Investing in the stock market is challenging since it never guarantees success. All investor's and traders' knowledge, investment goals, and risk tolerances are different, so their decision-making approaches differ.
New investors and traders check many case studies and explore tricks and tips to help them make the right investment decision. However, professionals and traders often cannot make the right decisions and fail to get profit from their investments. There are many common mistakes that novice and even professional investors often make.
Let us check the ten most common investing mistakes in the share market highlighted by NIWS, the stock market classes indore, that investors should avoid.
Among the most common investment mistakes is investing in companies and stocks you don’t know much about or lack understanding of their business models. Buying their shares would be the biggest mistake when you don't understand a business and it can lead to loss.
Even if the business or the industry is trending, investing without knowing it would be a mistake. You must adequately research the company you want to invest in and understand its business models and financial viability before investing.
Investing in a business might be the incorrect choice when you lack an investment strategy. Strategising investment must be a regular process that every investor and venture capitalist must ensure. It ensures their investment choice is valuable and will not turn into a loss.
A well-planned investment choice with reasonable steps can help you avoid mistakes, and you would be more likely to benefit from your investment in the stock market.
It is incredibly challenging to time the stock market as it often fails. This approach that involves selling or buying stocks depending on the anticipated changes in stock price is a mistake usually made by many stock market investors. Most portfolio outcomes fail when they are based on individual stock selection or market timing yet succeed due to the correct allocation of assets.
Emotional trading is one of the reasons for the failure of investment returns. Although fear and selfishness rule every market, it is wise to control emotion-based investment decisions. Negative returns are often experienced by investors who sell stocks. Staying longer on the investment may give better returns to the investors who wait patiently, while irrational judgments and emotional trading may experience negative returns.
Poor diversification is often suboptimal as it substantially impacts value. A diversified portfolio is a significant risk management strategy that prevents a stock from affecting your entire portfolio’s value.
A diversified portfolio is the ideal investment choice in the stock market. Investors may substantially lose invested amounts due to avoidable losses caused by a lack of diversity. A well-diversified portfolio produces profits even if a few asset classes or companies experience loss.
Higher expectations from stock prove incorrect since investors may react emotionally when expectations are unmet. Maintaining balanced expectations from stock may prevent them from emotional reactions and maintain a long-term perspective.
A long-term and consistent approach that provides returns and profits over time since stock investments cannot provide instant profit and do not instantly build wealth.
Understanding risk tolerance is crucial since impulsive, poor, and irrational investment decisions can lead to risks you cannot afford. Misunderstanding risk tolerance will tend to a more significant loss of investment.
Therefore, evaluating your assets in exchange for profit or better results and understanding how much you can afford to lose on your stock investment is crucial to prevent the risk of spending more than what you can afford.
Focusing on short-term investments is often a rash choice that diverts them from their strategic thinking. Since the stock market constantly fluctuates, short-term investment volatilities may lead to substantial investment loss. Focusing on the long-term potential of the stock market is a successful investment approach.
Evaluating market activity and longer trends may align well with the investment strategy, and avoiding jumping trends is the best investment choice since the stock market is often volatile.
Lacking trading goals and stock market investments made without a plan often fails. The right approach is to Thoroughly understand the time horizon, risk tolerance, and investment goals. It is crucial to set your goals whether your investment is short-term, mid-term, or long-term.
A plan for the capital invested in derivatives, shares, futures, and other equity investments and evaluating risk tolerance is crucial for stock market investments.
Higher trading often results in losing the money invested in the stock market. New traders often choose to trade higher to get instant and higher returns, which often proves incorrect. When you enthusiastically trade, the risk levels are substantially raised. Trading requires patience and skills with a consistent and steady approach to achieve the heights you wish.
High and frequent trading are mostly damaging and risky approaches, while a reasonable and consistent approach may provide better investment returns.
Choosing the right approach and stock market investment options is the right approach to increase the chances of profit. Therefore, developing an investment plan of action while investing in the stock market is crucial. Sticking to the plan and avoiding impulsive decisions will make you avoid investing mistakes and provide fruitful long-term results.
Analysing market trends and historical events will give you better insight into trading and leveraging high results.
Mistakes in investment choices are often experienced by new and even professional investors since no investment approach guarantees the success of the decision-making approach and even profit. Although making the perfect investment choice is challenging, avoiding some mistakes can prevent the risk of causing substantial loss.
Once you recognise the mistakes that you should always avoid, your decision-making approach will be successful. Avoiding mistakes include a lack of investment understanding, investment strategy, and trading goals. Timing the stock market, emotional trading, poor diversification, higher expectations from stock, misunderstanding risk, focus on the short-term, and increased trading or frequent trading are some additional investing mistakes in the share market that every investor must avoid.
The guidance of strategic approach and investment plan by the National Institute of Wall Street (NIWS) can give you an in-depth understanding of the stock market and valuable ways to gain profit and success in the trading world.
Ever found yourself curious about how companies decide the price of their shares when they first enter the stock market? Let's simplify it. Think of it as a company preparing for a grand sale of its shares. This process is called "book-building" during an Initial Public Offering (IPO).
Before going public, a company sets the ideal price for each share, like deciding the ticket cost for those wanting a piece of the company. In the book-building process, the company and its underwriters evaluate share demand, analysing bids from potential investors to determine the final IPO price based on these assessments.
Here's the interesting twist: when they decide to go public, there's often a huge demand for these shares, sometimes way more than the actual number of available shares. It's like everyone is eager to grab a slice of the company.
Are you a stock market enthusiast keen to know more about this financial spectacle? If yes, we’ve covered all the details in our affordable and detailed stock market courses, available online and offline modules in Jaipur and Delhi.
NIWS is one of the most prominent and renowned stock market institutes in Delhi and Jaipur, known for offering comprehensive stock market courses. Connect with our professional and expert traders for a demo session, and meanwhile, stay connected with us till the end of this blog to explore more about the book-building process in an IPO and how it works!
In the IPO landscape, "book-building" is how a company sets the price for its shares before going public. Imagine deciding the price tag for each share before entering the stock market.
Essentially, before the big stock market debut, the company determines the perfect price for each share they offer. It's like deciding the entry fee for anyone interested in investing.
During book-building, the company, with its financial experts (underwriters), assesses how much people want its shares. They scrutinise bids from potential investors, considering how much these investors are willing to pay. The final IPO price is then set based on these evaluations.
Beyond the basics, the book-building process decides the share price and provides insights into investor sentiment. It's like gauging if people are excited about investing in the company. Moreover, it's not a one-time thing; adjustments can be made based on real-time market feedback. Understanding IPOs and the stock market just got a bit clearer!
In the financial landscape, an underwriter is crucial when a company plans to go public through an Initial Public Offering (IPO). Their role involves managing the intricacies and crucial decisions associated with the IPO process.
An underwriter's primary responsibility is to facilitate the IPO journey by assessing the company's financial health, determining the optimal share price, and strategising the offering. They navigate through market conditions, regulatory requirements, and investor expectations. Decisions about the number of shares to be offered, pricing strategies, and timing are pivotal aspects managed by underwriters.
In essence, underwriters act as financial architects, ensuring a smooth and successful transition for the company into the public market. They are vital in mitigating risks, optimising valuation, and securing the best possible outcome for the company and potential investors.
With its underwriter, the company invites potential investors to a bidding game. Investors state how much they will pay for the company's shares at different price levels. This bidding process helps the company understand how much people value its shares, guiding the pricing strategy.
Concept: Consider creating an organised record (the "book") of all the bids received. The lead underwriter compiles this book, arranging the bids based on the price and quantity of shares each investor is interested in. The book becomes a reference guide, clearly showing the demand for shares at different price points.
The company shares the information from the book with the public. It's like opening a window, allowing everyone to see who wants to invest and at what price. Transparency is key. This step ensures that everyone, not just a select few, can access information to make informed decisions.
Once the bids are in, the company decides how many shares to allocate to each investor and at what price. The settlement involves finalising the transactions. This step concludes the process, determining who gets how much of the company's shares and at what cost.
Companies opt for book-building processes to strike a balance between allowing adjustments according to the demands of the investors and maximising the capital raised for the issuing company. This process allows -
In book building, companies strategically allocate funds for maximum efficiency. This involves carefully understanding how much investors want to buy shares within a specific timeframe.
Think of it like a business figuring out which products are in high demand. Through detailed analysis, companies identify areas of investor interest, allowing them to use financial resources wisely. The process ensures investment in sectors with the potential for the best returns, much like a business stocking popular items.
Book building acts as a guide, helping companies make smart financial decisions for the most efficient and profitable outcomes.
Companies attract big-league investors during book building. Like seasoned financial pros, these investors are large organisations managing money for many people, such as mutual funds or pension funds.
Why the attraction? These investors bring in a lot of money, stability, and know-how. Companies pitch convincingly during book building, acting like top chefs showcasing premium ingredients, unique recipes, and a prime kitchen location to attract skilled cooks. In the business world, luring institutional investors boosts a company's credibility and potential for a successful stock market debut.
Book building involves engaging potential investors actively. Companies conduct roadshows, presentations, and discussions to build excitement. This interactive approach generates market support, setting the stage for a successful market entry.
Book building incorporates a thorough valuation process. With the help of underwriters, companies assess market conditions, industry trends, and competitor performance. This meticulous analysis ensures the determination of a fair and transparent share price.
In book building, companies actively gauge investor sentiment through the book-building period. This involves monitoring bids and demand levels. By actively applying investors in the pricing process, companies reduce the risk of undervaluing their shares and ensure a more accurate representation of market appetite.
The book-building process stands out in this dynamic and market-driven approach to IPO Pricing. To start with the book-building process, the company has to hire an underwriter, usually an investment bank, responsible for marketing and pricing the shares. If you’re interested in understanding this process in-depth, joining a stock market institute in Jaipur can provide valuable insights. The next step involves bidding to the investors, and, based on the demands of the share, a book is made, which is a compilation of the bidding data by different investors.
That Book is then publicized to make it available to the general public, and after some time, in return for the money invested, shares are allotted to the investors. Embracing transparency and efficiency, the book-building process continues to be a key player in the world of IPO.
If you are interested in learning about the stock market, join NIWS. It is the stock market course in jaipur and Delhi. They offer course modules in Banking, finance, stock market, portfolio, and Wealth management. Their faculty consists of brilliant minds with extensive experience in the stock market, share trading, etc. Connect with NIWS now.
Digital marketing has become essential for businesses in today's digital age. It encompasses various strategies and techniques to promote products or services online. With the ever-increasing internet reach, companies must adapt and have a solid online presence to remain competitive.
Enrolling in a digital marketing course provides numerous benefits. Participants gain insights into consumer behaviour, market trends, and how to target specific audiences effectively. They also learn to use various tools and technologies that enhance digital marketing efforts. Additionally, these courses often provide practical training and real-life examples, allowing participants to apply what they learn hands-on.
NIWS is a highly esteemed digital marketing institute in Jaipur, Rajasthan that provides top-notch training and education in this rapidly growing field. With a commitment to excellence and a strong emphasis on practical skills, NIWS stands out as a premier choice for individuals seeking to enhance their knowledge and expertise in digital marketing.
At NIWS, we understand the importance of staying up-to-date with industry trends and technologies. Therefore, our carefully curated curriculum is designed to equip students with the necessary tools and strategies to succeed in the dynamic world of digital marketing. Our industry-expert faculty members bring years of experience to the classroom, ensuring students receive comprehensive and relevant instruction.
NIWS Digital marketing course covers various topics to provide comprehensive field knowledge. Below are some of the critical aspects often included in these courses:
The foundational learning at NIWS delves deep into the core concepts of digital marketing. Students explore the vast digital marketing landscape, understanding how it differs significantly from traditional marketing methods. They learn about the various channels and techniques used in digital marketing and the immense benefits they offer in terms of reach, customer engagement, and ROI.
This module goes beyond basic website design. Students learn about the intricacies of website development, including domain registration, hosting, and maintenance. They gain hands-on experience in creating functional, aesthetically pleasing, and user-friendly websites, which form the cornerstone of any successful digital marketing strategy.
This comprehensive section covers everything from on-page and off-page SEO strategies to advanced keyword research techniques. Students learn about building effective link-building strategies, conducting thorough SEO audits, utilising various SEO tools, and staying updated with the latest Google algorithms.
In this module, students delve into the world of Google AdWords and pay-per-click (PPC) marketing. They explore different facets of display advertising, shopping ads, and the nuances of remarketing, gaining skills to manage and optimize SEM campaigns effectively.
This part of the course covers various social media platforms, teaching students how to craft effective social media strategies. It includes training on engaging customers, creating compelling social media advertising campaigns, and methods to measure and analyse social media success.
Students learn the art of creating and marketing engaging content. This module includes developing content strategies, blogging, guest posting, and optimising content for different digital platforms, emphasising the role of quality content in attracting and retaining audiences.
The course covers designing impactful email marketing campaigns, building and segmenting email lists, and employing strategies to maximise the effectiveness of email communications. It also includes measuring and analysing the success of email campaigns.
This module focuses on the rapidly growing field of mobile marketing. Students learn about various mobile platforms, advertising techniques, and app-based marketing strategies, understanding how to reach audiences on mobile devices effectively.
This module teaches students how to leverage tools like Google Analytics, a critical aspect of digital marketing. They learn to interpret complex data, make data-driven marketing decisions, and understand consumer behaviour and campaign performance through analytics.
This segment provides detailed insights into earning revenue through affiliate marketing and Google AdSense. Students learn about different affiliate networks, strategies for successful affiliate marketing, and how to use AdSense for monetisation effectively.
Students are taught strategies for managing and enhancing an organization's online reputation. This includes monitoring online presence, addressing negative feedback, and building a positive brand image online.
This topic covers the essentials of e-commerce marketing, including understanding various e-commerce platforms, digital payment systems, security aspects, and strategies to promote online stores effectively.
Each module is designed to provide a thorough understanding and practical skills in each aspect of digital marketing, making NIWS's program comprehensive and industry-relevant.
Aside from these, other elements like video marketing, influencer marketing, and strategic digital marketing planning could be part of the course. The topics covered may vary between course providers, with some offering more specialised or advanced topics. Real-time projects and certifications are often provided to ensure practical learning and credibility. The courses equip students with the theoretical knowledge necessary to understand digital marketing principles and strategies and the practical skills needed to implement those strategies effectively.
We invite you to join us in Jaipur-Rajasthan as the best digital marketing institute and boost your career with our affordable and flexible learning solutions. Whether you aim to start your own online business, land a well-paying job, or enhance your existing skill set, our digital marketing courses are the stepping stones to your career success.
Come be a part of our vibrant learning community and pave your way to a successful digital marketing career.
Are you trying to explore the stock market potentials, but confused about the trending term - Dabba Trading? The stock market is known for its two sides - the bright aspect - known for legal and online trading, and the dark market - explained as Dabba Trading - where all the traders are executed on papers or illegal notes!
Dabba trading, or box trading, is an illegal practice prevalent in the stock market. It involves trading in stocks without the transactions being recorded on the official exchange platform. This fraudulent activity occurs when brokers execute trades "off-market" or "behind the scenes". They create a parallel system that matches buyers and sellers internally without interacting with legitimate exchanges.
Since it is an illegal practice, involving Dabba Trading may not be a lucrative decision. Opt for the best stock market course in Delhi from authorised institutes for all trading enthusiasts planning to build their careers in stock trading.
NIWS is committed to providing complete and honest financial or stock market education. Their stock market courses are designed to give students a deep understanding of stock market mechanisms, including the legal and ethical aspects of trading. By providing the right trading knowledge, NIWS contributes to developing a more transparent and reliable stock market.
To know more, let's read this topic further.
Bucket trading manipulates stock prices by artificially inflating or deflating them for personal gain. This unethical practice involves traders intentionally misleading investors and creating false market trends.
Regulators and authorities continuously work together to combat dabba trading by imposing stricter regulations and enhancing surveillance systems. Investors are encouraged to remain vigilant and only trade through authorized brokers on official platforms to safeguard their investments and contribute to the stability of the stock market.
According to a CNBC report, dabba traders use online ads and apps to make their illegal activities look professional. To help investors, the National Stock Exchange (NSE) sends warnings to avoid 'dabba trading' and these traders.
These trades do not appear on the trading books of any exchange and, hence, are unofficial. It thrived when there was no mechanism for real-time access to stock prices, and orders were placed based on telephonic instructions.
However, with the advancement of technology and strict regulation by the Securities and Exchange Board of India (SEBI), it has lost its prevalence in mainstream trading. To ensure a transparent and reliable stock market, investors must be vigilant in identifying signs of bucket trading and report any suspicious activities to the appropriate authorities. It is essential to rely on accurate information from reputable sources, conduct thorough research before making investment decisions, and seek guidance from qualified professionals.
Historically, Dabba trading found its roots in times when stock market access was limited. It was a period characterised by the absence of digital platforms, and trades were often executed based on information received via telephone or personal contacts. This lack of transparency and real-time data made the stock market a fertile ground for unofficial and unregulated trading practices like Dabba.
It is essential to understand that despite its history, dabba trading is illegal and can result in severe penalties. The trades are not recorded officially and do not follow the necessary compliance requirements. The promise of lower transaction costs often lures people still involved in dabba trading, the possibility to trade on credit, no tedious documentation, and the flexibility of not settling transactions on the same day.
However, these benefits are far outweighed by the risks involved. In dabba trading, trade settlements are not guaranteed, and unfair price manipulations are frequent.
People often get into Dabba trading because they're attracted to making fast money with less paperwork and the chance to borrow a lot of money to invest. They also like that it's secret and not official, which helps them avoid legal rules and taxes. But focusing only on these quick benefits means they're not considering the significant risks that can happen later.
Investors are advised to avoid such unregulated trading practices and stick to registered brokers and trading platforms verified and monitored by regulatory bodies. It is not only necessary for maintaining the transparency and integrity of financial markets but also essential to safeguard the interests of individual investors. In the age of electronic trading and real-time access to market data, there is no need to resort to illegitimate ways.
The way we trade stocks is changing fast, thanks to digital technology. This change is all about making stock trading clearer for everyone, safer from risks, and easier to get into. Here's what's happening:
With all these digital tools, old and unofficial ways of trading, like Dabba trading, are losing their charm. Why? Because trading on official digital platforms is just safer and more straightforward.
The future looks bright for stock trading. It's heading towards being more open to everyone, more straightforward to understand, and safer from risks. Here's what to expect:
In short, stock trading is becoming easier and safer for everyone, thanks to digital technology. As we go forward, it's essential for traders, old and new, to embrace these changes. This way, everyone can make the most of what the digital age offers in stock trading.
In conclusion, Dabba trading or Bucket trading in the stock market is a damaging and deceptive practice that compromises the integrity of the financial markets. Both investors and regulatory bodies must be proactive in their efforts to detect and deter such misconduct. Only through such combined efforts can we ensure a fair and transparent stock market. By promoting ethical behaviour and adhering to regulations, we can protect investors and maintain a level playing field for all participants.
The best defense against bucket trading and similar fraudulent practices in the stock market is an investor education and stringent regulatory oversight. Investors must understand how the market functions and be vigilant about where and with whom they choose to invest their money.
They should place trades only with licensed, reputable brokers and should pay careful attention to the execution prices and times of their orders.
NIWS is dedicated to providing students with the best possible education and guidance in the stock market. Our career-oriented courses, compact sessions, comprehensive reviews, in-depth analysis, exclusive insights, and practical certifications are designed to give you a competitive edge in the financial market.
A strategic decision-making approach, sharp intuition, and logical and quick thinking are essential to navigate and understand the potential and complexities of the stock market. Since the stock industry has many lucrative career pathways, you can let your financial expertise rise in the dynamic trading world.
The right skills, determination, and expertise will help you create a rewarding career in the trading industry while experiencing success and unparalleled growth. Some career paths in the stock market shared through this guide are suggested by NIWS, stock market trading courses in delhi, and are the opportunities beyond trading that will help you gain financial freedom and success.
A successful career in the stock market is crucial for people willing to enter the financial or trading market.
People willing to grow well in their financing careers and want to become financial marketers can work as chief financial officers, auditors, financial analysts, financial advisors, investment managers, and other finance professionals.
Your confidence in handling the complexities and managing the risks of trading and investing in the stock market is with the right ideal guidance, education, certification, skills, and knowledge.
These demanding positions are beneficial due to the rapid expansion of businesses, and people seek experts and professionals to seal in this ever-evolving and rapidly growing finance industry.
Professional certifications from reputed stock market institutes, like NIWS, will exhibit your commitment and experience in the financial market. The certification programs are extensive testing, studying, and training, providing knowledge and a competitive edge in this trading world. Some certifications to consider are a certified Diploma in Research Analyst, a Certificate in Stock and Financial Markets, Certified Investment Analysis and Portfolio Management, and many more.
Since the stock market is constantly evolving, staying current and updated with emerging financial trends is crucial. Understanding financial software, data analysis tools, and trading platforms will help you stay informed. Participating in development opportunities and skills and seeking training programs are all helpful in staying current in industry trends and best practices.
Experiencing entry-level positions and internships will help you gain practical experience in the stock market. It is the best option to get knowledge and expertise from industry experts. Asset management companies, investment banks, or brokerage companies are the best to opt for entry-level positions and internships. It will help you gain knowledge and exposure to sales, trading, research, and many other roles in the stock market.
Understanding financial principles and concepts is crucial to succeed in the financial or stock market. Formal education or courses associated with investments, accounting, and finance can help you gain a better understanding. Attending seminars and conferences and reviewing financial news and publications will help you remain updated with industry trends.
Communication skills are necessary for every career opportunity, and developing them will help you make informed investment decisions and build relationships in the stock industry. Strong communication will help you communicate complex finance ideas adequately to your colleagues, clients, or industry experts. Seeking advice from mentors and educators can improve the financial analytic presentation practice and skills to others.
Building a network of experts and professionals is crucial for almost every industry. Networking is a great opportunity to seek industry experts' knowledge and career advancement options. You can build networking by participating in stock market-specific social media groups, online forums, or networks to share ideas and connect with industry experts.
Joining professional organisations and attending seminars, conferences, and other industry events will expand your network and help you learn more about career pathways in the stock market.
Investment bankers are the ones who bring the biggest deals on stock markets, including Wall Street. Initial public offerings, acquisitions and mergers, and security offerings moved by all financial transactions are operated behind the scenes by investment bankers. They raise capital for the companies by selling and underwriting securities.
Communicative solid and analytical capabilities are required for this role, along with the vital skills to perform perfectly under pressure.
Financial analysis is among those career paths that necessitate strong analytical and mathematical skills. This role is crucial for making investment decisions and strategies for the clients and the company they work for. Investment banks, insurance companies, and other large corporations often provide employment opportunities to financial analysts.
Portfolio managers develop new investment strategies while considering the company’s or the client’s past investments. They manage and create investment allocations for corporate or institutional investors, individuals, private clients, and families. This role necessitates forecasting knowledge, financial modelling, and strong leadership and analytical skills.
Stockbrokers often assist in selling and buying stocks to investors. This role as an intermediary and middleman is regulated and licensed by the financial regulatory authority. They advise clients and investors on investment advisory services, interpret financial reports, and manage portfolios.
This position required strong negotiation, mathematical communication and analytical skills, while perfectly evaluating financial reports and offering accurate investment advice.
Risk managers are responsible for mitigating many risks in the stock market, including operational, reputational, regulatory, liquidity, market, and credit risks. Their expertise helps them implement policies and strategies to manage risks while providing recommendations and valuable insights on investments and financial decisions.
This role necessitates leadership, IT, problem-solving, and communication skills while being detail-oriented and skilled in statistical models and analysis.
Traders often sell and buy securities for larger investment management firms, such as banks or exchanges, they work for. Their specialisation is in one asset class or investment type. They conduct their analysis and research, review them to recommend them to portfolio managers or clients, and work in forex, derivatives, commodities, debts, stocks, and other markets.
This role necessitates multi-tasking skills and must have the capability to work under a high-pressure and fast-paced work setting.
The interesting and beneficial directions and highly globalised financial market demand finance professionals. This dynamic industry necessitates industry and role-specific skills, including stock market research, financial modelling, equity and valuations skills and other certifications and expertise to grab the right career path in the stock market.
Building a network of industry experts, considering professional certifications, developing communication skills, developing financial knowledge, practical experience in entry-level positions or internships, and staying current with industry trends can help you grab many career opportunities. These career paths may include the role of financial analyst, investment banker, portfolio manager, stockbroker, risk manager, trader, and many other finance professionals.
The suitable qualifications and skills can help you gain the right career path in the fast-paced, ever-evolving, and demanding financial market. Consider reaching NIWS to specialise in the role you opt for and succeed in the stock market.
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Suppose you have XYZ asset in your portfolio, purchased at INR 200, currently valued at INR 180, and, based on the declared quarter results, the stock value is expected suddenly fall more. But according to your research, the company is planning for a change and is about to launch the same, which holds a high chance of a price increase, possibly a 2x or 3x surge in the current price. So, you wish not to sell the stock at a lower price but also to protect the risk (if your prediction goes wrong!)
So, in this jumbled-up situation, Option Trading strategies are your saviour. But before we begin with the option trading details, here’s a quick overview of hedging (a financial strategy that protects against risk).
Hedging is a financial strategy that helps offset risk, protecting yourself against loss and paying a premium for the same.
To begin with, here’s an easy example to explain what hedging is and how it helps wave off the risk!
Rice Farmer and Rice Futures Market -
A farmer plants his winter rice seeds in June-July and plans to sell his harvest in November-December. However, in the six months gap, the farmer is subject to the price risk that it might fall from its current value, INR 80/Kg. While the farmer is planning for maximum profits on his harvest, he also does not want to speculate on the price of rice. So, after planting the seeds, he sells a 6-months (expiration date) futures contract for INR 80/Kg (the strike price).
Six months have passed, and the farmer is now ready to sell his harvest. So, there might be three situations, either the price is the same, has fallen or has increased.
In case of the same price, i.e., INR 80/Kg, the farmer will sell at no profit or loss.
In case of a price fall to INR 70/Kg, the farmer will be on the safe side, selling his harvest at the pre-decided price, INR 80/Kg, preventing the loss of INR 10/Kg.
In case of a price rise, INR 90/Kg, the farmer will sell his lot at the pre-decided future contract price, INR 80, recording a loss of INR 10/Kg.
This is termed hedging, where the rice farmer has limited profits and losses.
Options are trading contracts that give the holder the right to sell or purchase a share when it reaches the strike price or before the contract expiration date. However, options trading only gives the right, not the obligation, to sell or purchase.
Call Options - If you believe that the stock’s market price has a chance to rise from its current level, you will buy a call option.
Put Options - If you believe that the market price of the share will fall below the current price, you will buy a put option.
The risk factor is, therefore, limited when buying put or call options and more when selling the same.
To explain it in easier terms, let’s relate options trading with hedging with an example -
You own 50 stocks of XYZ Company, and bought these stocks at INR 10 each. You are concerned that the price of this stock might fall in future and want to limit your risk. In this case, you will buy a call option at a strike price of INR 8 (which will give you the right and not an obligation) after paying INR 50 premium, with an expiration period of 1 month. Suppose the price fell to INR 5 (recording a loss of INR 250) after 15 days, but since you had a put option at INR 8, you are at INR 150 profit from the current price, recording a total loss of INR 100 only.
Suppose the price rises to INR 20; your profit will be INR 10 x 50 stocks = INR 500 - INR 50 (premium paid), which is INR 450 (total profits).
Options trading with hedging can effectively minimise the risk of potential losses caused by price fluctuations, safeguarding investments.
Options contracts are highly flexible regarding strike prices, expiration dates, and other factors, allowing investors to customise their hedging strategies to their specific needs and goals.
Despite being a risk-averse strategy, options trading with hedging still offers gains if the underlying asset's price moves in the investor's favour, enabling investors to benefit from favourable market conditions.
By hedging with options contracts, investors can limit their losses to a predetermined amount, providing greater certainty and peace of mind in uncertain market conditions.
Compared to other hedging strategies, options trading can be relatively cost-effective, particularly when combined with other methods, making it accessible to many investors.
The options market is highly liquid, which means that options contracts can be easily bought and sold, giving investors greater control over their hedging strategies and facilitating the quick execution of trades.
Financial terms for trading and investment, including hedging, options trading, and options trading with hedging, are quite challenging to understand without clearing out the basics. And trading with fewer or no details about the financial terms can lead to significant losses.
If you want to hedge in options trading, NIWS courses in Jaipur, Delhi and Indore or online trading courses will help you. NIWS is a renowned Stock Market Institute In Jaipur. It offers the best modules for finance, banking, fundamental analysis, technical analysis, wealth management, stock market, portfolio management and other high-paying skills.
For all trading and stock market course in Indore, book your free demo with the experts to excel in your skills.
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