What is Share

A Share is an instrument in the form of a Share Certificate. A Share is a Share in the Share Capital of the Company. And a person holding a Share is a Member/Stake Holder of that Company.

The Shares are traded in the Share Market, viz. BSE, NSE, NYSE, etc.

Company issue shares initially in Initial Public Offer (IPO) as a public offer. It is also called a Primary Market.

Sometimes company requires additional share capital issue shares again. Since this issue is not a 1st-time issue of capital, it is called a Follow on Public Offer (FPO). And the FPO is always issued at a discount say e.g. 5% less than the prevailing Spot price in the Open/Cash market. So that public can subscribe to this also at a discounted price.

The shares are bought in IPO/FPO, then get traded in Secondary Market i.e. in Share market, viz. BSE, NSE, NYSE, etc.

 

What is Share Trading

Share Trading or Transactions in Share is taking place under the below segment and sub-segments. Explained in very brief.

1. Cash Segment 

>> Delivery Based Share Trading

The Shares purchased and taken delivery. Thereafter the shares are sold, which is called delivery-based trading/transactions. Means Shares purchased Today are sold tomorrow and onwards.

>> Intra Day Trading

The shares are purchased and sold or sold and purchased on the same day without taking the delivery, which is called Intraday Trading.

* Delivery of shares means, when Shares are purchased those get credit to De-mat account & when Sold, get debited to De-mat account.

 

2. Derivative Segment 

>> Futures Trading

The shares of a company are bundled in the quantity is called a Lot. The lots are traded on payment of Margin money on the value of the contract. (There is no physical delivery of Shares in the De-mat account.)

The contract value is calculated as “Number of shares in a Lot X Price” (The price is +/- of the share traded in Cash Segment). And Margin Money is calculated at a certain percentage of this value by the Exchange house (BSE, NSE).

>> Options Trading

The Lots as defined above are traded for the anticipation of the price movement, called Strike Price.

Call Option : This option is traded in anticipation of Upward price movement

Put Option : This option is traded in anticipation of Downward price movement

Unlike Margin in Future transaction, here Premium is get paid in Options Trading. For the strike price at each level, the premium gets calculated.

 

Example | what is share and share trading :

Stage 1 

Infosys issued shares in a market at 1^st time is through Initial Public Offer (IPO) is a Primary Market

 

Stage 2 

Infosys share is traded in the market @ Rs. 1,400/- (Spot Rate). Buying and selling of share here normally in this example is a Cash Market or Cash Segment.

CASH SEGMENT : Shares are getting Bought and Sold in Secondary Market

• Delivery Based Transaction – Buying the share today and selling tomorrow or thereafter. Herein the shares get credited into the Demat account of the purchaser & Debited at the time of Sales.
• Intraday Transaction – Buying of share in the Morning & selling before the market closed on the same day. Or Selling in the morning & Buying back later on the same day.

 

Stage 3 

DERIVATIVE SEGMENT : The share of Infosys is bundled into 1 (One) Lot. Say e.g. 600 shares are bundled as 1 (One) Lot and the Lots get traded in the market.

• Future Trading – The contract value of a lot is of (Lot 600 * 1,400 Spot rate) = Rs. 8,40,000/-. NSE fix a margin of say e.g. 20% of the value of Lot = Rs. 1,68,000/-.

An Investor can buy or sell a lot (containing 600 shares) by paying only Rs. 1,68,000/- per lot as Margin money; till the expiry of a contract. The Shares in this lot will not get credited or debited to the Demat Account.

If the share increase by Rs. 50/- to Rs. 1,450/- he will gain Rs. 30,000/-. This surplus amount can be withdrawn.

If the Share decrease by Rs. 40/- to Rs. 1,360/- he will lose Rs. 24,000/-. This deficit amount must get paid to maintain the margin.

Once the contract gets squared off, the Margin will get refunded after adjusting, +/- i.e. Profit/Loss.

• Options Trading – The lot size will remain the same of 600 shares as in the Futures trading.

Now, the price either goes up or comes down from its Spot market price in the Cash Market of Rs. 1,400/-.

# The upward price anticipated will be Rs. 1,450, Rs. 1,500 in a short period. These prices are called, ‘Strike Price’ and it is a Bullish prediction. It is traded as a “Call Option”. Or

# The downward price anticipated will be Rs. 1,350, Rs. 1,300 in a short period. These prices are called, ‘Strike Price’ and it is a Bearish prediction. It is traded as a “Put Option”.

Here the anticipated price movements (Strike Price) get traded by paying a small premium.

 

In the Money | Out of the Money call options :

Expect Rs. 1,500 – Bullish anticipation (Call option) at a strike price of Rs. 1,500/- (Since this price is not close to the Spot price, it is called as “Out of the Money option”)

Expect Rs. 1,450 – Bullish anticipation (Call option) at a strike price of Rs. 1,450/- (Since this price is close to the Spot price, it is called as “In the Money option”)

Rs. 1,400 – Spot Price in Cash market/segment.

Expect Rs. 1,350 – Bearish anticipation (Put option) at a strike price of Rs. 1,350/- (Since this price is close to the Spot price, it is called as “In the Money option”)

Expect Rs. 1,300 – Bearish anticipation (Put option) at a strike price of Rs. 1,300/- (Since this price is not close to the Spot price, it is called as “Out of the Money option”)

 

The Call option of the strike price of Rs. 1,450/- is traded for a premium of e.g. for Rs. 15/-. The contract value will be Rs. 9,000/-. And when the Spot price starts increasing, the Premium also starts increasing & Vice versa. The trader makes Profit / Loss for a difference between the Premium amount paid & received on purchase and sale of transaction.

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