Question of the Day

July 4, 2013

1. If someone is discussing about stock markets and asks you what is the market doing today(22nd May), what will your answer be?

Ans: Nifty closed at 6095, down 20 points/0.32% down, was a flat day.

2. How has markets been performing for the last 2 months? Which has been the best performing sector during this period?

Ans: Market has been bullish in the last 3months, Nifty was around 5800 early march and today at around 6000, up around 4%. It had dipped to 5500 early april and has seen a very bullish 5 weeks gaining almost 500 points. FMCG(fast moving consumer goods) index has been the outperforming index in the last 3 months gaining almost 18%. So stocks like HUL, ITC and others which comprise in the FMCG index have outperformed the markets.

3. Which is the index that is the most popular after the market index nifty/sensex? How has this index performed in the last 1 year?

Ans: “Yes the answer is Bank nifty. Index for tracking how banking stocks are performing in India. It is also popular because of trading activity in its futures and options contract.

The bank nifty has been bullish and is up almost 35%. “
4. I feel market is going up(feeling bullish), I don’t know what stocks to buy, what will you advise me to buy? I am new to the markets( give me 3 different options)
Ans. Ideally, If I am new to the markets, your advise to me would be to firstly say don’t directly invest into stocks. Since I believe NIFTY is going up, the strategy should be : a). Buy NIFTY ETF(exchange traded funds), For eg similar to buying stocks you can buy nifty bees(an ETF on Nifty), if nifty goes up , nifty bees would go up and vice versa. It is safer because there is no individual stock risk. Blog on ETF: Buy a diversified mutual fund, because I am new to the markets it is better a qualified fund manager manages. c). You don’t want to let a new guy trade f&o, but you could suggest to buy nifty calls or buy nifty futures if he feels that nifty is going to go up. ” Trend is your friend” , buy if the trend is up and sell if the trend is down, don’t go against it.
5. I am your friend looking at investing into gold, suggest me a bunch of ideal ways to do this, just short one liners is good enough, don’t be descriptive. Start from the most ideal way to least..
Ans. a). e-Gold. Similar to how you buy stocks in demat format(electronic format), you can open a commodity demat account and buy gold in an electronic format. You can buy e-gold today only on NSEL(National Spot exchange limited). Zerodha is still not a member of this exchange. b). GOLD ETFs- Difference between gold ETF and e-gold is that in e-gold you buy gold directly in electronic format, but in gold ETF you buy into ETF(exchange traded funds) basically mutual funds which will in turn by gold. The disadvantage of this is that, because there is a mutual fund doing this for you, there will be management charges and also sometimes there can be something called a tracking error, basically a divergence between the way the gold prices actually move to what your gold ETF moves by. c). Gold Coins/Biscuits: Buy gold in physical form, the risk with this is that it can get stolen or get lost. This is a huge disadvantage compared to egold and gold etf, which can never be lost/stolen. Gold futures is not an ideal tool for investment, but yes it could be used to invest. By a far month gold future and keep rolling over the contract. But definitely no if it is a friend who is asking for it.. 🙂

6. What is STT? What is CTT? Who charges this? STT/CTT rates change effective today. What are the new rates and how do you think it will impact? Is there STT for currency trading??

Ans. STT is for security transaction tax and CTT for commodity transaction tax. In 2004 P Chidambaram for encouraging long term investment into stock markets waived off long term capital gain tax. So what this meant was that if you bought any stock and held for more than 1 year, whatever profit you made would be tax free. By doing the above, government would make a loss n terms of income tax collected and to make this up he introduced a tax called STT. So basically whenever you buy/sell stocks and derivatives on stocks(futures and options) you would have to pay this tax upfront. Taxes are usually paid on profits but this was a tax on transaction which can be called regressive. STT when introduced was 0.125% for equity delivery based, 0.025% on selling side for intraday equity trading and 0.017% for selling side turnover for futures and options. CTT was zero till 1st june 2013. There is presently no STT for currency trading. This year during the budget P chidambaram, reduced the STT by popular demand, but made up by introducing CTT to forego any revenue loss to the govt. So what changes effective today isSTT for futures trading reduces to 0.01% on selling sideCTT for commodity futures trading on non agri commodity(gold , silver , crude, copper, zinc etc) futures will be 0.01% on the selling side. STT remains the same for delivery based, intraday equity trading and also for options trading. With lower transaction tax we should see more volumes in stock/index futures and the higher transaction tax would lower volumes on commodity exchanges for non agri commodity.

7. What is margin required for trading options intraday and overnight? Answer for both buying options and writing options(selling options first is called writing)?

Ans. For buying options you need the entire premium amount and doesn’t matter if you are trading intraday or overnight. For writing/selling options, margin required varies based on the contract and the premium. Margin is similar to futures margin for an ATM(at the money) option and will increase/decrease based on if premium is more/less. We are among the only few brokers in the country to have a SPAN calculator which will tell you the exact margin requirement before taking a trade.

a) I bought and sold 1000 shares of Reliance for intraday at Rs 800 in 4 orders. I pay brokerage of 0.03% with sharekhan. How much brokerage did I pay? If I shift to Zerodha, how much will I save?

Ans. You bought and sold 1000 shares at Rs 800. Buying turnover: 800 *1000 = 8llks Selling turnover 800 *1000 = 8lks, 0.03% means Rs 30/lk brokerage( 0.01% is Rs 10/lk) , for 8lks Rs 240 , 240 +240 = Rs 480 is what you will pay at Sharekhan. At Zerodha you execute this in 4 orders, hence you pay only Rs 80. Saving : Rs 400

b) My brokerage is Rs 50/lot on options at Kotak. If I bought 20 lots once and sold 10 lots twice, how much brokerage do I pay?What is the savings at Zerodha?

Ans. Rs 50/lot , for 20 lots buying and 20 lots selling it is Rs1000 + Rs 1000 = Rs 2000, At Zerodha you bought 1 order, sold in 2 orders, so total 3 orders and hence brokerage of Rs 60 . Saving Rs 1940.

c) Nifty is at 6000 you bought and sold 4 lots of nifty futures at 6000. At 0.02% trading at Indiainfoline, how much brokerage did I pay? What is the savings at Zerodha?

Ans. at 6000 , 1 lot of nifty is 6000*50 = 3lks. If you bought 4lots, it means turnover of 12lks for buying and selling 12lks. at 0.02% is Rs 20/lk brokerage. So for 12 lks it is Rs 240 brokerage + Rs 240 brokerage for selling = Rs 480 brokerage. at Zerodha Rs 20 + Rs 20 = Rs 40. Saving Rs 440

8. We have been the pioneers of discount broking in India, but what do you think discount broking means? 1 line answer. If you had to sell me why discount broking works by referring to how it worked in the US, what will you say? 2 Lines

Ans. Discount broking: Online broking where we remove all the offline elements and because of the cost savings offer at discounted brokerage. Discount broking as a concept was introduced in the US in the late 90’s early 2000’s by brokers like etrade, ameritrade, zecco and today discount brokers contribute more than 85% of the broking business in US. What we have started at Zerodha is a model which has worked in developed markets and eventually India should follow the suit.

9. What is the form you are supposed to get from Zerodha at the end of the year which shows how much taxes deducted from your salary? Which ITR(income tax return form) do you need to use if you are only a salaried person while filing your taxes? Which ITR form do you need to use if you are salaried and also have done trades on futures and options?

Ans. a) Form 16 – Salary Certificate b) ITR 1 (Sahaj) c) ITR 4 if the turnover is greater than 1 Cr or if the turnover is less than 1CR and profit is less than 8% (books need to be audited), ITR 4S (Sugam) if Turnover is Less than 1 Cr and Profit should more than 8% of Turnover

10. Who is a member of an exchange and what is his role? Zerodha is a member of what exchanges? Can I have two trading accounts with the same member?

Ans. a) A person(individual/company) registered on the exchange to either trade for himself or to offer a trading platform for clients(retail/institutions) is called a member of an exchange. A member is sometimes also called a brokerage firm. So Zerodha is a member of NSE or you can say Zerodha is a brokerage firm on NSE, both mean the same. The role of a member is to basically propagate the idea of trading on the exchanges, introduce clients, help the economy grow and also earn revenue for the exchange and themselves. One thing that might be of interest to all of you is that stock exchange have been around for over 100 years, industries have come and gone, it was railway construction companies in the 40s, cement companies in 60’s, textile in 80’s , technology in 90’s, financial services in 2000’s, there are industries that have come and gone, but the business of stock exchange has always been around and will probably continue to do so. b) We are members of NSE, BSE, MCX-SX, MCX and NCDEXYes we are members on NCDEX also, we have still not started trading on this exchange because the contracts that trade on NCDEX are illiquid and volatile. c) No you cannot.

11. Name the 3 to 4 popular types of analysis that traders/investors use to decide on buying/selling stocks, futures, options or anything that trades.Explain each of it in 1 to 2 lines.

Ans. When you are trading the logic behind which makes you buy/sell is called as Analysis. This can be broadly divided into 4 typesa) Reading the Tape: Basically there is no analysis in this method. You develop a gut feeling and you bet money based on your gut feeling. Most of the people who trade in the market use this method and hence lose. b) Fundamental Analysis: You buy/sell based on fundamentals basically reports that measure the performance of a company or a country. Today the inflation numbers were lower than expected, because of this you expect RBI to lower rates, when RBI lowers rates, bank in turn lowers rates and if bank lowers rates there will be more people buying cars on loan. So you go and buy Tata motors stock, this is fundamental analysis. This is not a good way to trade for short term and also the problem with this is that if you trade short term based on reports/news, there will be someone who would have gotten access to this news much before you and hence the stock might have moved before the news. hence the saying in the markets buy on rumour – sell on news for short term trading. It might be a good way to invest into stocks. c) Technical Analysis: Where you look at charts and decide on buying/selling based on predetermined patterns. It is very similar to palmistry, you take bets based on success of a particular pattern based on how it has performed historically. There are many patterns and many tools used for this. d) Quantiative Analysis: It is a mathematical formulae that decides whether to take a trade or not. Still not a popular method in India, but probably the most used method of trading by hedge funds.

12. Are NRI’s allowed to trade on the markets? What are they allowed to trade and what not? What is the significance of PIS for NRI’s?

Ans. A) Yes they are and can trade on : Equity(delivery based only). They can’t trade on Currency, intraday equity or commodities. They can trade on f&O provided they have a custodian. Usually people who will have a custodian are HNI’s or institutions. Retail clients like the ones we at Zerodha interact to will typically not have a custodian and hence we will not allow them to trade futures and options also. B) Let me explain the process: a) NRI can open 2 types of bank accounts either NRE( Where he is allowed to take the money back to the foreign country from where he transfers) or NRO ( where once he transfers the funds from foreign bank, he cannot take the money back to the foreign bank account). b) Once the bank account is opened, the NRI will get an approval from RBI(reserve bank of India) to be able to invest into Indian markets. This approval process is done by the bank where he opens the NRE/NRO account. This once approved the client now gets a PIS(Portfolio Investment Scheme) letter from the bank. c) Using this PIS letter the client can open a trading/Demat account with any broker to trade only on equity delivery based. d) Usually with NRI trading delivery based, the funds to buy stocks will be sitting in the NRE/NRO bank account and not in the Zerodha Trading account. Zerodha will keep only a small amount of money in the trading account and not the entire amount. So if an NRI buys 100 share of Reliance for Rs 1000 (Rs 1lk worth), Zerodha will send a contract note to the NRE/NRO bank and the bank will then transfer the Rs 1lk to Zerodha. The reason we will keep only a small amount is to ensure that the client doesn’t default after buying the stocks and asking his bank to not transfer funds to Zerodha. The above process is what an NRI should ideally follow to firstly open an account and then trade.

13. If a friend asks you, Why does Zerodha charge flat brokerage fess of Rs 20? What would you say? What is this method of charging brokerage called?

Ans. In today’s online world, the cost of executing a trade for a broker doesn’t go up then why brokerage fees should go up. This method is called “Discount Brokerage”

14. Trading globally happens on 3 types of markets:
a). Equity
b). Commodity
c). Currency
Can you classify the above list in terms of turnover, from the highest to lowest? Also can you find out and let me know which bank/brokerage contributes to the highest amount of turnover to the above markets. ?

Ans. The order globally in terms of turnover is: a). Currencyb). Commodityc). Equity Typically currency markets(OTC, inter bank, currency on exchange etc) trades more than 50 times the turnover of the equity markets. Most traded is EURUSDCommodity market turnover is typically upto 10 times of the equity market turnover. Most traded GoldDeutsche Bank is the biggest contributor to turnover on currency markets and hence also the biggest broker in the world in terms of turnover contribution. In India as of today equity contributes the maximum turnover. The reason currency is not popular in India is firstly because we are allowed to trade only on Rs pairs, we cannot trade EURUSD and secondly because currency markets world over a 24hour market but in India it is open only between 9 to 5. Commodity exchanges in India started only in 2004 and hence yet to catch up with the popularity of the equity markets.

15. What are the top 5 and least 5 stocks on Nifty and Sensex in terms of % weightage and mention their weightage.

Ans. Top 5 1. TCS 8.94%2 ONGC 8.69%3. Reliance 8.50%4. ITC 8.29%5. Coal India 6.07%Bottom 51. Hindalco 0.61%2. Tata power 0.63%3. Jindal Steel 0.64%4. Sterlite Ind 0.85%5. Tata Steel 0.85%

16. What does rollover of a position mean? What does ban period on a scrip mean? Can a client rollover a position when the scrip is in ban period?

Ans. When you trade futures and options( equity, currency, commodity) you can either buy(long) or sell(Short). When you buy/sell in f&O, you have to choose a contract, for eg nifty futures presently has 3 series, June expiry, July expiry and August expiry. You can buy/sell nifty futures/options on any of the 3. All f&o contracts expire on the last thursday of the month, so assume you bought/sold June expiry and tomorrow 27th is the expiry(last thu of the month). So if you don’t do anything before 3.30pm tomorrow, the contract will expire. What if you want to continue holding this position you bought for another 5 days? You rollover the position, that is, you exit the june contract and enter July contract. a) Rolling over is basically exiting a present month f&o contract and entering the next month. So if you had bought June futures 10 days back, if anytime before expiry you sell june futures and buy july futures to ensure that you can continue holding the position, it is called rollover. Similarly in gold we have alternative month contracts. Today you can short(if you are feeling bearing, sell) either August futures or October futures. August futures expires on 5th Aug, but traders have to square the position 5 days before expiry(in gold) which is 30th July. Assume you short gold aug futures and anytime before 30th July, if you fell like you want to hold this position for a longer time, you can buy back Aug contract and sell October. This is again Rollover. b) In f&O, for every buyer there has to be a seller and hence we call it a contract. It is not like buying stock, where all of us can buy stock and if the stock price goes up everyone makes money. In f&o for every person making money, there is someone losing. In f&o, if I want to buy 1lot of reliance there has to be someone who is ready to sell. If i buy 1 lot( i am betting it will go up) and someone sells 1 lot(he is betting it will go down), this is 1 open contract also called Open interest. All stocks which trade on f&O, NSE has specified what the maximum open interest can be, which bascially means what is the maximum position that people together can take in that particular stock on f&O. Whenever the total open positions reach 95% of this maximum open interest set by the exchange, the exchange puts all f&o on this stock into ban period. That means no broker can let clients add positions, clients who have existing positions can exit only. This ban period will then be removed by the exchange only when the open interest comes down to 80% of the maximum limit set by the exchange.

17. Same stock can trade on various exchanges. For eg If infosys share price is Rs 2500 on NSE and Rs 2525 on BSE. Can you buy on NSE and sell it on BSE and make Rs 25 profit? If not why not? If you had to how would you be able to?

Ans. Firstly, No you cannot buy on NSE at 2500 and sell on BSE at 2525 immediately and make Rs 25 profit. The reason is when you buy on NSE, you will get the stocks into your demat on T+2 days, so if you bought on Monday, you will get the stock on wednesday. Since you have also sold on BSE at 2525, you will have to give the stock to the exchange the next day. But on Tuesday you don’t have any stocks, what you bought on NSE you will get only on Wedensday. Hence on tuesday you will default on giving the stocks and risk auction penalty. Therefore this cannot be done.
You can buy on NSE, wait till it comes to your demat or else wait till the next day(Buy today, sell tomorrow) and sell on BSE. But the risk here is that tomorrow, the stock price itself might come down and you could even make a loss.
If you are already holding Infosys stock in your demat account, yes you can sell it on BSE and buy it back on NSE immediately. You will conitnue to hold same number of infy stocks, but you would have made a profit.
It is not called as an arbitrage as a lot of you have said. In an arbitrage trade, there cannot be a directional risk. In the first 2 examples above, there is a risk of market coming down, when you have bought on NSE and waiting to sell on BSE. 3rd example is closest to being an arbitrage, because you already hold the stock and you see an arbitrage opportunity to make some money.

18. Why has the commodity trading turnover on the exchanges dropped by almost 40% in the last 10 days? MCX is a listed company on the stock exchanges, can you let me know the 52 week high and 52 week low? The stock price fell from 1200 to almost 800 just in March 2013, why so?

Ans. CTT(commodity transaction tax) got introduced on non agri commodities on July1st 2013. This has increased the cost of trading commodities quite a bit.
For eg 1lot of gold buy and sell can cost you a CTT of almost Rs300 which was zero before. 52 week High and Low: 1618 and 710, MCX which trades as a stock on the exchange.
CTT was introduced this budget last week of Feb and hence followed by fall in stock price in March.

19. a) Stocks as collateral?Ans. Many of our clients would have stocks which are sitting with them as investments. If they want to pledge this stock to get some money to trade, that is called as giving stocks as collateral.b) If you have 1lk of stocks?Ans. NSE has an approved list of stocks that can be taken as collateral, we need to first see if these stocks are approved. NSE also gives a haircut % for each of this. What a haircut signifies is the margin that will be given if that stock is pledged. So if a stock has a 20% haircut, it means that if you pledge 1lk of that stock, you will get margin of Rs 80,000.c) How do you pledge a stock?Ans. If client has opened a demat account with Zerodha, he will have to send an email asking to pledge his stocks. If client has demat account outside Zerodha, he can transfer shares to Zerodha Pool demat account and ask us to pledge.
In both the cases, the total cost for pledging and unpledging(once he doesn’t require the margin, he can ask us to unpledge and the stocks will be transferred to his demat account) is Rs 60 for every scrip(stock of a company he has, so if you have 100 shares of Infy to be pledged it will be Rs 60 to pledge/unpledge).
At Zerodha we will take a pledge only if the value of his stocks are more than Rs 50,000.d) Can I use this margin to trade equity/f&o/Currency/Commodity?Ans. The money you get by pledging the stock can be used only for trading futures and options and nothing else.e) Can I use the entire margin from the pledge to trade?Ans. At Zerodha 70% of the margin required to trade f&o can be used from the pledge and the rest 30% has to be in terms of cash. So if you have pledged stocks worth 1lk with haircut of 20%. You get 80,000 margin to trade. But if your cash balance in your trading account is 0, you cannot use this margin. If you want to trade in f&o positions worth 1lk, you need to bring 30% in cash( Rs 30,000 in cash) and you can use the rest 70,000 from the 80,000 margin you got because of the pledge.

The reason we ask the client to bring in cash is because if he makes a loss while trading, we can use the cash from his account to pay to the exchange. If he doesn’t have cash, we would be forced to sell the stocks which is given as pledge, which is not a good thing to do.

20. What is the difference between equity trading and stock/share trading? If you buy 100 shares of Reliance for Rs 800, explain me what is equity trading , what is stock/share trading or is it both the same?

Ans. Equity is the value of the stock you hold, but basically both mean the same, different way of saying the same. If you buy 100 shares of Reliance at Rs 800/share, Number of shares/Stock you hold is 100 , Equity: Rs 80000

21. 2 stocks one in the US context and another in India context which has made shareholders wealthy are Berkshire hathaway and Infosys. Berkshire Hathway is run by Warren Buffet, among the top 3 richest in the world.

a) Market cap of infosys during IPO was Rs 30 crore which is around 1,50,000 crores, increase of 5000 times. Stock price of Infy at IPO was Rs 95, so each each share today should have been worth 95 x 5000 = around Rs 5lk, but the stock price is only Rs 2500 why?
b) Berkshire hathway has also given similar returns over the last 30 years almost, the stock price of each share is around 1,60,000 dollars, almost Rs 1crore to buy 1 share of it. Why has stock price of this company not reduced like Infosys?
Ans. Usually when a stock price goes up companies split the stock or give bonus to reduce the price of the share.
For example if Stock A went from Rs1000/share to Rs10000/share, since the price is so high per share the number of small investors who can buy reduces. To make the share price more affordable the company will either split or give bonus.
So in the above example, if the company give 1: 10 bonus, tomorrow you will have 10 shares of Rs1000 instead of 1 share of Rs 10000.
The difference between bonus and stock split is that in a bonus issue the face value of the share doesn’t change, whereas in a split face value reduces. In India the face value of every share usually is Rs 10. So in the above case if we had a 1: 2 stock split, instead of 1 share you have 2 shares of Rs 5000 with face value of Rs 5 instead of 10.
So in the question I asked: if you had 100 shares of Infy in 1993,
1. in 1997 there would be a 1: 1 Bonus, so you would have 200 shares.
2. In 1999 there would have been another 1:1 Bonus, you would now have 400 shares
3. In 1999 there would be stock split, your face value reduces from 10 to 5, so you now have 800 shares
4. In 2000 another 1: 1 bonus, You now have 1600 shares
5. In 2004 3: 1 bonus, for every 3 shares 1 share , so you would now have around 2200 shares
6. In 2006 1: 1 bonus, now 4400 shares.
Along with this Infosys has kept giving dividends. This is the reason the stock is still at 2500. because your 100 shares would have become 4500 shares.
Berkshire Hathway on the other hand has never split or given bonus. It has paid dividend only once in the last 30 years, the reason for price to be so high of almost Rs 1crore/share.
I work as AVP - Sales at Zerodha and I coordinate with our business partners and associates, passionate about everything we do at Zerodha. Love life - traveling, music, gaming and humoring the people around me.

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