Thursday, October 13, 2005

FUTURES & OPTIONS: No money? 1

OPTION - This is different from ‘Future’.

You have to pay premium price of only one ‘Lot’. For example, for Tata Motors’ one ‘Lot’ (100 shares) you have to pay the premium of Rs 20 or Rs 25 for each share as the case may be.

That means if you pay only Rs 2000 then 100 shares of Tata Motors (which is quoted at Rs 558 in the market) is yours.

From share to share the premium amount also differs.

According to the market graph your premium will also correspondingly either decrease or increase. What you have paid - (Rs 20) might become Rs 15 or it might increase to Rs 70.

For example, the premium you pay for a share at Rs 20 when it becomes Rs 22 your overall increase for a ‘Lot’ is Rs 200. So you will be aware of the loss in advance.

You can buy and sell using this route. This is what’s called ‘Put’ (Sell) and ‘Call’ (buy) option in the market.

MORE IN NSE - F&O business in Bombay Stock Exchange is low compared to National Stock Exchange--Rs 2,600 crore worth of trade in BSE and Rs 15,000 crore in NSE in this segment.

KEEP IT IN MIND - In share market you should always call the decisive shots. Never bite more than what you can chew!

DERIVATIVES This system was evolved in the Seventies. To bring in a semblance of order in the share market this was introduced in the capital market by the US Stock Exchange.

It became popular only in 1980’s.

CASH Vs F&O - In cash market if the value of share you purchase falls, you can still wait and make up provided you have the holding capacity and patience. In F&O there is no commodity and so the question of holding any shares does not exist.

In cash market you have to remit the cash the next day after you buy. In ‘Futures’ you have to pay only 20 percent of the value.

And, in Option, it’s enough if you pay the premium. Cash is risky. Future is riskier, but returns are higher.

Option - Risk and profit are equally low.

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