A few months back, my friend asked me to teach him about the stock market,
A few of my other friends were also curious to learn about investing in the stock market,
Guys were excited and opened their new brokerage account,
But the biggest problem was they were clueless, didn’t know how to proceed further, extremely confused about what stocks to pick, concerned about the time horizon (When to buy and sell),
Their rationale was to buy a stock that was near it’s 52-week low and wait for some time to bounce back to make decent profits.
This bothered me a lot because this is not the right way to make money in the stock market,
At the time, even I was not aware of the whole picture of how to earn money in stock market,
After exploring, I got to know about these different opportunities,
What is trading:
Anything you invest with an idea to exit is called trading,
Buying a stock and selling it in a short period, maybe within a day or weeks or months, is considered as trading,
Stock trading is an extremely lucrative avenue of earning income. Of course, it’s also very risky,
There are different ways you can make money through trading,
Normal Trade (BTST):
BTST means “Buy today Sell Tomorrow,” as you might have understood from the name itself,
This option of trade is quite apparent. You buy “xyz” stock and hope the price will increase in the future,
A few months back, we saw that the Reliance share price had dipped and reached somewhere around Rs.1000,
At the time, if you had thought it would increase in the future, you would have bought it at that price and sold it in the future and booked a profit.
By looking at the numbers, I’m hoping you got better clarity on how normal trading works.
Bottom line: A person looking for short term profits can consider this type of trading. Among other trading options, this is relatively less risky.
What is intraday trading:
In Intraday trading, you buy “xyz” stock and hope the price will increase within a day. Once you see the stock price rising within a few minutes or hours, sell and book a profit.
You can’t hold the stock more than a day. Buying and selling should happen on the same day.
Day trading is like playing T20 game; you don’t have much time to act.
The beauty of the product is, it comes with leverage.
Leverage means the act of using borrowed money to invest in the stock market.
See the pros and cons of leverage with an example,
If you observe the above example, you would notice the effect of leverage,
The stock price movement is just ±1%, but the profit/loss is leveraged to ±10%.
The upside is if it works in your direction, you get 10% profit in a day, which is insane, right,
At the same time, you should be aware of the downside. When it goes in the opposite direction, you will lose 10% in a day.
Bottom line: Risk is exceptionally high with rewarding returns.
Last week, when I spoke with my friend, he asked me if there is a way to earn 2000rupees in a month with a capital of Rs.10,000 in the stock market.
This is the product I’d suggest which is option trading, it is one of the types of derivatives,
Derivatives is a contract signed between buyer and seller, where the price of a contract will be derived from the price of an underlying asset.
I know it sounds quite technical, but I hope you will get some idea with the following example,
Assume you have Rs.10,000 in hand,
Looking at Reliance share, which is trading at Rs.2000, you think it will increase to Rs.2,100 in a week or an in a month based on any announcements or for some other reasons,
You want to make money out of this opportunity,
Ideally, you can buy 5 shares now with Rs.10,000 and earn a decent profit. This is how regular trade works,
But option trade is designed in a way to earn significant profits in a very short period,
It is not as tricky as you think,
The above diagram is a reliance option contract (Just for the example)
Spot price is the current market price of reliance which is Rs.2,000.
Strike price is the target price, which we hope it will reach in a month, which is Rs.2,100.
Imagine for a moment a contract is signed between a buyer and a seller,
In this case, you are the buyer, hoping the stock price will increase. On the opposite side, someone who thinks stock price will go down who is the seller of the contract.
The premium of the contract is Rs.20. The lot size is 500units,
The price of the contract will be (Premium * Lot size) 20*500= Rs.10,000.
The buyer pays Rs.10,000 to the seller.
Remember one thing, the contract price will increase/decrease with respect to increase/decrease of reliance share price (underlying asset).
In scenario A, there is increase of Rs.2,000 in contract price with respect to Rs.100 increase in the share price.
In scenario B, there is decrease of Rs.2,000 in contract price with respect to Rs.100 decrease in the share price.
This is a simple example to understand how option trade works,
I’ve kept the information about the different ways of trading at a minimum so as to not overwhelm anyone.
Did you notice the difference between option trading, intraday trading, normal trading,
To start with trading, you have to work on the technical analysis part, where you get to explore different charts, patterns, moving average indicators, etc.
This is a game of skill, where you learn the basic rules of the game, practice it online using a virtual trading platform, then implement it, and enjoy the returns.