Options Trading Tutorial: Free Education Video

Options are derivative instruments used for both hedging and speculative purposes. 

By definition an option is a legal contract in which the writer (seller) of the contract grants to the buyer, the right to purchase from or sell to the writer a designated instrument or a scrip at a specified price within a specified period of time. 

The right to purchase a specified stock is called the Call option, while the right to sell a specified stock is called Put option. 

There exist many option strategies (tactics), which involves different combination of Calls and Puts, for hedging as well as speculation. Some of such strategies are Bull Call Spread, Bear Call Spread, Call Backspread, Covered Call, The Collar etc.

The following Options Strategies Course is designed to show how options work as a tool for hedging positions and how they can be used for speculative purposes.

Stock Market in a Nutshell: A Graphical Summary

Stocks and Stock Markets in one view

Market Cap to GDP Ratio: U.S Stock Markets Valuation Technique

Warren Buffett once said that the percentage of total market cap (TMC) to the United States GNP is probably the best measure of where valuations stand at any given moment.

In the past forty years U.S Stock Market history, the TMC to GNP ratio has varied within a very wide range. The ratio was lowest at 0.35 times in the previous deep recession of 1982, while the highest point was 1.48 during the tech bubble in 2000. As a rule of thumb we can broadly divide the market valuation in the five bands based on past records:

Ratio < 0.5 - Significantly Undervalued

0.5 < Ratio < 0.75 - Modestly Undervalued

0.75 < Ratio < 0.90 - Fair Valued

0.90 < Ratio < 1.15 - Modestly Overvalued

Ratio > 1.15 - Significantly Ovdrvalued

As on 13th March 2012 the ratio is 0.96 which suggest that US stock markets are moderately overvalued. Hence investors should cautiously select stocks which are undervalued and provide good yields.

Income Tax Saving Options / Instruments in India : 2012

With financial year FY 2011 - 2012 ending soon, tax savings is usually a big headache. Where to invest, how much is the return and other questions boggles our mind. Hence InvestorZclub has compiled a list of instruments which would help you in knowing the products that can save you tax and generate good returns on your investments

Employee Provident Fund: EPF (80 C)

As pet IT Act 80C, EPF scheme offers a total yearly exemption of INR 1 lakh. In this fund, 10 % to 12 % of a person's basic salary gets deducted and the other 12 % is contributed by the employer.

Average returns: 9.5%

Maturity period: One can withdraw the entire amount in instances of leaving job, retirement after 58 years of age or taking VRS. Partial withdrawal can be done for home, medical related expenses.

Public Provident Fund : PPF (80 C)

PPF is also a tax saving option that falls within the Section 80 C of the Income Tax Act in India. However the maximum amount that one can deposit in a single year is 70,000.

Average returns: 8.6% compounded annually

Maturity period: 15 years

National Savings Certificate : NSC (80 C)

NSC scheme falls under the Section 80 C of the IT Act of India. Annual interest earned is deemed to be reinvested and qualifies for tax rebate for first 5 years. The scheme is available at Banks, post office or any broker.

Average returns: 8% compounded half yearly

Maturity period: Usually 5-10 years.

Equity Linked Savings Schemes : ELSS (80 C)

ELSS is a mutual funds that help you save taxes under Section 80C as well as generate equity based returns. ELSS is similar to a typical equity MF scheme. It has the potential to deliver good returns and at the same time save tax.

Average returns: Based on Market performance

Maturity period: Lock in period of only three years but one can remain invested for long.

Unit-linked Insurance Plans : ULIPs (80 C)

ULIP is a unique blend of investment and insurance and is eligible for 80C benefits. The premium, which is being paid by a customer, gets deducted with initial charges while the rest of the amount is invested. Aggressive ULIPs invests 80 % to 100 % in equities. The rest is invested in debt instruments. Under balanced ULIPs an individual can invest 40 % to 60 % in equities while conservative ULIPs allows one to invest up to 20 % in equities

Average returns: As per market situation

Lock-in period: 5 years

Tax Saving Deposits (80 C)

Investment up to Rs 1 lakh in these special tax saving bank fixed deposits also entails an investor tax deduction under Section 80C. Interest income taxability upon maturity.

Average returns: 9-9.5% annually. Rate of interest varies from one bank or post office to another.

Lock-in period: 5 years

Infrastructure Bonds (80 CCF)

Over and above the deduction allowed by the Section 80 C, one can save income tax on a maximum amount of Rs 20, 000, by investing in different infrastructure bonds under the Section 80 CCF of the Indian I-T Act. L&T, REC, IDFC are some of the large issuers of infrastructure bonds

Maximum deduction: Rs 20,000

Average returns: The rate of interest  varies from 8 % to 8.7%.

Maturity period: 5 to 10 years.

Life Insurance Premium (80 C)

Any premium payable by an investor to provide cover to his life is eligible for deduction under Section 80C.

Average returns: 6-7% annual in a typical endowment policy. However term policies do not provide any return, as they are meant for cover only.

Maturity period: Length of policy.

Health Insurance Premium (80 D)

Under section 80 D of the country's Income Tax Act. these policies offers a maximum deduction of Rs 35, 000. This deduction is calculated in addition to any other tax saving done as per the Section 80 C.

List of Stock Market based Movies: Must Watch for Traders and Investors

I have seen lot of stock market based movies sometimes for learning and sometimes for the sheer adrenalin rush. I particularly like following movies and would recommend investors and traders to see them as they not only provide good learning but also boils your blood and keep you on which is very essential in stock markets.

Margin Call (2011) : A taut, sinewy drama set in a Wall Street investment bank. 

Wall Street (1987) : The classic Wall street film. You will love Michael Douglas' character Gordan Gekko

Wall Street - Money never sleeps (2010) : Wall Street part 2. A sequel to the 1987 popular movie “Wall Street”.

Trader (1987) : A very brilliant movie. Story about Paul Tudor Jones and his day-to-day life as an active investor.

Pursuit of Happiness (2006) : A very touching movie based on the real life of Chris Gardner. Will Smith is as brilliant as ever.

Rogue Trader (1999) : British version of "Wall Street". 

Enron- The smartest guys in the room (2005) : Tale of Enron's rise and fall. One of the best documentaries ever made.

Quants - The Alchemists of Wall Street (2010) : A short but excellent documentary on quantitative analysts on Wall Street.

Tips to succeed in equity investing: 4 Mantras to remember

We all know that the way to make returns higher than inflation is to invest in equities directly or indirectly. This helps investor grow their capital much faster and will help beat inflation inspite of sharp periods of decline. Direct equity investment involves buying and holding of shares of stock on a stock market by individuals and funds in anticipation of income from dividends and capital gain as the value of the stock rises.

If one remembers following points while investing in equities the chances of doing blunders reduces substantially.

1. Select stocks based on the company's performance

Collect historical data of the company in which you are planning to invest in and check their profit graph. They should be a minimum cap of around at least 20 - 25% on the returns from the capital invested by its shareholders.

Checking long term helps you assess the true value of the company while a shorter term of 6 months could just be a reflection of market mood rather than the solid foundation the company is based upon.

2. Strike the right balance and stick to it

- It is essential to take a very disciplined approach towards your stock plannhng.

- Be prepared to stumble over unexpected bumps when you start out or for that matter be prepared to be surprised from time to time as the volatility of the market is such.

- The best results await those who participate in the long drawn out game that last well over a number of years to the tune of 10-12 years to be precise.

- Strike a balance with your stocks, don’t accumulate too many and then again don’t invest in too little. A moderate diversification should be the key factor in striking this balance, i.e. perhaps say about 15 should be a good way to diversify for someone who wishes to stay invested in the long term.

- Understand the companies you are invested in and also keep a tab of the trading volumes of a particular stock purchased. This will help you estimate the percentage of active participation in that stock and is also a test of its liquidity quotient.

- Have a secure allocation plan in place, consult the experts and avoid temptation to buy too much into one single company.

3. Monitor and consistently evaluate the investments

Be in touch with every change that happens with regards to your stocks. During the lean times there might be good opportunities thrown up for the grabbing. Don’t lose sight of those if it makes investment sense for you. Figure out how you buy low at such points in time.

Keep track of the stock worth in order to determine if key elements that prompted you to buy the stocks in the first place are still secure in place or if your earlier expectations have been undermined. Keep track of the prices on your finance worksheet and subject them to a quarterly and yearly review. This will help you reassess and reallocate according your current risk capacity.

4. Errors are an individual’s portals of discovery

Your experience with stocks may be a mixed bag of both good and bad. Store away good pointers from the things that worked for you and learn from the bad experiences in perfecting your investment skills. Begin the exciting journey of making your every penny count!

Impact of Interest Rate on GDP

The Reserve Bank of India (RBI) has hiked repo rates by 375 bps since March, 2010 to curb inflation primarily by reducing demand in the system. Consequently inflation has got moderated, but such a massive increase in rates over short span of time has affected the economic growth significantly.

There is an interesting co-relation between GDP growth and repo rate hikes. Repo is the rate at which banks borrow from the RBI to meet their liquidity requirement. Currently, it is at 8.25%.

GDP growth is inversely proportional to repo rates, as can be seen from the chart below. When we compare the repo rate with the GDP growth in the period between Q4FY10 and Q2FY12, whenever there was a policy rate hike, GDP growth dropped.