Rachana Ranade. Blog

In an IPO flurry, we all have heard that this stock is having an 80% GMP, the other stock has a GMP of only 15% and the likes.

But what does GMP actually mean and is it even legal?

Let’s take an example – People apply for a blockbuster IPO and know for sure that it’s going to have a super listing - but many of the times they don’t get an allotment, especially in such rockstar IPO’s.

So, what do they do to enjoy the listing gains of such IPO’s?

Here comes the answer. They deal in the Grey Market.

A Grey Market, also known as a parallel market, is one where trading takes place outside the realm of official trading channels. Since this is an unofficial market, there are no rules and regulations. Market regulators like SEBI are not involved in these transactions and they don’t endorse this either.

Now, Grey Market Premium is nothing but the price at which the shares are being traded in the grey market. For instance, let’s assume the issue price for stock XYZ is Rs. 150 and the GMP is Rs. 100, it means that people are ready to buy the shares of company XYZ for Rs. 250, which implies that they expect the IPO listing price to be even above Rs. 250 and hence they will make a gain out of this transaction.

Comments (0) details

What is Grey Market Premium?

We all have heard about a company bringing an Offer for Sale (OFS), but don’t really understand the meaning of it, right? Let’s decode the same in today’s blog!
An OFS is a mechanism through which the promoters in listed companies offer their shares to others.
So, there is no fresh issue of shares in an OFS, rather it’s just an offer from promoters to sell their holding to others. Hence there is no increase in the share capital of the company and yes, as rightly guessed by you, the money paid by you against the shares purchased doesn’t go to the company, but goes to the selling promoters.
Now one question naturally arises in our minds being “Why do promoters sell their shares to others? Are they not confident about the shares of their own company?”
It’s not always like that!
There can be various reasons as to why promoters may be willing to sell their shares to others. Let’s see some of them:

1) To pursue other life goals:
Many a times it so happens that the promoters started a company from scratch and built it as a professional company, brought it to a certain stage - and it took them good amount of time to do so and at current stage of their personal lives, they wish to encash some money and pursue personal or professional goals.
2) Healthy profit booking on their part:
As they have built a business from scratch and have listed the company on the exchanges, doing good business and generating good cash flows, obviously they have made a decent return on their initial investments and what’s wrong with some profit booking? It doesn’t mean that they don’t believe in the fundamentals of their own company. Just assume yourself in their shoes. However strong stocks you may be holding in your portfolio, if you made a decent return, will you not want to secure some of the profits that have been made? Obviously yes!

3) Better investment opportunities:
It may also be a case where the promoters want some stake to be offloaded as they may be eyeing some better investment opportunities in some other space like say private equity, real estate etc.
So now we know as to why do promoters bring in an OFS and applying to an OFS is not always a bad proposition.

Conclusion
So that’s what an OFS is all about!

Comments (0) details

What is an OFS?

We all have observed “the new normal” during this pandemic. Hand sanitisers have now become one of the irreplaceable items in our bags. Why is that? Because these sanitisers can effectively kill germs and viruses and reduce our chances of getting infected. This practice has become so essential during the current times that there are various kinds of sanitisers being offered in the market. From alcohol-based, alcohol-free, spray, gel-based to fragrant sanitisers, there are numerous options available for us.

Do you think that if we have so many types just for a sanitiser, there won’t be any in derivatives? Of course, we do! And that’s exactly what we will be discussing in today's blog. Before we dig in, if you wish to revise the basics of derivatives discussed in the previous blog, click here.
Now let’s get started!

What is the structure of the Derivatives market?
Before jumping into the types of derivatives, we must understand the structure of the derivatives market. We already know that a derivative is a contract, based on the value of an underlying asset like stocks, bonds, commodities, currencies, interest rates and even indices.

Coming to the markets’ structure, the derivatives market is broadly classified into two categories:

a. OTC derivatives market
In simple words, the OTC market is where derivative instruments are traded informally. An over-the-counter (OTC) derivative is a contract that is tailored as per the needs of the parties involved. These instruments are not listed on any exchange and hence are negotiable between a buyer and a seller to match their risk and return. It is a decentralized dealer market. No intermediaries or exchanges like NSE, BSE, MCX, etc. are involved in the transaction due to which these instruments possess counter-party risk. Popularly known OTC derivatives instruments include forwards and swaps which we shall discuss ahead in this blog.

b. Exchange-traded derivatives market
As the name suggests, these derivatives instruments can be traded on exchanges like NSE, BSE, MCX, etc. These instruments are standardized contracts that have a pre-determined expiration date, price, lot size, etc. and hence are non-negotiable. Here, the exchanges act as an intermediary and thereby eliminates counter-party risk. Unlike the OTC derivatives market, this market is regulated by SEBI. Popularly known exchange-traded derivatives instruments include futures and options which we shall discuss ahead in this blog.

What is the difference between OTC & Exchange-traded derivatives markets?

What are the types of derivatives?
The primary purpose of derivatives is to minimize your risk and earn profits. But how to do that? For that, we have different types of derivatives being traded, in both OTC and exchange-traded markets. So, let’s unfold them one by one.

1. Forwards
Forwards are customized contracts between a buyer and a seller based on an underlying asset at a pre-decided price, quantity, expiration date, etc. I am sure after reading the word customized, you must have guessed that forwards are OTC instruments. You are absolutely right! Hence, forwards being a private transaction, do not trade on exchanges. Investors and businesses use forwards to hedge against the volatility in pricing.

2. Swaps
To put it very simply for you, swaps enable the buyer and the seller to exchange their revenue streams based on an underlying asset. These are again OTC instruments so no exchanges are involved in the transaction. Investors and businesses use swaps to hedge and speculate against the volatility in pricing. The most common types of swaps are interest rate swaps and currency swaps.

3. Futures
Now, the real game starts with Futures and options. Futures are standardized contracts between a buyer and a seller based on an underlying asset at a pre-decided price for a later date. We can say that futures are an advanced version of forwards. They are highly tradable due to the involvement of the exchanges. This also removes the counterparty risk on the traders’ part. Investors and businesses use future contracts to hedge and speculate against the volatility in pricing. The most common types of futures involve stock futures, index futures, currency futures and commodity futures.

4.Options
As the name suggests, options are contracts that give the buyer a right but not the obligation to buy or sell the underlying asset at a pre-decided price. The buyer of the option has to pay a premium to the seller. You must have heard about the call and put options that are widely known amongst traders. These are commonly used to hedge and speculate against portfolio risk.

Bottom Line
Well, the derivatives market is huge and there’s a lot more to learn about all the types of derivatives we discussed today. But don’t worry, we shall understand their basics better in future blogs. It is important to note that even though there’s huge profit potential in derivatives there’s an equal or more probability of losing. It is important to have extremely good knowledge about the stock market , technical analysis and derivatives, to trade in the derivatives market. If you want to learn about Futures and options in the most fun, simplified and practical manner, make sure you check out my course here. I am sure you will love it. Until next time!

Comments (0) details

Types of Derivatves

Mirror mirror on the wall, will Nifty jump or have a great fall? If only we had such a mirror that could tell us where a stock or market is headed! But only 2 people can tell where the market is headed. One is God and the other is a liar. We can only build predictions in this regard and take positions accordingly. But how can we do so and earn good money out of it? For that, we have a derivative instrument called Futures. So, let’s understand the world of Futures!

What are Futures?
A futures or futures contract is a financial contract between a buyer and a seller, who enter into the contract based on his/her view on an asset’s future price movement. It is a legally binding derivative contract to buy or sell an asset at a predetermined price on a future date. Hence, the name Futures. Two major features of futures contracts are that they are standardized and exchange-traded. Due to these reasons, they are often preferred over forward contracts by traders. We can say that futures are an extended or a better version of forwards. These important features protect a trader from various risks like liquidity risk, counterparty risk, etc. Futures are usually used by speculators and hedgers. You might recall these terms from our previous blog.

Following the definition of derivatives, even futures contract derives their value from an underlying asset’s spot price. The spot price is nothing but the price at which an asset is currently trading in the cash market. For example, the ACC Ltd. Futures contract will derive its value from the stock price of ACC i.e. its spot price.

How does it work?
Well, in a futures contract, both the buyer and the seller are obliged to fulfil the contract's specifications. The buyer of the contract is of the view that the price of an underlying will rise in near future and the seller has the opposite view. So, when both parties enter into a futures contract, the buyer must buy and accept the underlying asset whereas the seller must sell and deliver it on the expiry of the contract. Therefore, if the spot price of an asset goes up, the buyer wins and if it goes down the seller wins. And that’s how a futures contract work. I hope all of this is crystal clear. Now let’s level up a little and understand some contract specifications about futures.

Futures contract specifications

a. Lot size
By now you already know that futures are standardized contracts as they are exchange-traded. This means that everything in the contract is pre-specified by the exchanges. One such specification is the lot size of the contract. The lot size is nothing but the minimum quantity of the underlying asset you need to buy in order to enter into a futures contract. This minimum quantity is called 1 lot. For example, the lot size for ACC is 500 shares whereas for Gold it is 1 Kg. Lot sizes can vary from asset to asset.

b. Contract value
The contract value is simply the product of the agreed lot size and price. For example, if you agree to buy 3 lots of ACC (500*3= 1500) at say spot price of Rs. 2,400/share, your contract value will be Rs. 36 Lakh.

c. Tick size
Tick size is the minimum difference between the different bids and offer prices. Bid price is buying price whereas offer price is the selling price of an asset. To put it simply, it is the minimum difference between the consecutive bid and offer prices. Right now, the tick size on NSE is Rs. 0.05. So, if we continue with the example of ACC, let’s assume the LTP (Last traded price) of ACC futures was 2410 then the bid prices would be 2409.95, 2409.90, 2409. 85, etc. and offer prices would be 2410.05, 2410.10, 2410.15, etc.

d. Expiry
Just like any other product has an expiry date, even a futures contract has one. Expiry is nothing but the date on which the contract ceases to exist. So, naturally, this is the last trading day of a contract. Any scrip trading in the futures market shall have three different expiries available for trading - the near month expiry (expiry in the current month), the mid-month (expiry in next month) and the far month expiry (expiry in the month after). These contracts expire on the last Thursday of every month. If the last Thursday is a national holiday, then the contract will expire on the previous trading day. On the expiry of the near month contract, the mid-month contract shall become the near month, the far month will become mid-month and the exchange will introduce a new far month contract, this cycle goes on.

Example
So, this is how an actual futures contract for ACC Limited looks like. The screenshot is taken on September 6, 2021, from the NSE website.

I am sure you already have started noticing the terms we discussed but let’s go through it together. First, observe that this is a Stock future under the instrument type heading. After that, you can check the expiry date of the contract i.e. 30th September 2021. On the orange highlighted row, the first price is the LTP of the futures contract- Rs. 2483.35, along with the previous day’s close and OHLC. In the table below that, you can see the market lot/lot size as 500 and the underlying value/ spot price at Rs. 2473.35. In the order book, you can see the best 5 bids and offer prices.

Bottomline
In the end, I would like to say that if you trade in F&O without proper knowledge, you will have no Future and you will be left with no Options. Just to revise quickly what we learned today, futures are standardized agreements wherein the parties to the contract agree to buy/sell the underlying at a pre-determined price on a pre-determined future date. The contract specifications are standardized and are decided by the exchange. Under contract specifications, we understood few key terms like lot size, contract value, tick size, and expiry. There are many other things which you need to know to learn about the Futures and I got you covered. If you want to learn about Futures and Options in the most fun, simplified and practical manner, make sure you check out my course here. I am sure you will love it. Until next time!

Comments (0) details

What are futures?

Till now we have learnt about what are derivatives, what are the types of derivatives and what are futures. Let’s revise it quickly. A derivative instrument is a contract between a buyer and a seller based on their views about an underlying assets’ future price movement. An underlying asset can be any financial instrument like stocks, bonds, commodities, currencies, interest rates and even indices. After that, we understood various types of derivatives like- Forwards, Swaps, Futures and Options. Then we took it up a notch with understanding Futures. But, as usual, ye dil mange more! That hunger for knowledge in us has not been fulfilled yet. So, in today’s blog, we will be discussing various types of futures. Let’s begin!

1. Commodity Futures

A commodity is anything that holds commercial value. In India, the various types of commodities being traded are Bullion, Agri, Energy, Base Metals. Commodity futures are contracts that derive their value from a commodity, bought and sold at a predetermined price in future. These contracts are usually preferred by producers or buyers to hedge against future price volatility. Some commodities like gold act as a hedge against inflation due to their low correlation with the stock market. In India, commodity futures are traded on Multi Commodity Exchange (MCX) and the National Commodity and Derivatives Exchange (NCDEX).

2. Currency Futures

As the name suggests, currency futures derive their value from the spot rate of a currency pair. A currency pair indicates the price of one currency that can be exchanged for another currency. These contracts allow you to buy or sell a currency at a fixed exchange rate at a future date. These futures are usually used to hedge against currency risk. For example, an importer importing raw materials from US may purchase USDINR futures to safeguard against rupee depreciation in future. In India, currency futures can be traded on NSE, BSE and MCX SX.

3. Interest Rate Futures

These are futures contracts based on interest-bearing debt instruments. The underlying debt instruments can be T-bills, Government bonds, etc. Interest rate futures is a contract between a buyer and a seller for the future delivery of a debt instrument at a predetermined price. These futures are usually used to hedge against interest rate risk. Due to the inverse relationship between interest rate and bond prices, the interest rate futures are also inversely related to the interest rates. In India, NSE and BSE offer interest rate futures

4. Stock Futures

This is where the real game starts! Stock future is a contract with an individual stock as an underlying. It is a contract to buy or sell a stock at a predetermined price and quantity at a future date. Usually, stock futures are used for speculation and/or hedging purposes. You may trade in stock futures on BSE and NSE. However, they are available only for a specified list of stocks that fulfil certain criteria as stated by the exchanges.

5. Index Futures

Now, what if you don’t want to trade in individual stock futures? No worries! We have Index futures as well. These futures will be contracts based on market indices like Nifty, Sensex, Bank Nifty etc. Traders use these contracts to speculate based on their directional views about the market. Many traders prefer index futures over stock futures, as the underlying index is a basket of stocks the risk is spread out amongst them. You may trade in index futures on BSE and NS

Closing thoughts

I hope now you have a basic introduction to various types of futures. Generally, speculators and hedgers are the participants in these markets. Yes, the profit potential in these instruments is substantial but so is the risk of losses. There are many other things that you need to know about Futures before you take your first trade and as usual, I have got you covered. If you want to learn about Futures and Options in the most fun, simplified and practical manner, check out my detailed course on Futures & Options here. I am sure you will love it. Until next time!

Comments (0) details

Types of future contracts

Do you remember the days when the 10 Rs. Maggi used to cater the evening snack of 2 people, and now it is hardly enough for one person…. or do you remember the size of 10 Rs. Parle-G biscuit packet some years back, wasn’t that plentiful! Now indeed it has reduced. This phenomenon that we have experienced is called “Shrinkflation”.

What is Shrinkflation?

Shrinkflation is a form of hidden Inflation, wherein producers now sell the product at same price but with reduced quantity. This term shrinkflation was first coined by British economist Pippa Malmgren in 2009.

What causes Shrinkflation:

Increased Production cost combined with intense competition:

Rising production costs are generally the primary cause of shrinkflation. Increase in the cost of raw materials, energy commodities and labour cost increases the production costs and subsequently they can diminish producer’s profit margins. Thus, in order to maintain the profit level, the producer has to either increase the price of product or offer reduced quantity at same price.

However, due to intense market competition on price level, there is threat to the producer of losing out on consumers if the prices are increased. For the sake of example let us say, both Cola & Pepsi are selling one bottle at Rs. 30 and you frequently buy Cola, but one day Cola increases price from 30 to 35, then wouldn’t your mind incline towards Pepsi?

Various studies have also found that the consumers are far less sensitive to quantity reductions than they are to price increases. Thus, many producers resort to “shrinkflation” than increasing the price of the product.

Indian Scenario:

In India, major industry players in the FMCG domain like Dabur, Hindustan Unilever, Nestle, Britannia, Coca Cola, Pepsi Co, P&G etc. have opted for Shrinkflation strategy. From snacks, chocolates, to bar soap, everything is undergoing ‘Shrinkflation.’

As per ET, Dabur has also reduced the quantity of certain products, to protect 5 and 10 rupee ‘sacred price points’, said Chief Executive Officer Mohit Malhotra.

Also, currently the 10 Rs. Vim bar soap weighs 135 grams as compared to 155 grams about three months ago, a Delhi-based distributor said. At the same price point, a pack of aloo bhujia, a popular crunchy and salty snack, made by Haldiram’s fell to 42 grams from 55 grams, as per ET.

Conclusion:

By adopting this strategy, even though seemingly there is no increased pinch to the pocket of consumers, the price per unit of weight or volume which the consumer pays for, increases.

Comments (1) details

Inflation ate my maggi?

Introduction
As per a recent article of Business standard, Mutual Fund Houses have launched a clutch of new fund offers in the Silver ETF (exchange traded fund) category this year and collected Rs 1,400 crore in assets.
But why all of sudden Mutual Fund Houses are coming with so many Silver ETF & Fund-of-Fund options, & investing in silver has become a bandwagon? well there are different reasons for that, lets understand them through a crisp analysis below!!

Silver as an Asset class:
Silver comes under the category of precious metal; thus, it has the use case of jewellery & investing, but apart from that, Silver has many use cases in Industry, because of its quality of having high electrical conductivity, high thermal conductivity, high reflectivity. Don’t let these science words bog you down, we are here to simplify things for you . Simply speaking silver is useful in preparation of new-age Batteries, Smart phones, Electric Vehicles, Water filters, Solar panels, medical applications like disinfectants, Mirrors, Coatings, etc.
These Industries are expected to be grow good & bring good demand for silver. And as per the economic equilibrium rule, increase in demand is expected to give increase in prices.

Regulatory Updates:
SEBI (Securities Exchange Board of India), the Market regulator has in November 2021, given permission for Silver ETFs, and that is a catalyst for so many Fund houses coming with ETFs & Fund-of-Fund in recent times.

Technical Analysis:

The Price of Silver is near to its support level at 61.8% retracement, this is one of the reasons why some Analyst believes that Silver is expected to have up move from here.

So, is it all rosy?
As every coin has two sides, there are opposing views too. As per past trends, it is seen that silver prices are affected by the value of the rupee against the dollar. Any decrease in the value of the dollar sees the demand for silver increase, & vice versa. And taking into consideration the Monetary tightening going on in USA, the value of USD is expected to appreciate against INR, in-turn pulling the value of silver to down.

Conclusion
Considering all the factors in mind, we can say that the commodity silver which is having good use cases in growing industries, is trading at its support level, which can give the Investor good risk-to-reward ratio.

Comments (0) details

Is silver ready to shine?

A month after testing the wholesale central bank digital currency, the Reserve Bank of India (RBI) on Tuesday announced a trial for retail digital rupee (e₹-R) commencing on December 1 with four banks in as many cities participating in the pilot programme.

What is Digital Rupee?

CBDC is a legal tender that is issued in digital form by the central bank, as stated by the Reserve Bank. It is interchangeable 1:1 with the fiat currency and functions just like a sovereign currency.

The central bank defined its goals for the digital rupee in a "concept note" on Central Bank Digital Currency (CBDC). It also outlined the justification for creating a CBDC and how it will function as an alternative.

Classification of Digital rupee

Central bank Digital currency can be classified into two types:

1) Retail (CBDC-R): Retail CBDC would be potentially available for use by all.
2) Wholesale (CBDC-W): is designed for restricted access to select financial institutions.

For the wholesale pilot project for the digital rupee which has rolled out on 1^st November 2022, the RBI has chosen nine banks to take part. These include the Union Bank of India, State Bank of India, Bank of Baroda, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Yes Bank, IDFC First Bank, and HSBC.

The application of the wholesale digital rupee is for the settlement of transactions in government securities.

The Retail pilot project is going to get started on a trial basis from 1^st December 2022. The program would cover selected locations in a closed user group (CUG) comprising participating customers and merchants and has identified eight banks for gradual participation. The first phase will begin with four banks including State Bank of India, ICICI bank, yes bank, and IDFC first bank, and would initially cover Mumbai, New Delhi, Bengaluru, and Bhubaneshwar.

How will the Digital rupee work?

The Digital rupee will be in the form of a digital token that represents legal tender. It would be issued in the same denominations that paper currency and coins are currently issued. Users can transact with E-rupee through a digital wallet offered by participating banks and stored on mobile phones. Digital rupee transactions can be both person-to-person and person to merchant. Payments to merchants could be made using QR codes displayed at merchant’s locations.

The advantage of Digital currency over existing digital payment systems is that payments through digital currency would be final, without requiring interbank settlement. Reducing operational costs associated with physical cash management, promoting financial inclusion, bringing resilience, efficiency, and innovation to the payments system, enhancing efficiency in the settlement system, and fostering innovation in cross-border payments are among the main drivers for considering the issuance of CBDC in India.

Future of Digital currency?

One of the main advantages for users is that the central bank's digital money would provide better anonymity than traditional digital transactions. India is a developing country with a number of digital payment options now, but this would give people even more choices. Currently, it is being done as a pilot, but once it reaches a certain critical mass, it will eventually become the next big thing in the payments arena. India is dedicated to building a digital payments ecosystem with innovations that realize the concept of "Ease of Living" and guarantee that social assistance benefits are provided to those who need it the most.

Comments (0) details

What is Digital Rupee?

The RBI established the rupee trade settlement mechanism in July 2022. The Mechanism is a way to do international business using rupees rather than dollars or other major currencies, with a focus on Indian exports, in order to foster the growing interest of the world trading community in the rupee.

The RBI's decision on rupee-denominated trade was made in an effort to decrease India's trade imbalance since it is easier for India to increase its share of Russian oil purchases at lower rates.

Dollar-strapped Sri Lanka and Sanctions hit Russia are going to be the first nations to utilize the Indian Rupee Trade Settlement Mechanism.

What Does this mean for India?

As the world's reserve currency, the dollar is used to settle the majority of import and export transactions.

Let’s say an Indian buyer enters into a transaction with France then the Indian buyer must exchange his rupees for US dollars first. These dollars will be sent to the vendor, who will then exchange them for euros. In this case, the cost of currency conversion and the risk of exchange rate fluctuations is borne by both parties. However, if the counterparty has a Vostro account, the transaction will be settled in Indian rupees rather than exchanging dollars.

A Vostro account is a domestic bank-maintained account that holds the assets of a foreign entity in local currency. The Vostro account is frequently used to speed up the settlement of transactions involving Indian rupees. As of right now, the RBI has approved the opening of 12 Vostro accounts for trading Indian rupees.

India and its bigger trading partners, Saudi Arabia and the UAE continue to discuss the viability of trade in rupees. Countries like Tajikistan, Cuba, Luxembourg, and Sudan have also shown interest in the rupee trade mechanism.

Additionally, because India has a trade deficit—its imports exceed its exports—settling trades in rupees will prevent the outflow of dollars. Saving currency outflows becomes even more important for the RBI at a time when the value of the rupee against the US dollar is falling every week.

Benefits for India

1. No foreign exchange risk is involved.
2. Exporters will be able to set the most competitive pricing for their exports as they will be entitled to all the other benefits like export incentive schemes, RoDTEP (Refund of Duties and Taxes on exported Goods)
3. Long-term influence on regional nations wanting to trade with India.
4. Reduce India’s dependency on the US dollar

The most recent trade statistics show that in April and May, India imported $2.5 billion worth of goods from Russia. This annualizes to $30 billion, and according to analysts, it might reach $36 billion.

In the best-case scenario, India would wind up saving $30-36 billion in dollar outflows if it paid for all of its Russian imports in rupees.

A currency is typically referred to as international if it is widely used as a means of exchange for trade on a global scale. According to the RBI, using rupees for trade settlement would lessen reliance on hard currencies like the dollar, euro, and yen.

As per the recent developments in the trade settlement mechanism, we may expect the Indian rupee to emerge as a global currency in the coming years.

Comments (0) details

International Trade Settlemment in Indian Rupees

Blog

1. Commodity Futures

2. Currency Futures

3. Interest Rate Futures

4. Stock Futures

5. Index Futures

Closing thoughts

Open an account with

Open an account with

Download our apps