Cash Market – Where the buyer buys share and takes delivery immediately after making full payment for the same. E.g. You pay 2,500 Rs to buy one share of Infosys. If you sell shares in the cash market you are required to give delivery of the shares before the end of the settlement period (currently at 2nd working day after the day of trade – referred to as T+2 settlement). Shorting in cash – This refers to selling shares in the cash market without actually having the same shares in your demat account. If not squared off (bought back) before the day end, the shares need to be delivered and not meeting this commitment would result in the short seller to buy the shares in auction to give delivery to the buyer and over and above this, penalty and fines would be imposed (rate depending on your broker). Future Market – Where the parties contract to deliver the shares at a future date but the price is determined now. Buying or selling is permitted. So a person could actually sell shares in the futures market without owning them. One thing to be noted here is the margin concept. When buying or selling in futures, you are not required to pay the entire contract value, but only a percentage of it. This percentage varies from stock to stock and is lower for index as a whole. For Example for Satyam the margin would be 20% but for Nifty Futures the margin would be 10%. Thus by putting up part of the value, you are able to leverage the investment to gain a higher percentage of returns. Remember that the losses would also be of higher percentage (possibly could wipe out your capital also) Buying in Futures – This is a situation where you believe that the price of the stock would go up in future so you enter into a futures contract wherein you agrees to buy a lot of shares at a price that is determined now, but delivery of the shares to take place at a future date. E.g On 10-OCT-05 you buy 100 infosys October futures @ 2600 each. The futures expire on the last Thursday of the month (for October it is 27-OCT-05). On 27-OCT-05 if the price of Infosys is more than the contracted price (2600) you gain, but if the price of Infosys is less than the contracted price (2600) you loose. Shorting in Futures – This is a situation where you believe that the price of the stock would go down in future so you enter into a futures contract wherein you agrees to sell a lot of shares at a price that is determined now, but delivery of the shares to take place at a future date. E.g On 10-OCT-05 you sell 100 infosys October futures @ 2600 each. On 27-OCT-05 if the price of Infosys is less than the contracted price (2600) you gain, but if the price of Infosys is more than the contracted price (2600) you loose. Call Option - A Call Option gives an investor the right to purchase shares of stock at a pre-determined price. Investors who purchase Calls expect stock prices to rise in the coming months. It is different from Buying futures where you are obligated to buy the shares on the delivery date. In call option, you have an option to buy, but you are not obligated to do so. Put option - A Put gives an investor the right to sell shares of stock at a pre-set price. Investors purchasing Puts expect stock prices to decline. It is different from Selling futures where you are obligated to sell the shares on the delivery date. In call option, you have an option to sell, but you are not obligated to do so. Cost of carry – At any given point of time, the difference in the price of the stock in the cash market and the futures market is known as the cost of carry. For Example, Infosys is available in the cash market for 2600 but it is available in the futures market at 2650 the cost of carry is Rs. 50. Put/call ratio – As the name suggests, it is the ratio of the puts vs the calls that are open for a particular stock. Because investors who purchase Calls expect the market to rise and investors who purchase Puts expect the market to decline, the relationship between the number of Puts to Calls illustrates the bullish/bearish expectations of these investors. The higher the level of the P/C Ratio, the more bearish these investors are on the market. Conversely, lower readings indicate high Call volume and thus bullish expectations. The P/C Ratio is a contrarian indicator. When it reaches "excessive" levels, the market usually corrects by moving the opposite direction. Moving Averages (MA) – Is nothing but the average of the prices for a specified period. Fox example a 5 day MA would be calculated by totaling the prices of last 5 days and dividing it by 5 to get the 5 day average. Next day, replace the first days price and add the latest price to the numerator to arrive at that days 5 day MA. EMA – Exponential Moving Average Calculation – (Note that all charting softwares allow you to do this automatically). Just for the record of enthusiasts, EMA is calculated as below, EMA = (Pt * K) + (EMAyest * (1-K)) Where, Pt = Price Today, EMAyest = EMA of the stock yesterday, N = number of days of EMA. K = 2 / (N+1) Explaination of the calculation Choose N - the EMA length (say 10 days) Calculate K – Here it will be 2 / (10+1) = 0.18 Calculate MA for first 10 days – add 10 days closing prices and divide this by 10. On 11th day, multiply the closing price by K, multiply the previous days MA by (1-K) and add the two. The result is the 10 Day EMA Keep repeating step 4 in each subsequent day to obtain the latest 10 day EMA. EMA is used to identify trends. Traders use crossing of prices and EMA to identify buy and sell opportunities. The longer the trend you want to catch, the longer the EMA duration you need. MACD – Moving Average Convergence Divergence The MACD consists of two lines – a solid line (called the MACD line) and a dotted line (called the signal line). The MACD line is made up of two EMA’s. The signal line is made up of the MACD line smoothed with another EMA. MACD also has a histogram plotting to help identify trend strengths. Buy and sell signals are given on crossovers. To create MACD manually do the following, Calculate the 12 day EMA of closing prices. Calculate the 26 day EMA of closing prices. Subtract the 26 day EMA from the 12 day EMA and plot their differences as a solid line. This is the fast MACD line. Calculate the 9 day EMA of the MACD line and plot the result as a dotted line. This is the slower Signal Line. Subtract the signal line from the MACD line to obtain the histogram. ADX ADX consists of 3 lines +DI Line – is the portion of today’s range that is outside of the previous days range on the upside. -DI Line – is the portion of today’s range that is outside of the previous days range on the downside. The relationship between the two lines identifies trends. When +DI line is on top, it shows that the trend is up if not trend is down. Crossovers give buy and sell signals. ADX Line – ADX line measures the spread between the +DI and –DI lines. When ADX rises, it means that the market leaders are becoming stronger and losers are becoming weaker and this trend is likely to continue. RSI - Relative Strength Index RSI measures the strength of any stock by monitoring the change in its closing prices. It is a leading indicator and never a laggard. RSI = 100 – (100/1+RS) RS = Average of net up closing changes for a selected number of days divided by the Average of net down closing changes for a same number of days. Plot the RSI as a trendline. This can be used to identify divergences for trading. RSI always gives a value between 0 and 100. Above 70 RSI is considered to be in overbought zone and below 30 it is considered to be in oversold zone.