INTRODUCTION TO STOCK MARKET

AGENDA
• Market
• Stock Market
• Participants of Stock Market
• What to trade in Stock Market
o Mutual Funds
o Equity
o Derivatives
▪ Types of Derivatives
• Future
• Options
o Call & Put
o Price of an Option
o Derivatives Tenure & Expiry
WHAT IS A MARKET?

 A market is a place where two parties can gather to facilitate the

exchange of goods and services.
 The parties involved are usually buyers and sellers.
 The market may be physical like a retail outlet, where people meet
face-to-face, or virtual like an online market, where there is no
direct physical contact between buyers and sellers.
WHAT IS A STOCK MARKET

 The stock market refers to the collection of markets

and exchanges where regular activities of buying,
selling, and issuance of shares of publicly-held
companies take place.
 Such financial activities are conducted through
institutionalized formal exchanges which operate
under a defined set of regulations.
 The main purpose of the stock market is to help you
facilitate your transactions. So if you are a buyer of
a share, the stock market helps you meet the seller
and vice versa.
 There are two main stock exchanges in India that
make up the stock markets. They are the Bombay
Stock Exchange (BSE) and the National Stock
Exchange (NSE).
PARTICIPANTS OF STOCK MARKET
TRADER T
A trader is a person who spots an opportunity and initiates the trade with Investors
an expectation of profitably exiting the trade at the earliest given
opportunity. A trader usually has a short term view on markets.
Custodians Traders
DAY TRADER | SCALPER | SWING TRADER

Stock Market
INVESTOR I
An investor is a person who buys a stock expecting a significant Investment Stock
appreciation in the stock. He is willing to wait for his investment to Bankers Brokers
evolve. The typical holding period of investors usually runs into a few
years. Portfolio
GROWTH INVESTOR | VALUE INVESTOR Managers
WHAT TO TRADE IN STOCK MARKET

Financial Instruments

EQUITY DERIVATIVES

INVESTORS | TRADERS TRADERS

I T ( Hedgers / Speculators / Arbitrageurs )
T
 I
MUTUAL FUNDS

 A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to
invest in securities like stocks, bonds, money market instruments, and other assets.
 Mutual funds are operated by professional money managers, who allocate the fund's assets and attempt
to produce capital gains or income for the fund's investors.
 Mutual funds give small or individual investors access to professionally managed portfolios of
equities, bonds, and other securities.
 Mutual funds charge annual fees (called expense ratios) and, in some cases, commissions, which can
affect their overall returns.
 There are various kinds of Mutual funds to address every type of investor. Some examples are:
Equity Funds | Fixed Income Funds | Index Funds | Balanced Funds | Exchange Traded Funds
 I T
EQUITY

 Equity is a form of ownership in a company. A company can source funds for its projects by issuing
equity in the form of shares to the public and this forms the basis of a firm’s capital.
 They are traded on stock exchanges such as the NSE or BSE.

 You can potentially profit from equities either through a rise in the share price or by receiving dividends.

 The asset class of equities is often subdivided by market capitalization into small-cap, mid-cap, and
large-cap stocks.
 Equity represents the shareholders’ stake in the company, identified on a company's balance sheet.

Shareholders’ Equity = Total Assets − Total Liabilities

 T
DERIVATIVES
 A derivative is a contract between two or more parties whose value is based on an agreed-upon
underlying financial asset (like a security) or set of assets (like an index).
 Derivatives can be used to hedge a position, speculate on the directional movement of an underlying
asset, or give leverage to holdings. Their value comes from the fluctuations of the values of the
underlying asset.
 When using derivatives to speculate on the price movement of an underlying asset, the investor does
not need to have a holding or portfolio presence in the underlying asset.
 Common Derivatives include Futures, Forwards, Options and Swaps

Bonds Commodities Currencies Interest Rates Market Indexes Stocks

 T
TYPES OF DERIVATIVES - FUTURES

 Futures contracts—also known simply as futures—are an agreement between two parties for the
purchase and delivery of an asset at an agreed upon price at a future date.
 Traders will use a futures contract to hedge their risk or speculate on the price of an underlying asset.

 The parties involved in the futures transaction are obligated to fulfill a commitment to buy or sell the
underlying asset.
 Futures contracts detail the quantity of the underlying asset and are standardized to facilitate trading on
a futures exchange.
 T
TYPES OF DERIVATIVES - OPTIONS

 An options contract is similar to a futures contract in that it is an agreement between two parties to buy
or sell an asset at a predetermined future date for a specific price.
 The key difference between options and futures is that, with an option, the buyer is not obliged to
exercise their agreement to buy or sell.
 It is an opportunity only, not an obligation — futures are obligations.

 As with futures, options may be used to hedge or speculate on the price of the underlying asset.

 Options are available for Stocks and Indices

CALL OPTIONS | PUT OPTIONS

 T
OPTIONS – CALL & PUT

 A call option gives the holder the right to buy a stock. People who buy options are called holders and
those who sell options are called writers of
 A put option gives the holder the right to sell a stock.
options.
Think of a call option as a down-payment for a future purchase.

Call holders and put holders (buyers) are not

obligated to buy or sell. They have the choice to
exercise their rights. This limits the risk of buyers
CALL PUT
of options to only the premium spent.
Call writers and put writers (sellers),
however, are obligated to buy or sell if the option
expires in-the-money (more on that below). This
BUY SELL means that a seller may be required to make
good on a promise to buy or sell.
 T
PRICE OF AN OPTION

 Price of an option is derived from the underlying asset and some external calculations on factors
associated with the option (option greeks, time to expiry).
 Fluctuations in option prices can be explained by intrinsic value and extrinsic value.

 This combined is known as the Premium of the option.

P R E M I U M = I n t r i n s i c va l u e + E x t r i n s i c Va l u e

T I M E V A L U E + I M P L I E D V O L AT I L I T Y
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DERIVATIVES TENURE & EXPIRY

• Options expirations are a big deal for traders because, Derivatives

unlike stocks, options either expire in the money (ITM)
or out of the money (OTM) at expiration.

• If options are ITM at expiration, they will have intrinsic

Options Futures
value. If options are OTM at expiration, they will be
entirely worthless.

• Option sellers are hoping that the options they sell will
either decrease in value prior to expiration or expire Monthly Weekly Monthly
worthless (or both).

• Option buyers are hoping that the options they buy will
either increase in value prior to expiration or expire with Stocks Indices Indices Stocks Indices
intrinsic value (or both).
Questions?
THANK YOU