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Indian-stock-market trading explained

On today’s article, I’ll be explaining about indian stock market operations. Here I’ll be directly jumping into the key terms & factors we use while trading the market hence do not expect any form of detailed fundamental & theoretical information about stock market operations on this article as this article is for start up people in market & for newbies. You need to start with the very basics first & gradually you keep on learning the deeper insights of market.I’ll be explaining you the practical terms what we use in daily basis for trading in stock market which you need to know to kick-start your stock market trading journey.I’ve created this article based on the most asked questions from newbies to me regarding stock market start-up process & once you know below key points, you’re ready enough to start your trading career hereon. Instead of making the knowledge process complicated, I tried to keep it simple with below key points:

1)      What is a stock market & most important terms related to it

2)      What is trading Vs. investment & the difference

3)      How to open an account in stock market to start trading

4)      What is the cost of share trading

5)      With how much capital, we can start share trading

6)      Trading platform to do buy/sell

7)      EQUITY – FUTURE – OPTION > only three ways to buy/sell shares

Now here is a twist , I want every beginner to start from point 7 to point 1 !!!! and also we’ll mix all the topics in between so that it becomes an entertaining reading session otherwise you’ll feel like reading a boring book ! yes, I am doing this using my past training experience. This way beginners catch it well as far as I’ve seen  & most importantly it does not go boring at all . Stay with me !!!!!!!

So, since we are in stock market now , we all know we’ll be dealing with shares or stocks of different companies only to make our profits. Lets have a look how the stocks or share price really look like on the trading software:

Now, Lets talk about where to see the share prices going up or down first . We call it “trading software” what you just saw in above video.

A trading software is a software where we can see share price momentum & do trades like buying & selling of shares.

This software is provided by BROKER. Yes “A BROKER”

Now I’ll cover a topic regarding “BROKER’S ROLE IN STOCK MARKET”

Firstly, We all need a broker to start trading in indian stock market. As the name states,  A broker is nothing but an intermediary between we(traders or retailer) & exchange. A broker  does all the processing required for our share trading. There are lot of brokers you’ll find around once you search it in google.

Firstly find any broker & ask him to open accounts for you.Broker opens up necessary account for you required for share trading.There are two accounts required for share trading purpose :

1)      Demat account   &   2) Trading account

Lets talk about trading account first here.

Trading account is an account where you’ll be trading or buy/sell shares.Once your trading account is opened, you receive your personal id & password to access that account. You’ll have to deposit funds you want to invest or trade in that account, then you can login to that trading software & can see share prices movement like how you saw in above video. I’ve shown you a trading software given by a broker named www.sharekhan.com . As I said , there are many other brokers available in market,so you can open an account with anyone of them & can get a trading software.This software could be different in looks but the functions are almost same. Lets have another look at the same trading software where I’ll show you how I am logging in & I’ll explain you some common features you’ll find in any trading software like this one. Check

Here is quick video showing you some features of a trading software below:

Now lets talk about demat account :

Lets know full-form of DEMAT A/C first , its called dematerialization account. It’s an account where your bought shares will be deposited in electronic format like how your money is kept in your savings account as electronic format after deposit. There is a term called DP(depository participant) who has a right to open up demat accounts & most of the brokers have got this DP license to open up a demat account for you.So while you approach a broker, ask him whether he is a DP or not & if he is a DP,it means he has the right to open a demat & trading a/c for you.So every broker can open a trading account for you,but to open demat account for you,he needs to be a DP himself – so ask him whether he is a DP or not as your both the accounts should stay with the same broker for your comfort.

SO the key point is  : Your trading account is opened to buy/sell shares after you deposit money in it. Once you buy shares in trading a/c, those shares will be transferred from your trading account to your opened DEMAT account. Now whenever you want to sell off those shares, you  will have to sell it in your trading account & profits or losses after selling off your shares will be deposited back into your trading account.Now if you wish, you can have a withdrawal of your money from trading account.For fund withdrawal,place a request to your broker. Once broker process your withdrawal request , you’ll receive back your money in your bank account.Remember, there is no cash transaction in stock market.When you deposit money in your trading account, you’ll have to transfer funds or deposit a cheque or demand draft in your trading account.

Along-with providing you online trading platform, broker also provides you offline trading facility.In offline trading facility, you’ll have to call up the broker & instruct him what shares you want to buy/sell  instead of doing it on your own using the online trading software or platform.So it’s your wish which service you choose. Some broker provides both the facilities & some provides any one of them between online trading & offline trading.

What are the documents required to open an account ? here are the list of documents required:

(1) PAN CARD (2) 6 months bank statement (3) passport size photo (4) Address proof

Lets understand what is the broker’s advantage in providing all these services to us or it’s clients:

He earns commission from us for the service he provides.

What is the structure of the commissions he makes then ? We’ll discuss briefly about this topic later but for now,lets have a basic idea on this :

 Suppose,

You want to invest Rs 60,000/ in stock market. Hence you deposited Rs 60,000/ in your trading account so that you can buy shares. You analyze the market & see TATAMOTORS will be a good bet for making money.Lets assume, Stock value of TATAMOTORS is Rs 500 per share & you decided to buy 100 qty of shares.

 So, you bought 100 shares of TATAMOTORS at the rate of Rs 500 per share.

Your total investment becomes Rs 50,000/

Then is Rs 10,000/ left in your account ?????????????? “NO”. You did not count the cost of your done trade.There are some costs you’ll have to bear when you purchase shares as well as sell-off your holdings or shares & this cost structure is called “TRANSACTION COST”. As the name suggests, while doing a transaction in shares,these are the types of cost you’ll have to bear whether you make profits or loss. Below are the types of costs :

Trading or investment cost = Brokerage + STT + Stamp duty + service tax + other charges

Lets go one by one :

Brokerage : This is charged by the broker as his commissions. Considering above examples , When you had a transaction of Rs 50,000/ , broker charges you a commission of 0.3% on the transaction amount which is Rs 150/. Lets assume, after a week the stock shot up around rs 550/ per share & you thought about taking the profits of Rs 50/ per share.So you sell off your 100 shares that you bought for rs 500/ per share.Now while selling off, you’ll again have a transaction of Rs 55,000/ & the broker will again charge you a commission of 0.3% on that which is Rs 165/.So in this entire trade, you made a total profit of Rs 5000/ by buying & selling shares & your cost of broker commission is Rs 315/( rs 150 while buying & rs 165 while selling ).So net profit gained after brokerage is Rs 4685/ ( rs 5000 of total profit – rs 315 brokerage cost). Don’t be happy as I did not deduct other charges yet!!!!!! Pls note : Different brokers charge different amount of commissions. According to me, 0.2% is a standard commission pattern & you should not open an account with a broker who charges you more than 0.2%.

There are some more topics to discuss in terms of brokerage structure later once we finish up next few topics.

Now , lets talk about other charges like STT , stamp duty , service tax , sebi turnover tax etc. All these charges are from indian govt hence you cannot do anything about it.Below i’ve attached a few screenshots of these charges from NSE INDIA’s official website.Just have a look at these charges & don’t get confused if you’re not able to understand the terms & calculations as these charges will be easily understood once you strat real-time trading with a broker and also it’s your broker’s responsibilty to make you understand all these different charges.Below are the screenshots :

tax-1 tax-2 tax-3

Overall , you can assume around 0.2% will be charged on your transaction combining all different charges by govt. Below is an account statement screenshot I’ve shared to show you how different charges are applied on our trading transactions:

We’ll be knowing more details regarding “cost of trading” where we’ll know about different set of brokerage charged based on different category of trading & details of govt charges based on different category of trading transactions. As a beginner, I don’t want to put everything altogether on you hence going step by step. Once I clear the basic ideas of all the key topics , I’ll jump into detailing of each topics discussed here.

Lets talk about a few important terms of this market now :

What is stock market : The trading software screen you’ve seen is the real stock market basically where prices of different company’s share is moving up & down.Why is it moving up & down ? because some people are buying the shares & some people are selling it at the same time.When more people are buying, price moves up & more people are selling ,price goes down.So we can say, due to demand increases of a stock, price goes up & due to demand decreases of a stock, price goes down-simple.Stock market is a market where different company’s shares are traded by people,hence the place is called stock market & thanks to internet due to which we can access this market online from anywhere we live.

What is BSE & NSE / Exchange :

An exchange is a marketplace where buyers meet the sellers or sellers meet the buyers & do their transactions.You can say exchange is the organizer here who creates this market place called “stock market”.All the companies shares are listed on the exchange only.When someone wants to do share trading & open the account with broker, he gets registered with the exchange automatically as the account opening procedure is processed by the exchange only. There can be multiple exchange in a country.In india, BSE & NSE are the most popular stock exchange we have. Mostly people trade in NSE due to some advance facilities it offers which we’ll discuss later on.

What is SEBI :

Full form of SEBI is “ securities exchange board of india”. SEBI comes under finance ministry of india.SEBI is the watchdog of indian financial market & it monitors the exchanges,retailers,companies same like, we have lot of different banks in our country working independently but the regulatory body is RBI only.

What is bullish/bull & bearish/bear :

These two terms are widely used in all different markets in the world. People keep on saying “I am bullish in abc stock” or “I am bearish in xyz stock”. What does it mean ? When someone says, he is bullish it means he thinks that stock will move up & good for investment.When someone says, he is bearish it means he thinks the stock will go down & bad for investment.So keep this two terms in your mind as we’ll be using these two terms the same way in future.

Timings of stock market : Monday to Friday from 9.15 am to 3.30pm.

What is positional & intraday trades :

When you buy some stocks today & sell it tomorrow or later on is called- you have done a “positional trade”. As the name suggests, when you buy shares & when you do not sell it on the same day & hold it at least for 1 day, it becomes a positional trade. So when you buy some shares today & sell it off today itself, we’ll be calling it intraday trade as you did not hold it for tomorrow.Pls note this two points for further reference.

Long & Short :

In stock market , there is a facility to trade a stock in both the way – upward & downward.This topic will be a bit complicated to understand so focus on it.

Lets take an example : TATAMOTORS share value is rs. 500/ per share.

Now there are two friends, one is saying the stock price will move up to 550 & more in a week & other friend is saying, it will fall to 450 & more down in a week.As the views are exactly opposite, they thought about playing a bet on their thoughts.

So notice here, friend A is betting the stock upward, means when the stock rises up, he will make money but friend B is betting downward, means when the stock will fall down, then only he will make money & will win the bet.

Now , if price rises to 600 from 500, friend B will pay Rs 100/ per unit he bet to friend A

and otherway, if price falls from 500 to 450, friend A will pay Rs 50/ per unit to friend B.

So the same way, in market you get a chance to make money in both sides by placing your bet.

In the example , friend A is LONG in the stock & friend B is SHORT in the stock. Hope you got my point, when you bet upside in a stock, you will be called “bullish in the stock” as well as “LONG in the stock” and when you bet downside in a stock, you will be called “bearish in the stock “ as well as “short in the stock”.

SO , pls clear two points from here :

1) we can trade a stock either upward or downward & make money trading both the way.

2) When we trade a stock to move up – we’re long or bullish on that stock

     When we trade a stock to move down – we’re short or bearish on that stock.

We’ll talk more about this topic later once we gain some more basic ideas of market terms. 

We’ll discuss some more key topics later on & for now lets get back to real time trading area of money making process to know how the money is made :

There are three different ways we can trade & make money in stock market :

1)      EQUITY    2) FUTURE    3) OPTION

We need to know each of these topics so that we can take advantage of  different ways of making money in market. We’ll discuss EQUITY & FUTURE segment first :

To understand better, we’ll take an example.Lets assume,you have rs 50,000/ for investment & I’ll offer you two different ways of investment from where you’ll have to choose one.

Lets assume,  TATAMOTORS share price is rs 500/ per share

Investment option 1 : Buy 100 shares of tatamotors for Rs 500/ per share & your capital of Rs 50,000/ will be invested in it.As you bought the shares with full payment, now you become a shareholder & you can sell-off the shares whenever you want, means there is no timeline.All your shares will be deposited securely in your demat account once you buy it.

Investment option 2 : For investment option 2 , I need to ask you a question.If you answer the question with YES, then only we can go ahead with investment option 2.Now the question is, do you have a timeline set in your mind to sell-off the shares within a month’s period means, after buying now, do you want to sell-off your holdings with a profit or loss within a particular period(anytime in a month or any day during a month) instead of holding it for 6 months to 1 year or 10 years. Now who does this form of investments with a holding period of 1 week or 15 days etc(very short term)?? There are people who does it.If you are a good analyst or market trader & your analysis says any particular stock will move up for 3% in a week,then why not that trader will buy some shares today & when it grows up for 3% as he thought, he books the profit immediately in a week’s time – quite possible. In this small time trading scenario, where you agree to hold your shares for a month,then only I am offering you another investment option here:

                               You’ll have to pay 20% of your total investment amount instead of paying the full amount of investment like investment option-1 & you can enjoy the benefits of investing rs 50,000/(the benefits you would have received investing in option-1 discussed above). But there is a deadline for holding the stocks you bought here & that is 1 month. Within a month , you can sell-off your holdings of shares anytime you want but when the month ends, your holdings will be sold-off automatically at the market price irrespective of your profit/loss.

So on this form of investment ,we have certain conditions to follow what we did not have in investment option-1. Why investment-2 is more attractive , because you can buy more amount of shares using investment option-2 as you just need to pay 20% of your total investment in real & you are getting a credit of rest 80% of your investments by market.Using investment option-1 , you bought 100 shares with your capital of Rs 50,000/ whereas using investment option-2, you can buy 500 shares with the same amount( as for every 100 shares you are buying for Rs 50,000/, you’re just paying 20% of it which is Rs 10,000/ for 100 shares as investment capital)

So while you have a capital of Rs 50,000/ , you now have two options: you want to buy 100 shares investing your whole capital or you want to buy 500 shares paying a margin of 20% for each 100 shares. Both the investment options has their own advantages & disadvantages. Investment option-1 has no time limit to hold your bought shares as you paid full amount of share price whereas investment option-2 has a timelimit of 1 month to hold your bought shares as you paid a margin amount to buy those shares & did not pay full share value amount hence you do not become the owner of those shares.

Now, lets clear the cloud finally:

Investment option-1 is called “EQUITY” > when you buy a stock with a full payment of the stock price , you are buying EQUITY SHARES of the company stock. so when you buy a company’s stock in EQUITY segment, these are the facilities you receive :

= You become an investor of that company.

= You can hold that stock as long as you wish & sell whenever you want.

= you can buy number of shares as per your wish like 1,2,3 or 100,120,121,etc

= You’ll receive dividends & other facilities from the company when the company starts performing well.

Investment option-2 is called “FUTURE” > when you buy a stock with a margin value like 20% & do not pay full price of stock & have a particular time limit for holding those shares , you are buying future stock of the company.So here are the conditions when you trade in future segment of a company:

= You have a time limit on your holdings. Usually 3 months limit is allowed means if you want to buy a future stock then you’ll be given choice of maximum 3 month’s holding period like – current month, next month & far month.If you choose current month then current month will be your maximum timeframe to hold that stock future.If you choose next month,then current & next month will be your timeframe to hold the stock.

= Every month’s last Thursday is the expiry day of your holdings it means if you buy stock future with a current month holding,then current month’s last Thursday will be your holding’s expiry day or last day.If you do not sell your holding within that day, your holdings will be automatically sold off when market closes on that day & profit/loss amount will be credited in your account.

= You cannot buy shares as per your choice while trading in FUTURE segment. No. of shares to be traded for different stocks are allotted by NSE & here is the download link of the list – futurelotsize . For example, if you want to buy Infosys stock in future segment ,you cannot buy 1 or 10 shares, you’ll have to buy minimum 150 number of shares as defined by NSE. Likewise if you want to buy future of ICICI BANK,then min 700 shares will have to be bought. So the minimum no shares you will have to trade,are called “1 lot” means when we buy icici bank future with 700qty shares,we’ll be saying that “we bought 1 lot of icicibank future”.If we say,we bought 2 lots of icicibank future,it means we bought 1400 no shares In icicibank stock future. So this is how every stock has their own number of defined shares to be traded in future segment.

Now, when you buy 700 shares or 1 lot of icicibank fut, how much you will have to invest in that, lets find out.More or less,in future segment on an avg you need to pay around 20% of total share amount value you’re investing like : when you buy 700 shares of icicibank future it means icicibank share price ( 350 ) * 700qty = Rs 2,45,000/ worth of share you bought but you’ll have to pay approx. 20% of that total value which is Rs 49,000/. So by paying just Rs 49,000/ you’re getting the same profit/loss & advantage of paying rs 2,45,000/. Lets assume,

 Person A in equity segment buys 700 shares for Rs 2,45,000/

 person B in future segment   buys 700 shares for Rs 49,000/

Share price goes upto 800 in 10 days & both of them sell-off their shares

Person A earns a profit of  rs 100/ per share.So in 700 shares his profit = Rs 7,000/

Person B also earns a profit of  rs 100/ per share.So in 700 shares his profit = Rs 7,000/

Lets calculate the rate of return on capital invested for both investors:

Person A invested Rs 2,45,000/ & earned Rs 7,000/ on investment.His Return = 3% on capital

Person B invested Rs 49,000/ & earned Rs 7,000/ on investment.His Return = 15% on capital

So, the outcome is , person B  invested less amount than person A and also buying the same amount of shares like person A, but he managed to make much more higher profit than person A & this is the power of trading future segment using margin facility of 20% payment.

SO some key points to know when you are trading future segment:

1)      You cannot trade in future segment in all the stocks available for investment in market.But yes, you can trade all the stocks in equity segments. you’ll find only around 200 stocks are available to trade in future segments & here is that list – futurelotsize

2)      When you’re trading in fut segment, you are not really investing in company stock as you are not paying the full share price amount hence we will not call it like “we are buying shares of a company” but we’ll say “we are buying a future contract”. All future trades are contracts between you & some other trader who is trading on a stock value for a limited time period for profit or loss like you only.So future trades are the contract between you & some other random trader in market who is taking a position opposite to you in the same stock.Lets not make this concept complicated & in simple language, whenever you are buying something in market ,at the same time there is someone who is selling it to you otherwise how & from where will you buy it when someone else is not selling, so this is the overall concept goes on in market between buyers & sellers and so the share price keeps on changing up & down.

So , now on whenever you are buying a future segment of a stock , you’ll be saying “buying a future contract of XYZ stock” & when you are buying equity segment of a stock you’ll be saying, “buying shares of xyz stock.”

Here is a quick video showing you EQUITY & FUTURE segments on trading screen below:

Let me clear one more point here : difference between “TRADING & INVESTING”

Trading is a term used for short term traders like who buys & sells shares on the same day for small profits and trade stocks with holding period of 4 to 5 days.There are also terms like short term traders or very short term traders which is also known as swing trading.Very short term traders are them who trades intraday & swing traders trade a stock with a holding period from 4-5 days to 1 month. Mostly short term traders trade future segments in their trading as they have a limited timeframe to buy & hold their shares hence they can use the advantage of using 20% margin of their total investment.

INVESTING is a term used by medium & long term investors in the market.If you’re buying a share to hold it for 6 months ,1 year or 10 years timeframe, then you will be called an INVESTOR. For investing purpose,there is only one way of trading & that is buying EQUITY shares of a company by paying the full cost of those shares to become a owner of it.

 Lets understand option now :

Understanding option is a bit difficult & here I’ll be explaining the basic understanding of option trading. To understand option trading in deep, you need to trade option features in real time market condition for few months & once you spend certain amount of trading-screentime & gain experience of using basics of option, then only gaining a deeper level of knowledge in option trading is possible.So I suggest beginners not to trade options in your initial days & stick to equity & future segments only, for first few months and start monitoring option on your screen side by side.As a starter, your main focus should be on technical analysis & equity-future segments only.

To make you understand option trading, I’ll take an example of a cricket match as by explaining this way, you’ll get the concept in a much better way:

Assume , some friends are watching a cricket match going in between india & Pakistan .

Now before the match starts, some of them decided to have a friendly bet on this match & they designed a different way of playing the bet on that match.They did not bet on win & loss of the match as all of them were supporting the same team – INDIA.So they decided to play the bet based on score india makes that day.

They have chosen three layer of india’s score 150 , 250 , 300. For every layer of india’s score there is a an amount to invest for betting in that layer like :

For 150 layer of score, you’ll have to pay Rs 30/ per unit you bet

For 250 layer of score, you’ll have to pay Rs  10/ per unit you bet

For 300 layer of score, you’ll have to pay Rs 5/ per unit you bet

Now, How & when someone makes money ? >Once india’s score crosses “the layer + per unit cost” the player starts making money who bet on that layer.The profit formula is = india’s final total score – ( layer you bet + per unit cost you paid). For example, a player wants to play in 150 layer, he will have to pay Rs 30/ for that layer to play.So his investment from pocket is nothing but Rs 30.Now if India scores 300 finally how much he makes =  india’s final score –  ( His bought layer 150 + his investment per unit Rs 30 )= Rs 120 per unit.so the player made Rs 120 out of this match.If he would bet 100 units, total profit would be 100unit*rs 120 per unit which is Rs 12000/ profit.So the players will have to guess how much india will score & play based on that range. In this same case,lets assume india lost all it’s wickets with a score of 100 only,in that case the same player would have lost his Rs 30/ investment for playing 150 layer of score.So the great part of this game is, your loss is always limited to your investment only but profit is unlimited – more india scores,more you will make but in terms of losses, you loose the amount you invested only in case, india could not make it.Another situation is ,india scores 160 finally , then how much this same player will make, its just Rs 10 & he”ll loose his Rs 20 from his investment as the formula is =india’s final total score 160 – ( layer you bet 150 + per unit cost of layer rs 30) = – rs 20.So you loose rs 20/ on this investment.If this result becomes -30 when india scores only 150 which is your layer of bet, you loose all your investment which is Rs 30/ & below that you do not loose anything as in this game you cannot loose more than what you played for.So in case india score 100,then also you loose the amount you bet for rs 30/ only.So this is how, in this game losses are kept limited & profits are kept unlimited as if india scores 500,then you’ll get all the profits between the difference of india’s final score & your bet level.So hopefully you understood the game by now & if you got all my points,now you can easily understand option trading strategy used in indian market. Now why the per unit value is more or less?The value is decided based on probability like scoring 300 is much tougher than scoring 150.So layer of 150 will be costly than 300.

Like betting on the cricket match based on score layers above , in option trading we trade based on different layers of stock prices.For example, ICICIBANK stock value is 395. In market, you’ll find ICICIBANK option trading offers you some layers like 400,420,440,460,480,500. These layers are known as STRIKE PRICE.so now on, we’ll be using the term as STRIKE PRICE instead of layers. Like the cricket match, every strike price has a cost per unit & this cost is known as PREMIUM VALUE.Lets assume the premium value for the strike prices are like below :

When icicibank Stock price is at 395

strike level 400 will cost rs 30 

strike level 420 – will cost rs 25

strike level 440 –  will cost rs 20

strike level 460 – will cost rs 15

strike level 480 – will cost rs 10

strike level 500 – will cost rs 5

Since 400 strike price is close to market price, so it is expensive as probability of price reaching this level is much more higher than other strike price levels.

So a trader thinks icicibank will move up to 450 in next few days within a month,so he can bet on 400 strike price by paying 30 rs per unit. Lets assume he bet on 100 units, so his investment will be 100units*Rs 30 premium = Rs 3000/ in this trade.Now , finally if price moved up till 450, he will be able to make a profit of Rs 2,000/ . HOW ?

Same calculation as we did in the cricket match :

= icicibank final stock price after a month is 450 – (strike price you bet-400 + cost per unit or premium cost rs 30)

=  Gain of Rs 20/

As you have 100 units,so you made a profit of Rs 2000/. So with an investment of Rs 3000,you made a profit of Rs 2,000/ not bad !!!!!!!!!

Hopefully, you understood the concept of option trading by now. Now a few key points regarding option trading :

1)      Similarly like future segment, there are fixed lot sizes you’ll be trading in option.

2)      Similarly like future segment, there are expiry dates & min 1 month & max 3 months to 1 year holding time limitations too you have.

In option trading , there are two segments called “ call option “ & “put option”

As we discussed earlier, we can trade a stock in both the direction whether it will move up or it will move down. So for icicibank, two form of strike price you’ll find in market like below :

Put option

Stock current price

Call option

Strike 400 @ 35

          395

Strike 400@ 30

Strike 380 @ 20

 

Strike 420@ 20

Strike 360 @ 15

 

Strike 460@ 15

Strike 340 @ 10

 

Strike 480@ 10

So the rule is , when you want to bet icicibank on the upside,then you will choose a strike price from CALL OPTION on the right hand side. If you want to bet in icicibank falling down , then you’ll be choosing a strike price from put option on the left hand side.

As we’ve already done an example of stock moving up from 400 to 450 level after buying a strike of 400 call option above, lets do an example of how we make money when we bet that icicibank will fall down:

Lets assume,Current price of icicibank is 395 & our analysis says , it will fall upto 300 level from current 395 level.So we can choose any form of strike price as we have a big range of almost 100 points fall in our mind.lets say, we have chosen 380 level of strike price & to bet on that we’ll have to pay the premium cost for it which is Rs 20.Lets assume lot size permitted for icicibank is 100, so our investment will be 100qty*premium cost of Rs 20 = Rs 2000/.For example, if icicibank falls down upto 300 as we expected, then how much profit will come in,

Our profit will start from 360 downwards ( just opposite of what we did while buying call option in the upside).

icicibank final stock price after a month is 300 – ( Strike price we bet is 380 – premium cost rs 20/)= Rs 60 gain/unit

So , we’ll be making a profit of 60 points per unit for 100qty of shares which is Rs 6000/.

If you wish , you can buy both call & put at the same time.In that case, market moves either way ( up or down) , you make money.But remember, if market does not reach your strike+premium level in case of call & strike-premium level in case of put , you loose all your investment.For example, in above put trading example, you will loose your investment of Rs 2000/ in case price does not reach at least 360 level.

SO, In market, you can make money both the way .What matters is your viewpoint regarding which way market will move & to get this view we use technical analysis,then place our trade using equity,futures or options.

Here is a quick video presentation on option trading below :

Some key points here >>

When you invest or bet in a stock moving upside , you are doing a LONG in that stock . Remember this term “LONG”. So while you want to long a stock , you have three choices now :

1)      Long equity shares of that stock

2)      Long future contract of that stock

3)      Long call option of that stock

Similarly, When you invest or bet in a stock moving downside , you are doing a SHORT in that stock . Remember this term “SHORT”. So while you want to short a stock , you have three choices now :

1)      Short equity shares of that stock

2)      Short future contract of that stock

3)      Long a put option of that stock ( as “put” means you are betting down only which means you are shorting )

Now , there is a concept of shorting call & put options.But I’ll not be discussing that part here as that part is an advanced level studies of using call & put option trades.Once you are used to trading LONG CALL & LONG PUT then you can think about learning shorting call & put option which is covered in my training courses for paid members.

Remember these points :

In equity stocks, you can long a stock today & sell it after 2 days or whenever you wish after 2 days.

In future & options, you can long a stock future today & you’ll have to sell within the particular timeframe you’ve chosen.So you can buy today & sell today or tomorrow or after 5 days but the time-limit you have chosen will be your last day of holding that stock future contract.

In equity , you can short a stock today but you cannot hold it for next day hence you’ll have to exit the long position by today itself.

In future & options, You can short a stock future contract today & hold it till your chosen expiry date of that contract.

Equity market is known as CASH MARKET & future-option market known as DERIVATIVE MARKET. Usually medium to long term investors invest in cash market & very short term traders trade in derivative market.There are people who trades both the market to diversify their capital investment.

Brokerage structure is different for derivatives & equity market.Here are the recommended brokerage structure:

Equity transactions for positional trades : 0.2% on transaction value

Equity transactions for intraday trades : 0.02% on transaction value

Future transactions for intraday & positional : 0.02% on transaction value

option transactions for intraday & positional : Rs 30 per lot

 Any broker charging you higher than above structure is really charging you too much.

Very important term :

INDEX = SENSEX & NIFTY ????????

These two terms you must have heard thousand times – sensex & nifty !!!!!!!!!!

In india, we have thousands of companies in stock market.All these companies come from different sectors like from banking sector we have icici bank,axis bank etc, from auto sector we have bajajauto,tatamotors etc. So we have two different parts of trading instruments available in market:

One is a sector & other is companies on that sector.

In stock market, you can trade a single stock like infosys and also you can trade a sector from where it comes like IT sector which is called CNXIT .SO taking all the IT companies listed in NSE, the exchange formed price calculation based on those IT companies share price movement in stock market hence a particular figure comes out which is called CNXIT & this types of figures are known as INDEX.So if we want to checkout how the IT sector is performing in india, we can have a look on CNXIT INDEX momentum & judge the growth of overall IT companies.If on someday, all the IT companies share prices are falling,then CNXIT INDEX price will also dive down.

If you believe, out of entire IT sector, Infosys will do well individually, you can invest in the stock alone or if you want to play it safe & want to invest in entire IT sector,then go for the sector investment. Likewise, combining all the sectors’ major players, nse has formed NIFTY INDEX where they have chosen 50 different topmost companies coming up from different sectors. So if on someday all these 50 companies prices are falling, then nifty index will also fall.BSE has chosen 30 topmost companies to form another index called SENSEX.Trading all these index is much more safer instead of investing in a single company stock as you can invest in a pool of 50 topmost company in a small portion with the same money using index. 

Using equity segment, you cannot invest in any of these index directly.To trade on these index,you’ll be trading in derivative section using future & options. Mostly we trade in NIFTY future & BANKNIFTY future in index section.

Finally, a few important lines for beginners in this market:

As a starter, you should open a demat & trading account first with the help of a broker.Choose you broker carefully as if he misguides you,you can face lot of problems in your initial days.So choose a good branded broker rather than going for some random brokers.I’ll suggest you to open your accounts under a broker’s branch office & not under a franchisee shop of that broker.If you can open your account in the broker’s main branch office ,nothing better than that as you’ll get the best service from there.

So, what we discussed above are the basic understandings of indian stock market trading & next few articles we’ll be learning about indian commodity,currency & international forex market trading. Once you’re tuned up with the basic ideas we discussed here,i’ll suggest you to read the article regarding TECHNICAL ANALYSIS. As you’ll have to learn technical analysis next, to know which stock to trade & where to buy/sell.

Checkout My FREE VIDEO TRAINING COURSE SERIES on PRICE ACTION TRADING in Forex & Indian stock market. 

December 3, 2014

21 responses on "Indian-stock-market trading explained"

  1. Nice lesson thank you sir

  2. Excellent explanations

  3. it’s just excellent… cant be explained better than this.

  4. verywell explained. good teacher indeed! keep it up

  5. Excellent..!!. Since from last 3 months i’m searching for trading concepts, no one clear my doubts regarding basics, This was best explanations every seen in internet..!!! Thanks you so much Rajib 🙂

  6. Rohit PalwankarJuly 1, 2016 at 11:21 am

    really nice article for beginner,every thing is explain in simple and easily accessible manner.
    thank you Writer

  7. One Basic question: Today there are various websites on trade market, they show the graph of how a stock has performed over a period of time. Now why can’t I buy any stock which is at its 52 weeks low and sell it after few days and make profit? Generally there will be an increase in price after it reaches its low may be in few days or weeks. This way it is very profitable and simple, why people cannot do this?

  8. Never understand like this.Regards

  9. Superb sir

  10. Thank you for this
    Good knowledge

  11. working on video lessons on this particular Topic.. Checkout our youtube channel : https://www.youtube.com/playlist?list=PL_QCWqT4FN1UrTBshFO-StTwhopp92JW8

  12. Well Explained…Thankyou very much!!!

  13. thank u for such wonderful explaination

  14. Mr. Rajib,

    Excellent, I would say very and most excellent explanation. Novice like me, can able to grasp the meaning, methodology and the basic concenpts like in where to invest, in which sector to invest and how to make maximum gain from a very calculated loss or risk with minimum foresight and commonsense.

    Thank you for writing in very simple language with real time practical examples.

  15. Rajmangal singhMarch 23, 2017 at 5:58 pm

    Memorable summary of trading industry
    i have understood 99% about trading industry

    god bless you to post like
    thanks you forever

  16. Nice Post. Thank you for sharing above information that is really beneficial for the trader as well investor, in market there are so many strategy that a general trader are not fully awared about it. the post post really beneficial to know about how to trade.Equity tips

  17. Thank you for the lucid explaination…I enjoyed it very much

  18. Nandinis TechniMay 24, 2017 at 9:01 pm

    Hi Good Evening
    very nice article, keep up the good work
    http://nandinistechnical.com/?page_id=365

  19. Wat an explanation option trading excellent brilliant with easy method explained.Thañks

  20. Greeting sir, do you do lessons on mutual fund as well ? Pls send me the link.
    I like these free lessons. they are well explained and interesting to read. Thanks

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