speculative loss cannot be set off against any income including
speculative profits
How can NRIs, residing in any of these
countries, take benefit of ‘Double Tax Avoidance Treaty’?
To avail benefit of lower rates of tax as per double taxation avoidance treaty entered
in by India, NRIs need to submit the Residency Certificate issued by Tax Authorities
of the country of his residence. These documents should be submitted to designated
bank branch at the time of opening the bank account or subsequently. New TDS rate
shall be applied only after the acceptance of the Residency Certificate by the designated
bank.
What is "Tax Deduction at Source (TDS)"
on capital gains arising out of sale of holdings by NRIs?
As per Indian tax laws, all the capital gains arising out of sale transactions are
subject to tax. In the case of NRIs, the capital gain arising out of sale transaction
is subject to deduction of tax at source (TDS) i.e. at the time of crediting the
sale proceeds to the respective NRE account by the concerned bank branch. Accordingly,
the concerned bank shall determine the tax liability and tax will be deducted at
source. The concerned bank, which has deducted tax at source, shall issue a certificate
in this regard
Is there any Gift tax on the Gift
of shares?
There is no Gift Tax on Gift of Shares / Mutual Funds to any person. Gift of shares
/ Mutual Fund is also not considered as taxable income under the Income Tax Act.
Where as gift of money is considered as taxable income in the hands of donee in
excess of Rs. 50000 except gift is given to a close relative defined under the Act.
What is a Demat Account?
In the advanced countries, depository systems and services have played a significant
role in not only facilitating smooth trading and settlement but also attracting
foreign investment in the capital market. The depository system evolved by the National
Securities Depositories Limited (NSDL) enables investors to overcome all problems
related to handling physical certificates. NSDL is an organization formed to provide
electronic depository facilities for securities traded. The securities of investors
are held in electronic form through the medium of Depository Participants. The depository
concept is similar to the Banking system with the exception that banks handle funds
whereas a depository handles securities of the investors. A depository can therefore
be conceived of as a "Bank" for securities. An investor wishing to utilize the services
offered by a depository has to open an account with the depository through the Depository
Participant. This is very similar to opening an account with any of the branches
of a bank in order to utilize the services of that bank.
Can an NRI and person resident in
India have a joint Demat account?
Yes. For the purpose of determining ownership of holding, the first holder is taken
into account. Hence, even though other joint holders may be persons resident in
India, the sale proceeds of such securities can be repatriated in case the first
holder is permitted to repatriate funds
What is a Depository? Who is a Depository
Participant?
A depository holds the securities of investors in electronic form just like a bank
holds cash of its customers. As in a Bank, investors can deposit/withdraw and transfer
securities. The National Securities Depository Limited (NSDL) is the first depository
in India. The Securities and Exchange Board of India (SEBI) regulate the functions
of NSDL. The Depository Participants (DPs) are the link between the Shareholder,
the Company and NSDL. Banks, Financial Institutions, Custodians, Stock Brokers etc.
can become DPs subject to their meeting certain requirements prescribed by NSDL
and SEBI. NSDL publishes from time to time the list of DPs registered with them.
You can open your accounts with one DP, as you like. The procedure for opening an
account with the Depository Participant is similar to opening a Savings Bank Account
with the Bank. After opening the account, you can hold shares of any number of companies
in your account, provided all such companies have entered the depository system.
How do I check my transaction and
Demat holding?
We can provide you your Demat A/c number and password and you have to open our website-www.shahinvestors.com
and click to Demat Holding Online than go to check your Online Demat Holding you
have to type your Demat A/c no and Password and able to view the Demat A/c holding
status and for check it out the Trading contract bills please click to back office
and go to individual login and type your trading code and password you can able
to check back dated trading bill in detail
Can an NRI and person resident in
India have a joint Demat account?
Yes. For the purpose of determining ownership of holding, the first holder is taken
into account. Hence, even though other joint holders may be persons resident in
India, the sale proceeds of such securities can be repatriated in case the first
holder is permitted to repatriate funds
How do I make payments and receive
payments?
Whenever a client executes a Buy/Sell Trade in any of the exchanges, a bill for
the same is generated from our side (a copy of the bill is sent to the client by
email). This bill is then presented to the respective bank of the client by Shah
Investors. The bank verifies the clients account number and status and issues or
accepts the cheque for the amount of the bill.
What is a Fixed Deposit (FD)?
Fixed Deposit is an account maintained with a Bank, HFC (Housing Finance Company),
Corporate, NBFC (Non Banking Finance Company) or any other entity wherein the money
is given at a particular rate of interest for a particular period of time.
When is the interest added?
Interest is paid as per the scheme chosen for the FD. In case of Monthly / Quarterly
/ Annual Income Plan, interest is paid on a monthly/quarterly/annual basis. In case
of Cumulative scheme, compound interest is paid at the end of the term of FD along
with principal.
What is compounding in FDs?
In case of Cumulative Scheme deposits, interest accrued is added back to the principal
at the end of every month/quarter/half-year/year depending upon the compounding
factor. Cumulative scheme of is compounded annually.
What are the documents required?
The documents required (apart from duly filled FD Application Form) are the proof
of residence and PAN No. If a depositor is not assessed for tax then you will have
to fill Form No.60 as per the regulations.
How can I redeem my deposits?
The Deposit Receipt duly discharged with a revenue stamp should be surrendered to
the company on maturity for the repayment of the principal amount . This must be
done at least a month before the maturity to enable the company to renew or refund
the deposits as the case may be.
What is 'either or survivor'?
In this facility, any one of the account holders (if it is in a joint name) can
stake a claim to the money deposited and operate the account without the signature
of the other account holder(s). Moreover, if one of the account holders has expired
without any nomination, the other account holder can claim the funds on maturity.
What is a joint or survivor?
In this case, both account holders have to be present at the time of withdrawal
of deposits and their signatures have to be present on the cheque. In the case of
one account holder expiring, the other account holder(s) have to furnish the death
certificate of the expired account holder in order to claim the funds on maturity.
What is rollover?
If the FD matures and the investor does not claim the money then he/ she can renew
deposit for the same or different tenure depending on the interest rates.
What is nomination?
Nomination is a form of instruction by an investor, directing the company to pay
the matured fund amount to a particular person in case the original account holder
expires.
Do companies club interest on different
FDs in calculation of interest for TDS purposes?
Yes, it is mandatory for the companies to club the interest income on all the accounts
of the account holder and deduct TDS if interest is more than Rs. 5000. The Income
Tax is deducted at source in accordance with the Section 194-A of the Income Tax
Act except where appropriate certificates/Forms ie. Form 15H/15G is submitted at
least one month before the due date of interest.
What if I lose my FD receipt?
You should immediately inform the company so that the company can issue you a duplicate
receipt after getting an indemnity bond from you.
Are public deposits of Housing Finance
Companies guaranteed by NHB?
No. The depositor is advised to satisfy himself about the financial position and
all relevant aspects before placing his deposit with the HFC. A person making public
deposits with HFCs should satisfy himself that it holds a valid certificate of registration
for accepting public deposits from NHB. NHB while issuing certificate of registration
to an HFC specifically mentions whether or not it can accept public deposits.
What is Forex?
Any currency other than the local currency which is used in settling international
transactions (export, import) is called foreign currency. The system of trading
in and converting the currency of one country into that of another currency is referred
to as foreign exchange (Forex).
What are the factors affect the exchange
rate of a currency?
A countries currency exchange rate is typically affected by supply and demand for
the countries currency in the international foreign exchange market. The demand
and supply dynamics is principally influenced by factors like interest rates, inflation,
trade balance and economic and political scenario of the country. The level of confidence
in the economy of a particular country also influences the currency of that country.
How and why does the demand and supply
of a currency increase and decrease?
There are several reasons. A rise in export earning of the country increase foreign
exchange supply. A rise in imports increases demand. These are the objective reasons,
but there are many subjective reasons too. Some of the subjective reasons are: directional
view points of the market participants, expectations of national economic performance,
confidence in a country's economy and so on.
What is a currency futures contract?
A currency futures contract is the standardized version of a forward contract that
is traded on the regulated exchanges. It is an agreement to buy or sell a specified
quantity of an underlying currency on a specified in future at specified rate (e.g.,
USD 1= INR 44.00).
Why do we need currency futures?
We need currency futures if our business is influenced by fluctuations in currency
exchange rates. If you are in India and importing something, you have done the costing
of your imports on the basis of a certain exchange rate between the Indian Rupee
and the relevant foreign currency (usually, the US Dollar or the EURO). By the time
you actually import, the value of Indian Rupee may have gone down and you may lose
out on your income in terms of Indian Rupees by paying higher. On the contrary,
if you are exporting something and the value of Indian Rupee have gone up, you earn
less in terms of Rupee than you had anticipated. Currency futures helps you hedge
against these exchange rate risks.
Why exchange traded futures? What's
wrong with currency forward market that has been existing in India for a long time?
The exchange-traded futures, as compared to OTC forwards, serve the same economic
purpose, yet differ in fundamental ways. Exchange traded contracts are standardized.
In an exchange traded scenario where the market lot is fixed at much lesser size
than the OTC market, equitable opportunities is provided to all classes of investors
whether large or small to participate in the futures market. The other advantages
of an exchange traded market would be greater transparency, efficiency and accessibility.
The counterparty risk (credit risk) in futures contract is eliminated by the presence
of a clearing house / corporation, which by assuming counterparty guarantee, eliminates
default risk.
Who can participate in a currency
futures market?
An resident Indian or company including banks, and financial institutions can participate
in the futures market. However at present, Foreign Institutional Investors (FIIs)
and Non Resident Indians (NRIs) are not permitted to participate in currency futures
market.
In how many currencies can I trade?
At present, the SEBI has given the approval of trading in 4 currency pairs. US Dollar-Indian
Rupee (USD/INR), Euro - Indian Rupee (EUR/INR), Great Britain Pound- Indian Rupee
(GBP/INR), Japanese Yen - Indian Rupee (JPY/INR). With the trading point of View
Future contracts are available for next 12 months for each currency pair and Option
Contract are available only in USD/INR currency pair for next 3 months.
How many currency futures and Option
contracts are available for trading?
There are next 12 months currency futures contracts are available for 4 currency
pairs and Option Contracts are available only in USD/INR currency pair and its next
3 months are active on NSE. Each contract end on Two working days prior to the last
business day of the expiry month at 12:15pm.
Can I take physical delivery of currency?
No, the current currency derivative market required contracts to be settled in cash
and the settlement prices of the contract would be RBI’s reference rate on the last
trading day.
Which are the regulatory bodies in
Indian currency derivative markets?
In India, the currency derivative market falls under the purview of Security Exchange
Board of India (SEBI). Indian Rupee trades in a managed floating rate regime and
thus RBI intervention is also seen at time. Besides, the bye-laws of respective
Exchange Platform will also apply.
Do I need to open up a new DEMAT account
and a new trading account with SIHL for currency futures?
A new Demat Account is not required. Further as the currency future contract is
based on NSE platform, the existing SIHL equity client are required to fill up a
new contract agreement known as KYC form however the client code would be the same
as their equity client code. On the contrary, new SIHL client or the existing SIHL
Commodity Client are required to open up a new trading account by filling up KYC
form and they will be given a new client code for currency trading.
What is a hedge?
Hedge is an investment position taken in order to protect oneself from the risk
of an unfavorable price move in a currency.
Why one must hedge his foreign currency
Risk?
• To mitigate Exchange rate risk: Fluctuations in the exchange rate of currencies
give rise to exchange rate risk. As the time gap between finalizing an export/import
order and receiving/making payment against it widens, the possibility of fluctuation
of exchange rate rises. A hedge helps in protecting businesses from unfavorable
fluctuations. • To avail the following benefits: It brings certainty in business-
you would know the precise exchange rate at which your receivables/payables will
be converted. Helps in estimating receipts and payments-once you are aware of one
side on the P/L you can plan the other. Business is immune to any further movement
in currency markets, thus Relieving itself of the exercise of tracking currency
market.