MindMap: Regulators and market participants

Regulators watches and regulates the fair environment for transactions of stocks through stock exchanges to ensure interests of the stocks and different market participants and shareholders

MindMap -asset class for investment

In this article, through mindmap, different asset class in which investment can be done is explained. Asset class are class of investment with particular risks and return traits and subjected to the same laws and regulations.

Investing in several different asset classes diversifies the portfolio reducing risk and increasing probability of making a return.Asset Allocation is allocating money in different asset classes to diversify investment.

Understanding asset class for investment

Basics of option trading

Trading on a contract that has an underlying asset and a strike price. Whenever we talk of a trade, there needs to be two players for trade to take place, Buyer and seller. 
A buyer buys the contract from the seller of the option contract at a price known as Premium. Before going into Premium, let us understand, what the different types of option are, i.e Put and call options. 

Buying a call option gives buyer the right to sell underlying asset at the specified strike price but no obligation to exercise the option. The counterparty though has obligation to sell underlying asset at the strike price. 

Since buyer do not have any obligation, the buyer has to pay the seller of the contract a fee or premium for the contract. 

The premium for an option contract depends on the following factors:

• Strike Price of the contract to the current market price.
• Volatility in the stock.
• Lot Size for the contract.
• Time to expiry.

Let us take an example. Suppose buyer A buys a contract of 8000 Call Option of nifty. Assuming current market price for nifty at 8000 and the lot size of contract is 75. It means the buyer is getting into contract to buy 75 shares of the underlying assets. Suppose the expiry date( the date by which the contract will expire) is one month ahead, It means contract will expire after one month. 

Let us suppose, the current premium is Rs 100. the buyer has to pay 75*100 = 7500 as the premium to buy the contract. 

The premium is approximately equal to intrinsic value (based on difference between the current price and the strike price)+ time value( decreases as time approaches expiry) + other factors value (e.g volatility , higher the volatility ,more is the premium). 

Based on the current price and the strike price for the contract, a contract is said to in-the money, at the money and out of money contract money. 

An option contract can be exercised anytime before the expiry of the contract. Below are few key points to be considered before buying a contract:

• In case, you are bullish on a stock, buy a call option on the stock. 
• In case, you are bearish on a stock, buy a put option on the stock.
• An option can be exercised or position can be squared off(taking opposite direction) anytime before the expiry. 
• Similar to liquidity in stock, buy stocks which are liquid enough to be squared off.
• Higher the volatility, higher is the premium price.