An assurance of returns and capital is always preferred in an economy so volatile like India.
For risk-averse investors who prefer to invest in assured return schemes, fixed income securities are 'core' investments. Senior citizens too typically need an investment avenue which offers assured returns at regular intervals. Also safety (of capital and interest) is a priority.

Furthermore in FD programs, a preference to senior citizens in higher rates regime adds to the lure and in lower rates regime still make them feel comfortable and stable.

Highlights

• Interest is set in advance or variable and paid regularly or cumulative
• Paying interest on bonds is a higher priority for companies than paying dividends on shares
• The value of a bond in the open market may go up or down
• The bond issuer may default on interest payment or be unable to make the final repayment
• The bond market may be difficult to understand

If fixed income securities are your calling, then they should find place in your portfolio. Investors would do well by investing in line with their risk profiles.

For example, if you are a risk-averse investor, don't be tempted to invest in equities to capitalize on the Bull Run (if someone tells you that equities are not risky, don't believe him!).

Secondly, even investors with an appetite for high risk avenues should consider investing in fixed deposits from a diversification perspective. The higher interest rates on offer only make fixed deposits a more lucrative option.

However, after being stripped of tax benefits (Section 80L was scrapped in the last budget), FD investments may prove to be relatively unattractive for investors in the higher tax brackets.

Where should you invest?

1. Short-term instruments: Investors shouldn't lock-in their investments for longer time frames. The same might prevent them from benefiting from any further hike in fixed deposit rates. Hence fixed deposits of relatively shorter time frames should be chosen.
   
   
2. Variable rate instruments: Variable rate deposits enable investors to capitalize on a future hike in interest rates. The rate of interest on these deposits is reset in line with a benchmark rate. Hence a degree of flexibility is incorporated in the fixed deposit's earning potential.

Investors should consider investing in fixed income securities with ‘Sovereign’, 'AAA' or equivalent rating. The same is indicative of a high level of safety - something a risk-averse investor could really do with.

Various options are there for an investor.

1. Post Office Small Savings: TD, SCSS, MIS, RD, KVP, NSC
2. Fixed Deposit: Public and Private Banks, Mfg. Company, NBFC, HFC
3. Bonds: ZCB, Tax Saving, Regular Income, Capital Gain Relief
4. Debentures: Non Convertible, Convertible
5. Mutual Funds: FMP

 

3 step execution process

• Call us or Mail us or Download Application Form
• Fill up or call us for an assistance
• Send us the duly filled application form along with the cheque/DD by post or courier or call us for a pick up

The client would be offered following different execution models

Fee Based Model

1. Financial Plan: Indicating required savings to meet desired goals in required Asset Allocation
2. Mailers and Messages: Updating with current market trends, indices and informing about available new or concurrent schemes
3. Periodic Reports: Showing current status of the executed plan on regular intervals or on demand* (*Charges apply)
4. Annual Review by the advisor: Restructuring the plan if required

Charges

• First Meeting chargeable on hourly basis.
• Following charges shall be discussed on case to case basis.

 

Commission Based Model

1. Mailers and Messages: Updating with current market trends, indices and informing about available new or concurrent schemes
2. Periodic Reports: Showing current status on regular intervals or on demand* (*Charges apply)

Charges

• First Meeting: Nil
• Following charges: Nil

Declaration

What is personal budget planning?
Personal budget planning starts with making a list of what your income is every month, and what you spend you money on every month. To make a personal budget you will need a piece of paper, or a computer.

How do I make a personal budget?
To make a personal budget, first write down everything you spend money on each month. Most people remember their rent payment, but often forget the newspaper they buy on their way to work each morning.

We recommend that you carry a small notepad with you every day, and write down everything you spend money on, including newspapers, lunch, magazines, and your morning coffee. It will help you make your budget as accurate as possible and your personal budget planning more effective.
By writing down everything you spend money on, you will have a complete list of all of your expenses, which will make it easier to create your budget.

What does a budget look like?
To see how a personal budget look like, download a sample budget format (requires Excel 4.0 or higher).

There are many books you can buy on personal budget planning, but at SERNET, we recommend that you keep it simple: To make a personal budget that you will actually use, at the top of the page write down what you bring home each month. Then list everything you spend money on.

Now that you are familiar with basics on personal budget planning and know how to make a personal budget, we recommend you to create one for yourself and then do some personal budget analysis.

Mutual Fund is the most suitable asset class for any investor category as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low and shared cost.

A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal.

Highlights

• Professional management for security, steady growth and required diversification
• Benefit from easy liquidity
• Wide variety of options available
• Tax Benefits
• Well regulated by government agencies

The money thus collected is then invested in different markets and related instruments such as Stocks, Debentures, Real Estate, Commodities, Forex and other securities. The income earned through these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them.

Types of Mutual Fund Schemes

Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position, risk tolerance and return expectations etc. The table below gives an overview into the existing types of schemes in the Industry.

Recommended approach:

 

Risk Vs Return Relationship:

• Market Risk: Sometimes prices and yields of all securities rise and fall. Broad outside influences affecting the market in general lead to this. This is true, may it be big corporations or smaller mid-sized companies. This is known as Market Risk. A Systematic Investment Plan (“SIP”) that works on the concept of Rupee Cost Averaging (“RCA”) might help mitigate this risk.
  
  
• Credit Risk: The debt servicing ability (may it be interest payments or repayment of principal) of a company through its cashflows determines the Credit Risk faced by you. This credit risk is measured by independent rating agencies like CRISIL who rate companies and their paper. A ‘AAA’ rating is considered the safest whereas a ‘D’ rating is considered poor credit quality. A well-diversified portfolio might help mitigate this risk.
  
  
• Inflation Risk: Things you hear people talk about:“Rs. 100 today is worth more than Rs. 100 tomorrow.” “Remember the time when a bus ride costed 50 paise?” “Mehangai Ka Jamana Hai.” The root cause, Inflation. Inflation is the loss of purchasing power over time. A lot of times people make conservative investment decisions to protect their capital but end up with a sum of money that can buy less than what the principal could at the time of the investment. This happens when inflation grows faster than the return on your investment. A well-diversified portfolio with some investment in equities might help mitigate this risk.
  
  
• Interest Rate Risk: In a free market economy interest rates are difficult if not impossible to predict. Changes in interest rates affect the prices of bonds as well as equities. If interest rates rise the prices of bonds fall and vice versa. Equity might be negatively affected as well in a rising interest rate environment. A well-diversified portfolio might help mitigate this risk.
  
  
• Political/Government Policy Risk: Changes in government policy and political decision can change the investment environment. They can create a favorable environment for investment or vice versa.
  
  
• Liquidity Risk: Liquidity risk arises when it becomes difficult to sell the securities that one has purchased. Liquidity Risk can be partly mitigated by diversification, staggering of maturities as well as internal risk controls that lean towards purchase of liquid securities.

DO’S

• Read the offer document carefully before investing.
• Note that investments in Mutual Funds may be risky.
• Mention your bank account number in the application form.
• Invest in a scheme depending upon your investment objective and risk appetite.
• Note that Net Asset Value of a scheme is subject to change depending upon market conditions.
• Insist for a copy of the offer document/key information memorandum before investing.
• Note that past performance of a scheme is not indicative of future performance.
• Past performance of a scheme may or may not be sustained in future.
• Keep track of the Net Asset Value of a scheme, where you have invested, on a regular basis.
• Ensure that you receive an account statement for the money that you have invested.
• Update yourself on the performance of the scheme on a regular basis.

DON’TS

• Do not invest in a scheme just because somebody is offering you a commission or other incentive, gifts etc.
• Do not get carried away by the name of the scheme/Mutual Fund.
• Do not fall prey to promises of unrealistic returns.
• Do not forget to take note of risks involved in the investment.
• Do not hesitate to approach concerned persons and then the appropriate authorities for any problem.
• Do not deal with any agent/broker dealer who is not registered with Association of Mutual Funds in India (AMFI).

Mutual Fund investment decisions require consistent effort on the part of the investor. Before investing in Mutual Funds, the following steps must be given due weight age to decide on the right type of scheme:

Choosing a Mutual Fund Scheme:

1. Identifying the Investment Objective: You should clearly lay down the purpose for which you desire to invest. You should also define the tenure of investment and the risk appetite you have.
   
   
2. Selecting the right Scheme Category: Thereafter, you can select a fund type that best meets your need i.e. income schemes, liquid schemes, tax saving schemes, equity schemes etc.
   
   

   Investment Objective	Investment horizon	Ideal Instruments
   Short-term Investment	1- 6 months	Liquid/Short-term plans
   Capital Appreciation	Over 3 years	Diversified Equity/ Balanced Funds
   Regular Income	Flexible	Monthly Income Plans / Income Funds
   Tax Saving	3 yrs lock-in	Equity-Linked Saving Schemes (ELSS)

   
   
3. Selecting the right Mutual Fund: Given the plethora of fund options available to you, you can then choose the particular fund that you are comfortable with. You can choose the fund on various criteria but primarily these can be the following:
   
   
   • The track record of performance of schemes over the last few years managed by the fund
   • Quality of management and administration
   • Parentage of the Mutual Fund
   • Quality and adequacy of disclosures
   • Service levels
   • The price at which you can enter/exit (i.e. entry load / exit load) the scheme and its impact on overall return
   • The market price of the units of the scheme (where available) to see the discount/premium that the market assigns to the stated NAV of the scheme
   • Independent rating of the schemes, if available
     
     
4. Evaluating the Portfolio: Evaluation of equity fund involve analysis of risk and return, volatility, expense ratio, fund manager’s style of investment, portfolio diversification, fund manager’s experience. Good equity fund should provide consistent returns over a period of time. Also expense ratio should be within the prescribed limits. These days fund house charge around 2.50% as management fees.
   
   Evaluation of bond funds involve it's assets allocation analysis, return's consistency, it’s rating profile, maturity profile, and it’s performance over a period of time. The bond fund with ideal mix of corporate debt and gilt fund should be selected.

   1. Calculation of Applicable NAV and No. of units purchased:
   (a) Amount of Investment = Rs. 10,000
   (b) Market NAV = Rs. 10
   (c) Entry Load = 2% = Rs. 0.20
   (d) Applicable NAV (Purchase Price) = (b) + (c) = Rs. 10.20
   (e) Actual Units Purchased = (a) / (d) = 980.392 units
   
   2. Calculation of NAV at the time of Sale
   (a) NAV at the time of Sale = Rs 20
   (b) Exit Load = 0.5% or Rs.0.10
   (c) Applicable NAV = (a) – (b) = Rs. 19.90
   
   3. Returns/Growth on Mutual Funds
   (a) Applicable NAV at the time of Redemption = Rs. 19.90
   (b) Applicable NAV at the time of Purchase = Rs. 10.20
   (c) Growth/ Returns on Investment = {(a) – (b)/(b) * 100} = 95.30 %

Advantages:

• Professional Management
• Diversification
• Convenient Administration
• Return Potential
• Low Costs
• Liquidity
• Transparency
• Flexibility
• Choice of schemes
• Tax benefits
• Well regulated

The client would be offered following different execution models

Fee Based Model

1. Financial Plan: Indicating required savings to meet desired goals in required Asset Allocation
2. Mailers and Messages: Updating with current market trends, indices and informing about available new or concurrent schemes
3. Periodic Reports: Showing current status of the executed plan on regular intervals or on demand* (*Charges apply)
4. Annual Review by the advisor: Restructuring the plan if required

Charges

• First Meeting chargeable on hourly basis.
• Following charges shall be discussed on case to case basis.

Commission Based Model

1. Mailers and Messages: Updating with current market trends, indices and informing about available new or concurrent schemes
2. Periodic Reports: Showing current status on regular intervals or on demand* (*Charges apply)

Charges

• First Meeting: Nil
• Following charges: Nil

Declaration

Introduction
Different investment avenues are available to investors. Mutual funds also offer good investment opportunities to the investors. Like all investments, they also carry certain risks. The investors should compare the risks and expected yields after adjustment of tax on various instruments while taking investment decisions. The investors may seek advice from experts and consultants including agents and distributors of mutual funds schemes while making investment decisions.

With an objective to make the investors aware of functioning of mutual funds, an attempt has been made to provide information in question-answer format which may help the investors in taking investment decisions.

What is a Mutual Fund?

Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document.

Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with quantum of money invested by them. Investors of mutual fund are known as unitholders.

The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time. A mutual fund is required to be registered with Securities and Exchange Board of India (SEBI) which regulates securities markets before it can collect funds from the public.

What is the history of Mutual Funds in India and role of SEBI in mutual funds industry?

Unit Trust of India was the first mutual fund set up in India in the year 1963. In early 1990s, Government allowed public sector banks and institutions to set up mutual funds.

In the year 1992, Securities and Exchange Board of India (SEBI) Act was passed. The objectives of SEBI are – to protect the interest of investors in securities and to
Promote the development of and to regulate the securities market.

As far as mutual funds are concerned, SEBI formulates policies and regulates the mutual funds to protect the interest of the investors. SEBI notified regulations for the

mutual funds in 1993. Thereafter, mutual funds sponsored by private sector entities were allowed to enter the capital market. The regulations were fully revised in 1996 and have been amended thereafter from time to time. SEBI has also issued guidelines to the mutual funds from time to time to protect the interests of investors.

All mutual funds whether promoted by public sector or private sector entities including those promoted by foreign entities are governed by the same set of Regulations. There is no distinction in regulatory requirements for these mutual funds and all are subject to monitoring and inspections by SEBI. The risks associated with the schemes launched by the mutual funds sponsored by these entities are of similar type. It may be mentioned here that Unit Trust of India (UTI) is not registered with SEBI as a mutual fund (as on January 15, 2002).

How is a mutual fund set up?
A Mutual fund is set up in the form of a trust, which has sponsor, trustees, asset management company (AMC) and custodian. The trust is established by a sponsor or more than one sponsor who is like promoter of a company. The trustees of a mutual fund hold its property for the benefit of the unitholders. Asset management Company (AMC) approved by SEBI manages the funds by making investments in various types of securities. Custodian, who is registered with SEBI, holds the securities of various schemes of the fun in its custody. The trustees are vested with the general power of superintendence and direction over AMC. They monitor the performance and compliance of SEBI Regulations by the mutual fund.

SEBI Regulations require that at least two thirds of the directors of trustee company or board of trustees must be independent i.e. they should not be associated with the sponsors. Also, 50% of the directors of AMC must be independent. All mutual funds are required to be registered with SEBI before they launch any scheme. However, Unit Trust of India (UTI) is not registered with SEBI (as on January 15, 2002).

What is Net Asset Value (NAV) of a scheme?
The performance of a particular scheme of a mutual fund is denoted by Net Asset Value (NAV).

Mutual funds invest the money collected from the investors in securities markets. In simple words, Net Asset Value is the market value of the securities held by the scheme. Since market value of securities changes every day. NAV of a scheme also varies on day to day basis. The NAV per unit is the market value of securities of a scheme divided by the total number of units of the scheme on any particular date. For example, if the market value of securities of a mutual fund scheme is Rs. 200 lakhs and the mutual fund has issued 10 lakhs units of Rs. 10 each to the investors, then the NAV per unit of the fund is Rs. 20. NAV is required to be disclosed by the mutual funds on a regular basis – daily or weekly – depending on the type of scheme.

What are the different types of mutual fund schemes?
Schemes according to Maturity Period:
A mutual fund scheme can be classified into open-ended scheme or close-ended scheme depending on its maturity period.

Open-ended Fund/Scheme
An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis. The key feature of open-end schemes is liquidity.

Close-ended Fund/Scheme
A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase facility or through listing on stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis.

Schemes according to investment Objective:
A scheme can also be classified as growth scheme, income scheme, or balanced scheme considering its investment objective. Such schemes may be open-ended or close-ended schemes as described earlier. Such schemes may be classified mainly as follows:

Growth/Equity Oriented Scheme
The aim of growth funds is to provide capital appreciation over the medium to long-term. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. The investors must indicate the option in the application form. The mutual funds also allow the investors to change the options at a later date. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time.

Income/Debt Oriented Scheme
The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed incomes securities such as bonds, corporate debentures, Government securities and money market instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However, long term investors may not bother about these fluctuations.

Balanced Fund
The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40-60% in equity and debt instruments. These funds are also affected because of fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds.

Money Market or Liquid Fund
These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and interbank call money, government securities, etc. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods.

Gilt Fund
These funds invest exclusively in government securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or debt oriented schemes.

Index Funds
Index funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc. These schemes invest in the securities in the same weightage comprising of an index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors known as “tracking error” in technical terms. Necessary disclosures in this regard are made in the offer document of the mutual fund scheme.

There are also exchange traded index funds launched by the mutual funds which are traded on the stock exchanges.

What are sector specific funds/schemes?
These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents. E.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may give higher returns, they are more risky compared to diversified funds. Investors need to keep a watch on the performance of those sectors/industries and must exit at an appropriate time. They may also seek advice of an expert.

What are Tax Saving Schemes?
These schemes offer tax rebates to the investors under specific provisions of the Income Tax Act, 1961 as the Government offers tax incentives for investment in specified avenues. E.g. Equity Linked Savings Schemes (ELSS). Pension schemes launched by the mutual funds also offer tax benefits. These schemes are growth oriented and invest pre-dominantly in equities. Their growth opportunities and risks associated are like any equity-oriented scheme.

What is a Load or no-load Fund?
A Load Fund is one that charges a percentage of NAV for entry or exit. That is, each time one buys or sells units in the fund, a charge will be payable. This charge is used by the mutual fund for marketing and distribution expenses. Suppose the NAV per unit is Rs. 10. If the entry as well as exit load charged is 1%, then the investors who buy would be required to pay Rs. 10.10 and those who offer their units for repurchase to the mutual fund will get only Rs. 9.90 per unit. The investors should take the loads into consideration while making investment as these affect their yields/returns. However, the investors should also consider the performance track record and service standards of the mutual fund which are more important. Efficient funds may give higher returns in spite of loads.

A no-load fund is one that does not charge for entry or exit. It means the investors can enter the fund/scheme at NAV and no additional charges are payable on purchase or sale of units.

Can a mutual fund impose fresh load or increase the load beyond the level mentioned in the offer documents?
Mutual funds cannot increase the load beyond the level mentioned in the offer document. Any change in the load will be applicable only to prospective investments and not to the original investments. In case of imposition of fresh loads or increase in existing loads, the mutual funds are required to amend their offer documents so that the new investors are aware of loads at the time of investments.

What is a sale or repurchase/redemption price?
The price or NAV a unitholder is charged while investing in an open-ended scheme is called sales price. It may include sales load, if applicable.

Repurchase or redemption price is the price or NAV at which an open-ended scheme purchase or redeems its units from the unitholders. It may include exit load, if applicable.

What is an assured return scheme?
Assured return schemes are those schemes that assure a specific return to the unitholders irrespective of performance of the scheme.

A scheme cannot promise returns unless such returns are fully guaranteed by the sponsor or AMC and this is required to be disclosed in the offer document.

Investors should carefully read the offer document whether return is assured for the entire period of the scheme or only for a certain period. Some schemes assure returns one year at a time and they review and change it at the beginning of the next year.

Can a mutual fund change the asset allocation while deploying funds of investors?
Considering the market trends, any prudent fund managers can change the asset allocation i.e. he can invest higher or lower percentage of the fund in equity or debt instruments compared to what is disclosed in the offer document. It can be done on a short term basis on defensive consideration i.e. to protect the NAV. Hence the fund managers are allowed certain flexibility in altering the asset allocation considering  the interest of the investors. In case the mutual fund wants to change the asset allocation on a permanent basis, they are required to inform the unitholders and giving them option to exit the scheme at prevailing NAV without any load.

How to invest in a scheme of a mutual fund?
Mutual funds normally come out with an advertisement in newspapers publishing the date of launch of the new schemes. Investors can also contact the agents and distributors of mutual funds who are spread all over the country for necessary information and application forms. Forms can be deposited with mutual funds through the agents and distributors who provide such services. Now a days, the post offices and banks also distribute the units of mutual funds. However, the investors may please note that the mutual funds schemes being marketed by banks and post offices should not be taken as their own schemes and no assurance of returns is given by them. The only role of banks and post offices is to help in distribution of mutual funds schemes to the investors.

Investors should not be carried away by commission/gifts given by agents/distributors for investing in a particular scheme. On the other hand they must consider the track record of the mutual fund and should take objective decisions.

Can non-resident Indians (NRIs) invest in mutual funds?
Yes, non-resident Indians can also invest in mutual funds. Necessary details in this respect are given in the offer documents of the schemes.

How much should one invest in debt or equity oriented schemes?
An investor should take into account his risk taking capacity, age factor, financial position, etc. As already mentioned, the schemes invest in different type of securities as disclosed in the offer documents and offer different returns and risks. Investors may also consult financial experts before taking decisions. Agents and distributors may also help in this regard.

How to fill up the application form of a mutual fund scheme?
An investor must mention clearly his name, address, number of units applied for and such other information as required in the application form. He must give his bank account number so as to avoid any fraudulent encashment of any cheque/draft issued by the mutual fund at a later date for the purpose of dividend or repurchase. Any changes in the address, bank account number, etc at a later date should be informed to the mutual fund immediately.

What should an investor look into an offer document?
An abridged offer document, which contains very useful information, is required to be given to the prospective investor by the mutual fund. The application form for subscription to a scheme is an integral part of the offer document. SEBI has prescribed minimum disclosures in the offer document. An investor, before investing in a scheme, should carefully read the offer document. Due care must be given to portions relating to main features of the scheme, risk factors, initial issue expenses and recurring expenses to be charged to the scheme, entry or exit loads, sponsor’s track record, educational qualification and work experience of key personnel by the mutual fund in the past, pending litigations and penalties imposed, etc.

When will investor get certificate or statement of account after investing in a mutual fund?
Mutual funds are required to dispatch certificates or statements of accounts within six weeks from the date of closure of the initial subscription of the scheme. In case of close-ended schemes, the investors would get either a demat account statement or unit certificates as these are traded in the stock exchanges. In case of open-ended schemes, a statement of account is issued by the mutual fund within 30 days from the date of closure of initial public offer of the scheme. The procedure of repurchase is mentioned in the offer document.

How long will it take for transfer of units after purchase from stock markets in case of close-ended schemes?
According to SEBI Regulations, transfer of units is required to be done within thirty days from the date of lodgment of certificates with the mutual fund.

As a unitholder, how much time will it take to receive dividends/repurchase proceeds?
A mutual fund is required to dispatch to the unitholders the dividend warrants within 30 days of the declaration of the dividend and the redemption or repurchase proceeds within 10 working days from the date of redemption or repurchase request made by the unitholder.

In case of failures to dispatch the redemption/repurchase proceeds within the stipulated time period, Asset Management Company is liable to pay interest as specified by SEBI from time to time (15% at present).

Can a mutual fund change the nature of the scheme from the one specified in the offer document?
Yes. However, no change in the nature or terms of the scheme, known as fundamental attributes of the scheme e.g. structure, investment pattern, etc. can be carried out unless a written communication is sent to each unitholder and an advertisement is given in one English daily having nationwide circulation and in a newspaper published in a language of the region where the head office of the mutual fund is situated. The unitholders have the right to exit the scheme at the prevailing NAV without any exit load if they do not want to continue with the scheme. The mutual funds are also required to follow similar procedure while converting the scheme from close-ended to open-ended scheme and in case of change in sponsor.

How will an investor come to know about the changes, if any, which may occur in the mutual fund?
There may be changes from time to time in a mutual fund. The mutual funds are required to inform any material changes to their unitholders. Apart from it, many mutual funds send quarterly newsletters to their investors.

At present, offer documents are required to be revised and updated at least once in two years. In the meantime, new investors are informed about the material changes by way of addendum to the offer document till the time offer document is revised and reprinted.

How to know the performance of a mutual fund scheme?
The performance of a scheme is reflected in its net asset value (NAV) which is disclosed on daily basis in case of open-ended schemes and on weekly basis in case of close-ended schemes. The NAVs of mutual funds are required to be published in newspapers. The NAVs are also available on the web sites of mutual funds. All mutual funds are also required to put their NAVs on the web sites of Association of Mutual Funds in India (AMFI) www.amfiindia.com and thus the investors can access NAVs of all mutual funds at one place. The mutual funds are also required to publish their performance in the form of half-yearly results which also include their returns/yields over a period of time i.e. last six months, 1 year, 3 years, 5 years and since inception of schemes. Investors can also look into other details like percentage of expenses of total assets as these have an affect on the yield and other useful information in the same half-yearly format.

The mutual funds are also required to send annual report or abridged annual report to the unitholders at the end of the year.

Various studies on mutual fund schemes including yields of different schemes are being published by the financial newspapers on a weekly basis. Apart from these, many research agencies also publish research reports on performance of mutual funds including the ranking of various schemes in terms of their performance. Investors should study these reports and keep themselves informed about the performance of various schemes of different mutual funds.

Investors can compare the performance of their schemes with those of other mutual funds under the same category. They can also compare the performance of equity oriented schemes with the benchmarks like BSE Sensitive Index, S&P CNX Nifty, etc.

On the basis of performance of the mutual funds, the investors should decide when to enter or exit from a mutual fund scheme.

How to know where the mutual fund scheme has invested money mobilised from the investors?
The mutual funds are required to disclose full portfolios of all of their scheme on half-yearly basis which are published in the newspapers. Some mutual funds send the portfolios to their unitholders.

The scheme portfolio shows investment made in each security i.e. equity, debentures, money market instruments, government securities, etc. and their quantity, market value and % to NAV. These portfolio statements also required to disclose illiquid securities in the portfolio, investment made in rated and unrated debt securities, non-performing assets (NPAs), etc.

Is there any difference between investing in a mutual fund and in an initial public offering (IPO) of a company?
Yes, there is a difference. IPOs of companies may open at lower or higher price than the issue price depending on market sentiment and perception of investors. However, in the case of mutual funds, the par value of the units may not rise or fall immediately after allotment. A mutual fund scheme takes some time to make investment in securities. NAV of the scheme depends on the value of securities in which the funds have been deployed.

If schemes in the same category of different mutual funds are available, should one choose a scheme with lower NAV?
Some of the investors have the tendency to prefer a scheme that is available at lower NAV compared to the one available at higher NAV. Sometimes, they prefer a new scheme which is issuing units at RS. 10 whereas the existing schemes in the same category are available at much higher NAVs. Investors may please note that in case of mutual funds schemes, lower or higher NAVs of similar type schemes of different mutual funds have no relevance. On the other hand, investors should choose a scheme based on its merit considering performance track record of the mutual fund, service standards, professional management, etc. This is explained in an example given below.

Suppose scheme A is available at a NAV of Rs. 15 and another scheme B at Rs. 90. Both schemes are diversified equity oriented schemes. Investor has put Rs. 9,000 in each of the two schemes. He would get 600 units (9000/15) in scheme A and 100 units (9000/90) in scheme B. Assuming that the markets go up by 10 per cent and both the schemes perform equally good and it is reflected in their NAVs. NAV of scheme A would go up to Rs. 16.50 and that of scheme B to Rs. 99. Thus, the market value of investments would be Rs. 9,900 (600*16.50) in scheme A and it would be the same amount of Rs. 9900 in scheme B (100*99). The investor would get the same return of 10% on his investment in each of the schemes. Thus, lower or higher NAV of the schemes and allotment of higher or lower number of units within the amount an investor is willing to invest, should not be the factors for making investment decision. Likewise, if a new equity oriented scheme is being offered at Rs. 10 and an existing scheme is available for Rs. 90, should not be a factor for decision making by the investor. Similar is the case with income or debt-oriented schemes.

On the other hand, it is likely that the better managed scheme with higher NAV may give higher returns compared to a scheme which is available at lower NAV but is not managed efficiently. Similar is the case of fall in NAVs. Efficiently managed scheme at higher NAV may not fall as much as inefficiently managed scheme with lower NAV. Therefore, the investor should give more weightage to the professional management of a scheme instead of lower NAV of any scheme. He may get much higher number of units at lower NAV, but the scheme may not give higher returns if it is not managed efficiently.

How to choose a scheme for investment from a number of schemes available?
As already mentioned, the investors must read the offer document of the mutual fund scheme very carefully. They may also look into the past track record of performance of the scheme or other schemes of the same mutual fund. They may also compare the performance with other schemes having similar investment objectives. Though past performance of a scheme is not an indicator of its future performance and good performance in the past may or may not be sustained in the future, this is one of the important factors for making investment decision. In case of debt oriented schemes, apart from looking into past returns, the investors should also see the quality of debt instruments which is reflected in their rating. A scheme with lower rate of return but having investments in better rated instruments may be safer. Similarly, in equities schemes also, investors may look for quality of portfolio. They may also seek advice of experts.

Are the companies having names like mutual benefit the same as mutual funds scheme?
Investors should not assume some companies having the name “Mutual benefit” as mutual funds. These companies do not come under the purview of SEBI. On the other hand, mutual funds can mobilize funds from the investors by launching schemes only after getting registered with SEBI as mutual funds.

Is the higher net worth of the sponsor a guarantee for better returns?
In the offer document of any mutual fund scheme, financial performance including the net worth of the sponsor for a period of three years is required to be given. The only purpose is that the investors should know the track record of the company which has sponsored the mutual fund. However, higher net worth of the sponsor does not mean that the scheme would give better returns or the sponsor would compensate in case the NAV falls.

Where can an investor look out for information on mutual funds?
Almost all the mutual funds have their own web sites. Investors can also access the NAVs, half-yearly results and portfolios of all mutual funds at the web site of Association of Mutual Fund in India (AMFI) www.amfiindia.com AMFI has also published useful literature for the investors.

Investors can log on to the web site of SEBI www.sebi.gov.in and go to “Mutual Funds” section for information on SEBI regulations and guidelines, data on mutual funds, draft offer documents filed by mutual funds, addresses of mutual funds, etc. Also, in the annual reports of SEBI available on the web site, a lot of information on mutual funds is given.

There are a number of other web sites which give a lot of information of various schemes of mutual funds including yields over a period of time. Many newspapers also publish useful information on mutual funds on daily and weekly basis. Investors may approach their agents and distributors to guide them in this regard.

If mutual fund scheme is wound up, what happens to money invested?
In case of winding up of a scheme, the mutual funds pay a sum based on prevailing NAV after adjustment of expenses. Unitholders are entitled to receive a report on winding up from the mutual funds which gives all necessary details.

How can the investors redress their complaints?
Investors would find the name of contact person in the offer document of the mutual fund scheme whom they may approach in case of any query, complaints or grievances. Trustees of a mutual fund monitor the activities of the mutual fund. The names of the directors of asset management company and trustees are also given in the offer documents. Investors can also approach SEBI for redressal of their complaints. On receipt of complaints, SEBI takes up the matter with the concerned mutual fund and follows up with them till the matter is resolved. Investors may send their complaints to;

Securities and Exchange Board of India
Mutual Funds Department
Mittal Court ‘B’ wing, First Floor,
224, Nariman Point,
Mumbai – 400 021.
Phone: 2850451-56, 2880962-70

Account statement A physical document, similar to a bank account statement, representing the mutual fund units owned. Issued to the unit holder every time he/she carries out a transaction.

Annual report Unabridged financial results that comprise historical per unit statistics and complete portfolio of schemes of a mutual fund for a certain period. It is sent to unit holders once in a year.

Appreciation An increase in an investment’s value.

Asset allocation The process of diversifying investments among different types of assets like stocks, bonds and cash in order to optimize risk / return tradeoff based on a person’s financial situation and goals. Read more on asset allocation

Asset class Different types of investments such as stocks, bonds, real estate and cash.

Asset management company A firm that invests the pooled funds of retail investors in securities in line with the stated investment objectives. For a fee, the investment company provides more diversification, liquidity, and professional management service than is normally available to individual investors.

Asset-backed security A debt instrument backed by loan paper or accounts receivable from banks, companies or other providers of credit.

Assets An item of value owned by an individual or an organization. It could be stocks, cash, house or a car.

Automatic investment plan Periodic investment of a fixed amount by a unit holder, either directly from his bank account or by issuing post-dated cheque, in his mutual fund account. It allows the investor to benefit from rupee-cost averaging.

Automatic withdrawal plan Allows an investor to receive periodic payments of fixed amount or units from his investment in a mutual fund scheme. Retirees who want a regular income supplement often choose this.

Average portfolio maturity The average maturity of all the bonds in a bond fund’s portfolio.

Back-end/ redemption load One of two possible sales charges imposed by funds that charge fees. Redemption load is a charge an investor pays when units are redeemed or sold back to the fund. It sometimes depends on how long the investment is held -- generally the longer the time period, the smaller the charge.

Balanced scheme A mutual fund scheme with an investment objective of both long-term growth and income, through investment in stocks and bonds. Typically, the stock-bond ratio ranges around 60%-40% in an effort to obtain the highest returns consistent with a low risk strategy.

Basis point (bp) The smallest measure used in quoting yields on fixed income securities. One basis point is one percent of one percent, or 0.01%.

Bear market A prolonged period of falling securities prices in a stock market.

Benchmark A standard used for comparison. Usually to provide a point of reference for evaluating a fund's performance. The common benchmarks for equity-oriented funds are the bse 200 index or the bse sensex.

Bond A debt security, or an iou, issued by a company or government agency. A bond investor lends money to the issuer and, in exchange, the issuer promises to repay the loan amount on a specified maturity date; the issuer usually pays the bondholder periodic interest payments over the period of the loan.

Bond scheme A scheme that invests primarily in bonds with the general emphasis on income over growth.

Bottom-up An investment strategy that first seeks individual companies with attractive investment potential, and then considers the economic and industry trends affecting those companies.

Bull market A prolonged rise in the price of stocks, bonds or commodities characterized by high trading volumes.

Call risk The risk that bonds will be redeemed (or "called") before maturity. This possibility increases during periods of falling interest rates.

Capital appreciation An increase in the value of an investment, measured by the increase in a fund unit's value from the time of purchase to the time of redemption.

Capital gain The amount by which an investment’s selling price exceeds its purchase price.

Capital market A market where debt or equity securities are traded.

Contingent deferred sales charge (cdsc) A type of back-end sales load charged when shares are redeemed within a specific period following their purchase. Usually assessed on a sliding scale, these charges reduce; the longer the units are held.

Closed-end scheme A mutual fund scheme that offers a limited number of units, which have a lock-in period, usually of three to five years. Elss schemes are closed-ended schemes. The units of closed-end funds are often listed on one of the major stock exchanges and traded like securities at prices, which may be higher or lower than its net asset value.

Commercial paper Debt instruments issued by corporations to meet their short-term financing needs. Such instruments are unsecured and have maturities ranging from 15 to 365 days.

Commission A fee charged by a broker or distributor for his/her service in facilitating a transaction.

Compound interest Interest earned not only on the initially invested principal but also on accumulated interest during the period.

Coupon Interest rate on a debt security that the issuer promises to pay to the holder until maturity. Usually expressed as a percentage of the face value of the security.

Credit rating A measure of a bond issuer's creditworthiness or the ability to repay the loan as rated by an independent rating agency, such as crisil, icra and care.

Credit risk The possibility that a bond issuer will default, and fail to repay principal or interest as promised. Also known as "default risk."

Cumulative quantitative discount (cqd) Cumulative quantitative discount (cqd) is discount on sales load to investors on increasing purchase of units.

Currency risk The possibility that fluctuating currency exchange rates will affect the rupee value of an investment.

Custodian the organization (usually a bank) that keeps and safeguards the custody of securities and other assets of a fund

Depreciation a decline in an investment's value.

Distribution the payment of dividends to unit holders by a mutual fund.

Diversification the strategy of spreading investments among different securities to reduce risk. By nature, mutual funds are a diversified investment.

Dividend profits, stock dividends or interest income, which funds distribute to its unit holders.

Dividend reinvestment A unit holder service that allows dividend distributions to be reinvested automatically to purchase more fund units.

Equity schemes A scheme that invests primarily in stocks while seeking to provide relatively high long-term growth of capital.

Ex-dividend date The date following the record date for a scheme. When a fund's net asset value reduces by an amount equal to a dividend distribution.

Expense ratio A fund's operating expenses, expressed as a percentage of its average net assets.

Family of schemes A set of schemes with different investment objectives from a single asset management company usually allowing investors to switch their investments from one scheme to another at a no charge or a nominal charge.

Fixed income security A security that pays a fixed rate of interest such as a bond but do not offer an investor much potential for growth.

Front-end load A one-time charges that an investor pays at the time of buying units of a scheme.

Fully invested The investment of nearly all available assets in securities as per the stated objective of the scheme and having no cash or cash equivalents in one’s portfolio.

Fund manager The individual responsible for making portfolio decisions for a mutual fund.

Growth An investment objective of equity funds, which seek to provide capital gains, rather than dividend income.

Growth investing An investment style that seeks stocks with the belief they will go up in price, regardless of the stock's current price relative to its underlying value. Often discussed in contrast to value investing

Historical yield Yield provided by a scheme, typically a money market fund, over a specific time period.

Inception date The date when a scheme’s initial offering period ends and the scheme’s formation takes place.

Income /debt scheme A scheme that invests primarily in fixed income securities. Typically, income schemes seek to provide current income rather than growth of capital.

Index A benchmark against which the performance of a scheme is measured. Usually, equity funds use bse 30 or bse 200 as the benchmark. For fixed-income funds it is a bond index. The benchmark index must consist of securities similar to which the scheme invests in.

Index fund A fund that tries to mirror the performance of an index by investing in securities making up that index. (note: it is not possible for investors to actually invest in the actual index, such as the bse 30).

Inflation risk The possibility that the value of assets or income will be eroded by inflation affecting the purchasing power of a currency. Often mentioned in relation to fixed income funds as while they may minimize the possibility of losing principal, they expose an investor to inflation risk.

Initial public offer (ipo) The first sale of units of a scheme by a mutual fund to the public. Usually, for a fixed time period.

Investment grade High quality bonds that are rated aaa or higher by a rating agency. Investment grade bonds are considered safe. However, the higher the bond's rating, the lower the interest it offers.

Investment objective A scheme’s investment goal. Say, a growth scheme typically has an investment objective of providing long-term growth of capital.

Load A one-time sales charge paid by an investor while buying or selling units of a scheme. Typically, there are two types of loads front-end, charged at the time of purchase and back-end, charged at the time of redemption.

Liquidity The ease with which an investment can be converted into cash or cash equivalents. Mutual fund units are generally considered highly liquid investments as they can be sold on any business day at their current net asset value

Management fee The amount a scheme pays to its asset management company for its services. Typically, a certain percentage of assets under management. A fund's management fee is listed in its offer document.

Market timing Attempting to time the purchase and sale of securities or mutual fund units to coincide with market conditions.

Maturity date The date on which the principal amount of a bond is to be paid in full.
Minimum purchase The smallest investment amount a scheme will accept to open a new unit holder account.

Money market fund A fund that invests in the short-term, high-grade securities sold in the money market including government securities, treasury bills, certificates of deposit, and commercial paper.

Mutual fund An investment company through which an investor can pool his money with other investors who have a similar objective. Professional investment managers, then invest the pool in securities, which in their judgment will help investors achieve their objective. Mutual funds offer the benefits of portfolio diversification (which provides greater safety and reduced volatility), professional management, liquidity and convenience.

Net asset value (nav) The market value of a mutual fund unit. It is calculated daily by taking the funds total assets, securities, cash and any accrued earnings, deducting liabilities, and dividing the remainder by the number of units outstanding.

Net assets The net worth of a fund.

No load fund A fund that sells its units to investors without a sales load/charge.

Offer document / prospectus A legal document that describes a mutual fund scheme. It contains information required by the securities and exchange board of india explaining the offer, including the terms, issuer, objectives, historical financial statements, and other information that could help an individual decide whether the investment is appropriate for him.

Open-ended scheme A scheme where investors can buy and redeem their units on any business day. Its units are not listed on any stock exchange but are bought from and sold to the mutual fund.

Operating expenses The day-today costs a mutual fund incurs in conducting business, such as for maintaining offices, staff, and equipment. These expenses are paid from the fund's assets before any earnings are distributed.

Performance A measure of how well a fund is doing. Typically, mutual fund performance measures are yield (for dividends) and total return (which measures dividends plus changes in net asset value). Increase in the net asset value (nav)

Portfolio A collection of securities owned by a mutual fund. A fund's portfolio may include a combination of stocks, bonds, and money market securities.

Portfolio manager The individual responsible for managing a mutual fund's portfolio.

Portfolio turnover The rate of trading activity in a fund's portfolio of investments. In other words, how often securities are bought and sold.

Principal The original amount initially invested, exclusive of earnings.

Public offer price The price at which an investor can buy units of a mutual fund scheme. It includes the current net asset value plus any sales load.

Real return The rate return earned on an investment after adjusting for the rate of inflation.

Record date The date on which a unit holder must officially own a scheme's units in order to receive declared dividend

Redeem To cash in units by selling them back to the mutual fund.

Redemption price The price at which a mutual fund’s units are redeemed, or bought back, by the fund. It is usually the current net asset value per unit less exit load if any.

Reinstatement privilege A facility which allows unit holders who have redeemed units, and then wish to reinvest, to reinvest without paying the sales load. There is generally a 30-day time limit for this service.

Rollover A movement of funds from one investment to another, often similar, investment. Typically used when securities are maturing.

Rupee cost averaging An investment strategy that involves investing a fixed amount in a scheme at regular intervals - say, monthly or quarterly. As a result, more fund units are bought when prices are low than at high prices, usually bringing down an investor's average cost per share over time.

Sector fund A fund that invests primarily in securities of companies engaged in a specific industry. Sector funds entail more risk, but may offer greater potential returns than funds that diversify their portfolios.

Settlement date The date by which a transaction must be settled, that is, to make the payment of funds and the delivery of securities.

Standard deviation A measure of the degree to which a fund's return varies from the average of the scheme’s own return.

Stock fund A fund that invests primarily in stocks.

Switching The movement of investment from one scheme to another usually within the family of schemes. An investor may switch schemes because of market conditions.

Top down An investment method that first defines major economic and industry trends, and then identifies specific companies that is likely to benefit from those trends.

Total return A fund's performance that takes into account: income from dividends and unit price appreciation/depreciation over a time period.

Transfer The process of changing ownership of a unit holder account within the same scheme.

Transfer agent A firm employed by a mutual fund to maintain unit holder records, including purchases, sales, and account balances.

Treasury bill (t-bill) A debt security issued by the indian government, having a maturity of less than a year

Turnover rate Based on the corpus, it is the number of times at which the fund buys and sells securities each year.

Unit holder An investor, owning units of a mutual fund.

Unrealized gain or loss Increase or decrease in the prices of securities held by the fund.

Value investing The investment approach which favors buying under priced stocks that have the potential to perform well and increase in price.

Volatility The rate by which the price of a security fluctuates in changing market conditions.
Withdrawal plan

Year to date (ytd) A period in a calendar year starting january 1 of that year and ending on that date.

Yield The annual rate of return on an investment usually expressed as a percentage.

Yield curve A graph depicting yields vis-à-vis maturity. If short-term rates are lower than long-term rates, it is a positive yield curve, if short-term rates are higher; it is a negative or inverted yield curve. If there is isn’t much difference, it is a flat yield curve.

Portfolio Management Services (PMS) is a sophisticated investment vehicle that offers a range of specialised investment strategies to capitalise on opportunities in different markets.

Portfolio management service (PMS) is different from asset management companies. There is a world of a difference between PMS offered by banks and other investment advisors.

This service varies from pure mutual fund portfolios, direct investment in stocks and/or a combination of both. The only similarity between PMS and mutual funds is that the actual investment decisions and stock selection are made by a fund manager. It is not necessary that PMS will offer better returns than mutual funds or vice versa.

1. Types of PMS
   •  Discretionary
   •  Non Discretionary
   
   
2. Participation in PMS through
   •  AMC
   •  Brokers
   •  Financial Institutions
   •  Private Equity Fund
   •  Venture Finance Companies
   
   
3. Expected returns from an equity in form of
   •  Dividend
   •  Bonus
   •  Capital Appreciation
   
   
4. Costs of investing in equity:
   •  Broking Charges
   •  Demat charges
   •  Profit Sharing
   •  Securities Transaction Tax (STT)
   
   
5. Service Tax

Highlights

• PMS is a customised structured investment vehicle primarily targeted for HNI’s
• PMS returns may or may not be same as direct exposure or MF investments
• Limited/Unlimited liability

PMS offers personalised service and customised portfolio solutions. However, at Rs 10 or 20 lakh, the level of personalisation offered will not be significant. Further, your money will be invested in a common strategy pool with that of many other investors.

One of the features that go against PMS is that unlike mutual funds, it does not come under the purview of the Securities and Exchange Board of India (SEBI). Besides, the cost structure of PMS is very high. You also need to be cautious of the past performance indicators quoted by financial advisors.

These are often quoted over convenient periods. However, in case of mutual funds, performance indicators are available in the public domain.

There are various risks that companies are exposed to and when you invest in equity, your returns are affected by these risks. These are

1. Business risk: The risks associated with the prosperity of a business and the demand for its products
2. Financial risk: The skill with which a company’s finances are managed to ensure that it has an optimum level of debt, equity, reserves, etc.
3. Industry risk: Changes in technology, regulations, fashions, etc., affect the performance of an industry
4. Management risk: The level of corporate governance, management skills and vision
5. Political, Economic and Exchange rate risk: These factors affect a company but are outside its control.
6. Market risk: The risk that the market will collapse, or that you have invested at the peak

Do’s

• Transact only through SEBI registered PMS manager
• Complete all the required formalities of opening an account properly
• Ask for and sign “Know Your Client Agreement”.
• Read and properly understand the risks associated with investing in securities / derivatives before undertaking transactions.
• Ask all relevant questions and clear your doubts with your manager before transacting.
• Verify all details in given report, immediately on receipt.
• Keep copies of all your investment documentation.
• Pay the margins required to be paid in the time prescribed.
• Be aware of your rights and responsibilities.
• In case of complaints approach the right authorities for redressal in a timely manner

Don’ts

• Don’t undertake off-market transactions in securities.
• Don’t deal with unregistered intermediaries.
• Don’t fall prey to promises of unrealistic returns.
• Don’t forget to take note of risks involved in the investment.
• Don’t try to time the market.

Making the right financial decisions is harder than ever right now. Finding the time to manage investments effectively and keep up with everything that is going on in the world of investing can be difficult in today's fast-moving markets.

Investing in any high risk instrument could be profitable but tough to achieve without the necessary skills, information and presence in the market.

Investing in PMS: However, the amount of equity that you hold in your portfolio is a very subjective decision and will depend upon various factors.

• Personal Factors
  Identify Objective
  Identify your Risk Profile
  Identify your strategy and customisation in selected assets class
  
  
• Fundamentals
  Know the manager’s capital adequacy
  Know the management
  Know manager’s past performance
  
  
• Technical
  Check out technical position of the stock
  Analyse the price target

Before you start investing in PMS, you need to open the following accounts:

• A PMS account with a registered entity
• A demat account with a depository participant
• A bank account for cash payments and receipts

Costs of investing in PMS:                                                 

• Broking Charges: You will have to pay a nominal one-time account opening fee and brokerage charges for every purchase and sale transaction undertaken.
  
  
• Demat charges: These are charges levied for maintaining your demat account. These charges include periodical charges for maintenance of the account, transaction charges (for each debit and credit of shares for sales and purchases respectively) and other incidental charges.
  
  
• Payment of Securities Transaction Tax (STT): Investing in PMS involves paying of Securities Transaction Tax (STT) while buying as well as selling securities. Presently, STT rates are:
  
  
  • STT rate applicable while buying shares for delivery: 0.125    
  • STT rate applicable while selling shares for delivery: 0.125
  • STT rate applicable while trading in shares: 0.025
    
    
• Payment of Service Tax (ST) and Education Cess: Service Tax (ST) and Education Cess (EC) are payable as a percentage of brokerage due to the broker. ST and EC together are presently levied at the rate of 12.24 per cent.
  
  
• Profit Sharing: One has to shell out profit sharing as well above all expenses listed. It ranges from 5% to 25% of profits made depending on the strategy and customisation selected.

Advantages:

• Personalised Advice: Get investment advice and strategies from expert Fund Managers
• Professional Management: Money management services that work for you
• Continuous Monitoring: You are always informed about your investment decisions
• Hassle Free Operation: High standards of service and complete portfolio transparency

Equity markets have over time given returns far higher than inflation, but choice of correct securities is not easy. Realizing this and the fact that the risk profile of each individual and corporation varies, tailor made solutions are provided for investments in different markets.

The client would be offered following different execution models

Fee Based Model

1. Financial Plan: Indicating required savings to meet desired goals in required Asset Allocation
2. Mailers and Messages: Updating with current market trends, indices and informing about available new or concurrent schemes
3. Periodic Reports: Showing current status of the executed plan on regular intervals or on demand* (*Charges apply)
4. Annual Review by the advisor: Restructuring the plan if required

Charges

• First Meeting chargeable on hourly basis.
• Following charges shall be discussed on case to case basis.

Commission Based Model

1. Mailers and Messages: Updating with current market trends, indices and informing about available new or concurrent schemes
2. Periodic Reports: Showing current status on regular intervals or on demand* (*Charges apply)

Charges

• First Meeting: Nil
• Following charges: Nil

Declaration

• SERNET is not a registered Portfolio Manager
• SERNET is a registered PMS intermediary who can advise and execute your funds with your desired Portfolio Manager and assist you in getting executed your required customisation in a best possible way.

1. What is the difference between a discretionary and a non-discretionary Portfolio Management Services?
The discretionary portfolio manager will independently manage the funds of each client in accordance with the needs of the client. The non-discretionary portfolio manager will provide advisory services enabling the client to take decision with regards to his portfolio.

2. How can I introduce my initial corpus?
Initial corpus can be brought into the Portfolio Management Service by way of either Cash and/or securities. The initial portfolio of securities will be re-aligned as per the model.

3. Do you guarantee the initial corpus and any ‘return’ thereon?
Returns cannot be guranteed as per regulations governing Portfolio Management Services in India. However our objective is to out perform the benchmark indices. We believe, over long term, Equity performance will track corporate performance. Therefore historical trends indicate that well managed portfolio in Indian equities can yield 15-18% p.a. returns. (based on market trends & discretion of portfolio manage).

4. Is there a maximum limit for investing in the Portfolio Management Service?
There is no upper limit on the amount you can invest in the PMS.

5. What is the time horizon?
The ideal time horizon for a equity portfolio is at least 12-18 months.

6. Does the Portfolio Management Service have any lock-in period?
There is no lock-in period. You can exit/redeem at any point of time.

7. How can I check the NAV positions and transactions?
You can check your portfolio anytime by logging on to our website www.angeltrade.com. & then click on PMS link. You will also get a monthly statement of transactions & holdings.

8. Is the payment upfront?
Yes

9 .How will I receive the Contract Notes?
We don’t issue contract notes but a detailed statement of accounts will be emailed at the end of each month. We will also sent Physical copy of the same every quarter.

10. Are there different forms for different funds?
No, the same form can be used for any scheme..

11. What amount will be compulsorily invested at any given time?
The fund manager will decide on the amount of investment according to the market conditions.

12. Can I specify investments that I prefer to hold?
No. The discretion to invest primarily lies with the Portfolio Manager with the objective to maximize your returns.

13. In whose name investment will be made?
All investments will be made in the name of the scheme.

14. What is the paperwork and documentation needed to open a PMS account?
Documents required:
Account Opening Form
The Risk Disclosure
Address Proof
Identity proof
Pan card copy
Bank statements

15. Do I need to have Permanent Account Number?
Yes

16. What is the Fee Structure for PMS?
Fee Structure:
Asset Management Fess: 2.0% pa
Brokerage: 0.5% per transaction
Management fees are chargeable on daily average NAV at the end of each quarter or
on withdrawal of funds, whichever is earlier.

17. Can I withdraw my profit any time?
Yes, you can withdraw your profit as & when you want, provided you maintain the minimum ticket size.

18. What if I terminate from the PMS before one year?
You can terminate from PMS at any time; charges as agreed would be applicable.

19. How safe are my securities under the Portfolio Management Service?
Angel broking is a depository participant with Central Depository Services Limited (CDSL). This ensures complete safety in operations. Stock ownership always rests with the client.

20. What are the tax implications of investments in PMS?
Under the PMS each transaction scheme will be considered as an independent trade and capital gains will be applied on each depending upon whether the relevant stock was held long term or short term. Presently 10% tax is chargeable for Short Term Capital gains and no tax is chargeable on Long Term Capital Gains. The STT charges will also apply.

21. How will I know my tax status?
We expect all clients to consult their tax consultant before investing into any form of securities. At Angel Broking, we annually provide each client an audited tax statement of his portfolio. This can be used for filing returns.

22. Can a NRI avail of the Portfolio Management Service?
The PMS is open for all Indian nationals, resident or otherwise. NRIs will have to open a PIS Account in order to invest in the PMS scheme.

23. What is PIS?
In order to invest in the Secondary Markets in India, NRIs need to obtain RBI permission. In order to do so, a Bank account with a designated bank has to be opened under Portfolio Investment Scheme (PIS) and all the transactions related to the investment in secondary markets need to be routed through this account.

24. What would the Portfolio Manager do in case of falling markets?

To begin with we will assess the situation on two parameters
Whether the fall is a mere correction
Signal of reversal of trend
Based on our assessment of the fall, we will accordingly decide on the necessary course of action. In the first instance, depending on the anticipated extent of the correction, we may increase the percentage of cash in the portfolio. Since our focus is always to invest in those companies which are available at an attractive valuation, we believe that in the long term, any stock will always seek its fair valuation which is unaffected by corrections in the market. If however, we see signs of a trend reversal; our focus may change to increasing the cash component and restrict investments to defensive sectors which have low beta relative to the markets.

25. What are the advantages of investing in PMS vis a vis Mutual Fund?
You have greater control over the asset allocation, whereas it is automatic in MF. The portfolio can be customized to suit your risk- return profile.
The Portfolio manager has relatively greater flexibility to move in and out of cash as and when required depending on the market view.
Typically, charges are lower and more transparent in PMS vis-à-vis a Mutual Fund. Holdings not impacted by entry/exit of big investors.

26. Do you charge any entry or exit load akin to a Mutual Fund?
We do not charge any entry or exit load.

Funds brought into a business by its shareholders are called equity. It is a measure of a stake of a person or group of persons starting a business.

Equity is a share in the ownership of a company. It represents a claim on the company’s assets and earnings. As you acquire more stock, your ownership stake in the company increases

The terms share, equity and stock mean the same thing and can be used interchangeably.

Participation in equity through

1. IPO – Primary Market
2. Rights
3. Preference
4. Private Placement
5. Secondary market

Expected returns from an equity in form of

1. Dividend
2. Bonus
3. Capital Appreciation

Costs of investing in equity:

1. Broking Charges
2. Demat charges
3. Securities Transaction Tax (STT)

 
Highlights

• Equity is unsecured and a high risk-return investment
• Equity remains in perpetual existence
• Limited liability

When you buy a company's equity, you are in effect financing it, and being compensated with a stake in the business. You become part-owner of the company, entitled to dividends and other benefits that the company may announce, but without any guarantee of a return on your investments.

Equity is considered a high risk-high return investment avenue. This is because there is scope for considerable appreciation or loss of the capital that you invest, depending on various factors. However, it forms an integral part of any well-balanced portfolio, since it is at one end of the risk-return spectrum.

There are various risks that companies are exposed to and when you invest in equity, your returns are affected by these risks. These are

• Business risk: The risks associated with the prosperity of a business and the demand for its products
• Financial risk: The skill with which a company’s finances are managed to ensure that it has an optimum level of debt, equity, reserves, etc.
• Industry risk: Changes in technology, regulations, fashions, etc., affect the performance of an industry
• Management risk: The level of corporate governance, management skills and vision
• Political, Economic and Exchange rate risk: These factors affect a company but are outside its control.
• Market risk: The risk that the market will collapse, or that you have invested at the peak
  

Price Determination: There are various factors that determine the value of a stock. Understanding these will help you to pay a price that reflects the true value of a stock.

1. Fundamentals
2. Growth potential
3. Demand and Supply
4. Technical Points

Experienced traders can make money jumping in and out of a stock that’s caught the public’s attention, but it’s not a game for the inexperienced and it can definitely not be called ‘investing’, in the true sense of the word. There are risks involved and tax consequences that apply to such trading, along with other issues, which means that most investors should leave this tricky activity to short-term traders.

Do’s

• Transact only through Stock Exchanges.
• Deal only through SEBI registered intermediaries.
• Complete all the required formalities of opening an account properly (Client registration, Client agreement forms etc).
• Ask for and sign “Know Your Client Agreement”.
• Read and properly understand the risks associated with investing in securities / derivatives before undertaking transactions.
• Assess the risk – return profile of the investment as well as the liquidity and safety aspects before making your investment decision.
• Ask all relevant questions and clear your doubts with your broker before transacting.
• Invest based on sound reasoning after taking into account all publicly available information and on fundamentals.
• Give clear and unambiguous instructions to your broker / sub-broker / depository participant.
• Be vigilant in your transactions.
• Insist on a contract note for your transaction.
• Verify all details in contract note, immediately on receipt.
• Crosscheck details of your trade with details as available on the exchange website.
• Scrutinize minutely both the transaction and the holding statements that you receive from your Depository participant.
• Keep copies of all your investment documentation.
• Handle Delivery Instruction Slips (DIS) Book issued by DP’s carefully.
• Insist that the DIS numbers are pre-printed and your account number (client id) be pre stamped.
• In case you are not transacting frequently make use of the freezing facilities provided for your demat account.
• Pay the margins required to be paid in the time prescribed.
• Deliver the shares in case of sale or pay the money in case of purchase within the time prescribed.
• Participate and vote in general meetings either personally or through proxy.
• Be aware of your rights and responsibilities.
• In case of complaints approach the right authorities for redressal in a timely manner

Don’ts

• Don’t undertake off-market transactions in securities.
• Don’t deal with unregistered intermediaries.
• Don’t fall prey to promises of unrealistic returns.
• Don’t invest on the basis of hearsay and rumors; verify before investment.
• Don’t forget to take note of risks involved in the investment.
• Don’t be misled by rumours circulating in the market.
• Don’t be influenced into buying into fundamentally unsound companies (penny stocks) based on sudden spurts in trading volumes or prices or non authentic favorable looking articles / stories.
• Don’t follow the herd or play on momentum - it could turn against you.
• Don’t be misled by so called hot tips.
• Don’t try to time the market.
• Don’t hesitate to approach the proper authorities for redressal of your doubts / grievances.
• Don’t leave signed blank Delivery Instruction Slips of your demat account lying around carelessly or with anyone.
• Do not sign blank Delivery Instruction Slips (DIS) and keep them with Depository Participant (DP) or broker to save time. Remember your carelessness can be your peril.

Equity is a must for any well-balanced portfolio. So, irrespective of whether you are a high net worth investor or a small retail investor and irrespective of whether you have a large or timid appetite for risk, you must hold some portion of your assets in equity. This is because it is the only instrument that has the ability to truly deliver a high return, when held over a long period of time.

Investing in Equity: However, the amount of equity that you hold in your portfolio is a very subjective decision and will depend upon various factors.

• Personal Factors
  •  Identify Objective
  •  Identify your Risk Profile
  •  Identify your desired or required stock category
  
  
• Fundamentals
  •  Know company business
  •  Know the management
  •  Know company’s performance
  •  Know company’s valuation
  
  
• Technical
  •  Check out technical position of the stock
  •   Analyse the price target

Before you start investing in equity, you need to open the following accounts:

• A broking account with a stockbroker
• A demat account with a depository participant
• A bank account for cash payments and receipts

Costs of investing in equity:                                                          

• Broking Charges: You will have to pay a nominal one-time account opening fee and brokerage charges for every purchase and sale transaction undertaken.
  
  
• Demat charges: These are charges levied for maintaining your demat account. These charges include periodical charges for maintenance of the account, transaction charges (for each debit and credit of shares for sales and purchases respectively) and other incidental charges.
  
  
• Payment of Securities Transaction Tax (STT): Investing in equity involves paying of Securities Transaction Tax (STT) while buying as well as selling shares. Presently, STT rates are:
  
  
  • STT rate applicable while buying shares for delivery: 0.125    
  • STT rate applicable while selling shares for delivery: 0.125
  • STT rate applicable while trading in shares: 0.025
    
    
• Payment of Service Tax (ST) and Education Cess: Service Tax (ST) and Education Cess (EC) are payable as a percentage of brokerage due to the broker. ST and EC together are presently levied at the rate of 12.24 per cent.

Buy low and sell high is the ultimate guide to successful stock investing. It is also the reverse of what many investors do, although they don’t intend to. They tend to buy high and sell low because they use price, and in particular, the price movement, as their only signal to buy or sell.

The client would be offered following different execution models

Fee Based Model

1. Financial Plan: Indicating required savings to meet desired goals in required Asset Allocation
2. Mailers and Messages: Updating with current market trends, indices and informing about available new or concurrent schemes
3. Periodic Reports: Showing current status of the executed plan on regular intervals or on demand* (*Charges apply)
4. Annual Review by the advisor: Restructuring the plan if required

Charges

• First Meeting chargeable on hourly basis.
• Following charges shall be discussed on case to case basis.
  
  

Commission Based Model

1. Mailers and Messages: Updating with current market trends, indices and informing about available new or concurrent schemes
2. Periodic Reports: Showing current status on regular intervals or on demand* (*Charges apply)

Charges

• First Meeting: Nil
• Following charges: Nil

Declaration

1. Please share some basic information on equity investing

Investing in equity involves purchasing shares of a company listed on a stock exchange. You can acquire these shares in two ways - either through the Primary Market, i.e., when a company makes an offer to issue its equity for the first time (this is called Initial Public Offering (IPO)) or through the secondary market, i.e. via a stock exchange. When you trade in equity through a stock exchange, you have to make use of the services of a brokerage firm, which acts as your agent whenever you buy or sell.

Equity is considered a high risk-high return investment avenue. This is because there is scope for considerable appreciation or loss of the capital that you invest, depending on various factors such as the performance of the company that you have invested in, general market conditions, the state of the economy, etc. However, it forms an integral part of any well-balanced portfolio, since it is at one end of the risk-return spectrum.

2. How should I decide whether equity investing is right for me?                                                                                                                          
Equity is a must for any well-balanced portfolio. So, irrespective of whether you are a high net worth investor or a small retail investor and irrespective of whether you have a large or timid appetite for risk, you must hold some portion of your assets in equity. This is because it is the only instrument that has the ability to truly deliver a high return, when held over a long period of time.

However, the amount of equity that you hold in your portfolio is a very subjective decision and will depend upon various factors. These include your investment objectives, time horizon and risk appetite. But as a general guideline, there’s a rule of thumb that states that to decide upon the proportion of your assets that should go into equities, reduce your age from 100 and that’s the proportion of your money which should be put in equities. The remaining can be invested in fixed income securities.                                                                                                                                                                                
3. How should I study stocks before I make my selection?                                                                                                                                  
Every investor must do some homework before investing money in equities… 

• While recommendations and tips received from your broker, a friend, etc. may be the starting point of your selection, let it not be the only reason that makes you purchase a particular stock, even if these tips have come from ‘market experts’. Short list the shares that you want to buy on the basis of your investment objective, risk profile and the stock’s fundamentals.
• If you feel that the price of a stock is high, don''t purchase it. Buy stocks that you believe still have scope for appreciation.
• Don''t try to time your purchases. That could turn you into a speculator instead of an investor.
• Lastly, once you have purchased shares, if the business prospects of the company change to its detriment, get rid of the stock. Don''t hesitate to liquidate your portfolio before your target time horizon if circumstances lead you to believe that it’s necessary.

                                                                   
4. How do I know whether I am paying the right price for the stock?

There are various factors that determine the value of a stock. Understanding these will help you to pay a price that reflects the true value of a stock.

Demand and Supply: In the short term, the basic economic theory of demand and supply determines a stock’s worth. So, when the demand for a stock exceeds its supply (that is, there are more buyers than sellers), its price tends to rise. And, when supply overtakes demand (that is, sellers exceed buyers), the stock loses value. However, these are short-term market trends, which tend to get evened out over a period of time. In the medium to long-term, a stock is driven by the company’s fundamental strength i.e. business potential, past performance, competence and credibility of its promoters and management, etc.

Growth potential: Investors are willing to pay a premium for stocks of companies that have the potential to increase their revenues and net profits. The greater this growth potential, the higher the premium given to the stock. If a company proves that it is capable of sustaining growth, the market will continue to give it high valuations. And, that’s likely to be the major driver for stock valuations

Fundamentals: A company’s growth outlook is linked to its business prospects and how well its management is capitalising on the existing opportunities. The quality of a company’s management is crucial. So, pay attention to the management practices of a company and its level of corporate governance.

   
5. When should I buy to minimise my costs and sell to maximise the profits?

Buy low and sell high is the ultimate guide to successful stock investing. It is also the reverse of what many investors do, although they don’t intend to. They tend to buy high and sell low because they use price, and in particular, the price movement, as their only signal to buy or sell.

Investors are tempted to buy stocks that have shot up and are basking in the media spotlight just to get a part of the action. They jump at a stock that is already trading at a premium… that’s how they buy high. Ironically, if a stock has had a good run up it may be time to sell, not buy (sell high).

On the flip side, when a stock price is falling, most investors may want to sell in a panic, although the company has not lost any intrinsic value and still remains a sound investment…that’s how they sell low. In fact, when a stock’s price has fallen, it’s a great time to buy (buy low), if your research on the company suggests that it is a good long term buy.

Experienced traders can make money jumping in and out of a stock that’s caught the public’s attention, but it’s not a game for the inexperienced and it can definitely not be called ‘investing’, in the true sense of the word. There are risks involved and tax consequences that apply to such trading, along with other issues, which means that most investors should leave this tricky activity to short-term traders.

6. What are the risks involved in equity investing?
 
There are various risks that companies are exposed to and when you invest in equity, your returns are affected by these risks. These are business risks (i.e. the risks associated with the prosperity of a business and the demand for its products), financial risks (the skill with which a company’s finances are managed to ensure that it has an optimum level of debt, equity, reserves, etc.), industry risk (changes in technology, regulations, fashions, etc., affect the performance of an industry), management risks (the level of corporate governance, management skills and vision), political, economic and exchange rate risks (these factors affect a company but are outside its control). There are other risks, such as market risks (the risk that the market will collapse, or that you have invested at the peak), which determine your returns on your equity investment.

7. How do I go about investing in equity?
                                                                                             
Before you start investing in equity, you need to open the following accounts: 

• A broking account with a stock broker
• A demat account with a depository participant
• A bank account for cash payments and receipts (you can use one of your existing bank accounts for this purpose)

You then need to decide whether you want to invest by making purchases/taking delivery of shares or by undertaking margin trading (in this case you pay only a portion of the cost for purchases and your broker funds the balance and you don’t take delivery of the shares. You simply book your profit or loss).

8. What are the costs of investing in equity?
                                                                                                  
BROKING CHARGES                                                                           
You will have to pay a nominal one-time account opening fee and brokerage charges for every purchase and sale transaction undertaken. Presently, brokerage charges range between 0.25 per cent and 0.85 per cent.

Demat charges     
These are charges levied for maintaining your demat account. These charges include periodical charges for maintenance of the account, transaction charges (for each debit and credit of shares for sales and purchases respectively) and other incidental charges.

Payment of Securities Transaction Tax (STT) 
Investing in equity involves paying of Securities Transaction Tax (STT) while buying as well as selling shares. Presently, STT rates are:

                                                                            
STT rate applicable while buying shares for delivery                                      0.125                                                                                                               
STT rate applicable while selling shares for delivery                                      0.125                                                                                                               
STT rate applicable while trading in shares                                                      0.025  
                                                                                                                                                                                                                                                             
Payment of Service Tax (ST) and Education Cess                                                                                    
Service Tax (ST) and Education Cess (EC) are payable as a percentage of brokerage due to the broker. ST and EC together are presently levied at the rate of 12.24 per cent.

                                                                      
9. How is income from equity investing taxed?

The dividends that you receive on shares are not taxable in your hands. You are, however, required to pay short term capital gains tax on any short-term capital gains that you make from transacting in shares. These are gains that arise from selling equity shares that have been

purchased and sold within a period of less than 1 year. The rate of tax payable on such gains is 11.22 per cent (10 per cent tax + 2 per cent education cess + 10 per cent surcharge, if applicable). There is no tax on long-term capital gains.

Further, while transacting, you are required to pay Service Tax at the rate of 12.24 per cent on the brokerage charges that you pay. In addition, you have to pay Securities Transaction Tax (STT) on certain types of sale and purchase transactions of shares. The STT rate for delivery-based transactions is 0.125 per cent of the transaction value for both buyers and sellers. For non-delivery based transactions, STT of 0.025 per cent of the transaction value is payable.

                                                                                                                                                                                 
10. What is the grievance redressal facility available for equity investing?

If you have grievances against a listed company/ intermediary registered with SEBI, you should first approach the concerned company/ intermediary against whom you have a grievance. Then, if you are not satisfied with their response you can approach SEBI, who is the regulatory authority for such entities. SEBI takes up grievances related to issue and transfer of securities, non-payment of dividend, etc. with listed companies. In addition, this market regulator also takes up grievances against various intermediaries that are registered with it. Visit http://www.sebi.gov.in/ for more information.

Equity is unsecured and a high risk-return investment
When you invest your money in a debt investment such as a bank deposit, bonds, etc., you are promised a fixed amount of interest on your investment and return of capital. This isn't the case with an equity investment. By becoming an owner, you bear the risk of the company not being successful. However, the rewards for bearing this risk are high. You, as an equity shareholder, are entitled to a share in the profits of the company’s business as well as any appreciation in the perceived value of the shares.

The risks and rewards of investing in equity are clearly apparent from the Bombay Stock Exchange Sensitive Index (BSE Sensex), which is a popular stock market index. This index reflects the movement of the share prices on the stock markets. The Sensex rises and/or falls continuously during trading hours. Rises indicate gains and falls indicate losses. True equity money is unsecured and directly reflects the faith of the investor in the business, its management and the commitment of its principals to it.

Equity remains in perpetual existence
The perpetual existence of a company implies that the death, disability, retirement or termination of a shareholder, director or officer, will not affect the existence of the company. For an equity shareholder, this is convenient since he does not need to renew/renegotiate the terms of his investment (like in the case of a fixed tenure debt investment). He also has the option to sell his equity holding through the stock exchange if he no longer wants to remain invested in the company.

Limited liability
Another extremely important feature of equity is its limited liability, which means that, as a part-owner of the company, you are not personally liable if the company is not able to pay its debts. In case of other entities such as partnerships, if the partnership goes bankrupt, the partners are personally liable towards the creditors/lenders and they may have to sell off their personal assets like their house, car, furniture, etc., to make good the loss. In case of holding equity shares, the maximum value you can lose is the value of your investment. Even if a company of which you are a shareholder goes bankrupt, you can never lose your personal assets.
Income from equity investing


Capital appreciation
Equity shares of companies are listed and traded on a stock exchange (the Bombay Stock Exchange or the National Stock Exchange). The market prices of these shares are continuously moving up or down depending on the interest in the company’s stock, it’s business potential, etc. As an equity shareholder, you can profit/lose from the market price rise/fall. For instance, if you have purchased the equity shares of Company ABC at Rs 25 per share and the market price of the share rises to Rs 30, you can sell the shares at this price to make a profit. This is called ‘capital appreciation’. However, if the market price falls to below Rs 25, you would lose. This loss would be notional till you actually sell at this price and book the loss.

Bonus shares
When you purchase shares of a company, you become a shareholder of the company. When the company is doing well, it may declare a ‘bonus issue’. This means that the company will issue fresh equity shares to its existing shareholders, for free. As a shareholder, you will be entitled to receive bonus shares in proportion to your holding in the company. For instance, if the company declares a bonus in the ratio of 1:2 (this means it will issue one share for every two shares you hold) and if you hold 100 shares, you will be entitled to 50 shares as a bonus. When you sell your bonus shares in the stock market, the market price at which you sell your bonus, minus brokerage charges and necessary taxes (Service Tax, Securities Transaction Tax, etc.), will be your profit i.e. capital appreciation. In this case, there will be no cost of purchase since you have received the bonus for free.  For instance, if the company declares a ‘bonus issue’ in the ratio of 1:2 (this means it will issue one bonus share for every two shares you hold) and if you hold 100 shares, you will be entitled to 50 shares as a ‘bonus shares’. The cost of these shares will be nil. In this case, if you sell your bonus shares in the market at say, Rs 35, your capital appreciation will be the entire Rs 35 per share minus brokerage, taxes, etc.

Rights shares
Another way a company offers benefits to its shareholders is by offering ‘rights shares’. This means that the company will offer fresh equity shares to its existing shareholders at a price, which is lower than the current market price of the share. For instance, if the current market price of the company’s share is Rs 35, it will offer shares at below this price, say Rs 25. As a shareholder, you will be entitled to receive ‘rights shares’ in proportion to your holding in the company. For instance, if the company declares a ‘rights issue’ in the ratio of 1:2 (this means it will issue one share for every two shares you hold) and if you hold 100 shares, you will be entitled to 50 shares as a ‘rights shares’. This implies that to obtain the ‘rights shares’, you will have to pay Rs 1,250 (50 shares you are entitled to x Rs 25 per share). In this case, if you sell your rights shares in the market at say, Rs 35, your capital appreciation will be Rs 10 per share minus incidental selling costs.
However, if you don’t want to subscribe to the rights offered to you, you can sell your rights entitlements. The price that you receive to sell your rights entitlements will depend on the rights offer price, the current market price and the demand for the company’s shares. For instance, taking the above example forward, if you decide to sell your rights entitlements of 50 shares and you receive Rs 2.50 per share, you will get a total of Rs 125. This will be your profit after deducting incidental selling expenses.

Dividend income
Companies report their profits earned on a quarterly basis. Based on the quantum of profits, companies declare dividends to distribute a portion of these profits to their shareholders. Dividends are declared as a percentage of the share’s face value. For instance, if a company declares a dividend of 10 per cent and its share has a face value of Rs 10, it implies that it will pay Re 1 per share as dividend (Rs 10 x 10 per cent). As a shareholder, you will be entitled to dividend to the extent of your share holding. For instance, in this case if you hold 500 shares, you will get a dividend of Rs 500 (500 shares x Re 1 per share). However, dividend income is uncertain. Companies don’t declare dividends regularly. Dividends are declared only when there are profits available for distribution.

A financial contract whose value is derived from the performance of assets, interest rates, currency exchange rates or indexes. Derivative transactions include a wide assortment of financial contracts including structured debt obligations and deposits, swaps, futures, options, caps, floors, collars, forwards and various combinations thereof.

Derivatives are financial instruments whose value changes in response to the changes in underlying variables. Their performance can determine both the amount and the timing of the pay-offs.

Derivatives Instrument

• Futures: A futures contract is an agreement between two parties to buy or sell a specified quantity and quality of asset at a certain time in future at a certain price agreed at the time of entering into the contract on the futures exchange.
• Forwards: A Forward contract is an agreement entered between two parties to buy or sell an asset at a future date for an agreed price. A Forward contract is not traded on an exchange.
• Options: An Option is the right but not the obligation of the holder, to buy or sell the underlying asset by a certain date at a certain price. There are two types of options: CALL OPTION and PUT OPTION
• Swaps: Swap is an agreement between two parties to exchange different stream of cash flows in future according to a pre-determined formulae.

Derivatives can be based on different types of assets such as

• Interest Rates
• Equity
• Commodity
• Forex
• Bonds,
• Indexes: SENSEX, NIFTY etc.
• Inflation: WPI, CPI
• Weather conditions

Expected returns from an equity in form of

• Hedging
• Arbitrage
• Trading Profits
  
  

Derivatives markets

• Exchange Traded Derivatives
• OTC Derivatives (Over The Counter)

Costs of investing in Derivative:

• Broking Charges
• Securities Transaction Tax (STT)
• Service Tax

 
Highlights

• Derivative is highly volatile and unsecured trading instrument
• Derivative remains in temporary existence
• Limited/Unlimited liability

The main use of derivatives is to reduce risk for one party. The diverse range of potential underlying assets and pay-off alternatives leads to a wide range of derivatives contracts available to be traded in the market.

Objectives and benefits of derivatives:

• Hedging - price risk management by risk mitigation
• Speculation - take advantage of favourable price movements
• Leverage - pay low margin to enjoy large exposure
• Liquidity - ease of entry and exit of market
• Price discovery - for taking farming and business decisions
• Price stabilization along with balancing demand and supply position
• Facilitates integrated price structure
• Flexibility, certainty and transparency in purchasing commodities facilitate bank financing
• Facilitates 'informed' lending by the banks

Speculative trading in derivatives gained a great deal of notoriety in 1995 when Nick Leeson, a trader at Barings Bank, made poor and unauthorized investments in index futures. Through a combination of poor judgment on his part, lack of oversight by management, a naive regulatory environment and unfortunate outside events like the Kobe earthquake, Leeson incurred a $1.3 billion loss that bankrupted the centuries-old financial institution.

Types of Risks attached:

• Counter Party risk
• Unsuitable High Volatility risk
• Large Notional Value
• Leverage the debt in an economy
• Buying & Selling risk
• Market risk

Valuation: Two common measures of value are:

• Market price: The price at which traders are willing to buy or sell the contract
• Arbitrage-free price: No risk-free profits can be made by trading in these contract

Experienced traders can make money jumping in and out of a stock that’s caught the public’s attention, but it’s not a game for the inexperienced and it can definitely not be called ‘investing’, in the true sense of the word. There are risks involved and tax consequences that apply to such trading, along with other issues, which means that most investors should leave this tricky activity to short-term traders.

DO’S

• Go through all rules, regulations, bye-laws and disclosures made by the exchanges.
• Trade only through - Trading Member (TM) registered with SEBI or authorized person of TM registered with the exchange.
• While dealing with an authorized person, ensure that the contract note has been issued by the TM of the authorized person only.
• While dealing with an authorized person, pay the brokerage/payments/margins etc. to the TM only
• Ensure that for every executed trade you receive duly signed contract note from your TM highlighting the details of the trade along with your unique client-id.
• Obtain receipt for collateral deposited with Trading Member (TM) towards margin.
• Go through details of Client-Trading Member Agreement.
• Know your rights and duties vis-à-vis those of TM/ Clearing Member.
• Be aware of the risk associated with your positions in the market and margin calls on them.
• Collect / pay mark to market margins on your futures position on a daily basis from / to your Trading member.

DON’TS

• Do not start trading before reading and understanding the Risk Disclosure Documents
• Do not trade on any product without knowing the risk and rewards associated with it

It should be understood that derivatives themselves are not to be considered investments since they are not an asset class. They simply derive their values from assets such as bonds, equities, currencies, etc. and are used to either hedge those assets or improve the returns on those assets.

Derivative trading in India takes can place either on a separate and independent Derivative Exchange or on a separate segment of an existing Stock Exchange. Derivative Exchange/Segment function as a Self-Regulatory Organisation (SRO) and SEBI acts as the oversight regulator.

Trading in Derivative: Exposure that you hold in your portfolio is a very sensitive decision and will depend upon various factors.

• Personal Factors
  •  Identify Objective
  •  Identify your Risk Profile
  •  Identify your desired or required derivative instrument
  
  
• Fundamentals
  •  Know underlying asset’s valuation
  •  Know all possible events affecting the valuation
  
  
• Technical
  •  Check out technical position of the underlying asset as well as respective derivative
  •  Analyse the price target

Before you start trading in derivatives, you need to open the following accounts:

• A broking account with a derivative broker
• A demat account with a depository participant
• A bank account for cash payments and receipts

Costs of investing in derivatives:

• Broking Charges: You will have to pay a nominal one-time account opening fee and brokerage charges for every purchase and sale transaction undertaken.
• Demat charges: These are charges levied for maintaining your demat account. These charges include periodical charges for maintenance of the account, transaction charges (for each debit and credit of shares for sales and purchases respectively) and other incidental charges.
• Payment of Securities Transaction Tax (STT): Investing in equity involves paying of Securities Transaction Tax (STT) while buying as well as selling derivative contracts. Presently, STT rates are:
  
  
  • STT rate applicable while buying derivative for carry forward: 0.125   
  • STT rate applicable while selling derivative for carry forward: 0.125
  • STT rate applicable while trading in derivative: 0.025
    
    
• Payment of Service Tax (ST) and Education Cess: Service Tax (ST) and Education Cess (EC) are payable as a percentage of brokerage due to the broker. ST and EC together are presently levied at the rate of 12.24 per cent.

The clearing & settlement of all trades on the Derivative Exchange/Segment would have to be through a Clearing Corporation/House, which is independent in governance and membership from the Derivative Exchange/Segment. 

The client would be offered following different execution models

Fee Based Model

1. Financial Plan: Indicating required savings to meet desired goals in required Asset Allocation
2. Mailers and Messages: Updating with current market trends, indices and informing about available new or concurrent schemes
3. Periodic Reports: Showing current status of the executed plan on regular intervals or on demand* (*Charges apply)
4. Annual Review by the advisor: Restructuring the plan if required

Charges

• First Meeting chargeable on hourly basis.
• Following charges shall be discussed on case to case basis.

 

Commission Based Model

1. Mailers and Messages: Updating with current market trends, indices and informing about available new or concurrent schemes
2. Periodic Reports: Showing current status on regular intervals or on demand* (*Charges apply)

Charges

• First Meeting: Nil
• Following charges: Nil

Declaration

What are Derivatives?
The term "Derivative" indicates that it has no independent value, i.e. its value is entirely "derived" from the value of the underlying asset. The underlying asset can be securities, commodities, bullion, currency, live stock or anything else. In other words, Derivative means a forward, future, option or any other hybrid contract of pre determined fixed duration, linked for the purpose of contract fulfillment to the value of a specified real or financial asset or to an index of securities.
With Securities Laws (Second Amendment) Act,1999, Derivatives has been included in the definition of Securities. The term Derivative has been defined in Securities Contracts (Regulations) Act, as:-
A Derivative includes: -

1. a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security;
2. a contract which derives its value from the prices, or index of prices, of underlying securities;

What is a Futures Contract?
Futures Contract means a legally binding agreement to buy or sell the underlying security on a future date. Future contracts are the organized/standardized contracts in terms of quantity, quality (in case of commodities), delivery time and place for settlement on any date in future. The contract expires on a pre-specified date which is called the expiry date of the contract. On expiry, futures can be settled by delivery of the underlying asset or cash. Cash settlement enables the settlement of obligations arising out of the future/option contract in cash.

What is an Option contract?
Options Contract is a type of Derivatives Contract which gives the buyer/holder of the contract the right (but not the obligation) to buy/sell the underlying asset at a predetermined price within or at end of a specified period. The buyer / holder of the option purchases the right from the seller/writer for a consideration which is called the premium. The seller/writer of an option is obligated to settle the option as per the terms of the contract when the buyer/holder exercises his right. The underlying asset could include securities, an index of prices of securities etc.

Under Securities Contracts (Regulations) Act,1956 options on securities has been defined as "option in securities" meaning a contract for the purchase or sale of a right to buy or sell, or a right to buy and sell, securities in future, and includes a teji, a mandi, a teji mandi, a galli, a put, a call or a put and call in securities.

An Option to buy is called Call option and option to sell is called Put option. Further, if an option that is exercisable on or before the expiry date is called American option and one that is exercisable only on expiry date, is called European option. The price at which the option is to be exercised is called Strike price or Exercise price.

Therefore, in the case of American options the buyer has the right to exercise the option at anytime on or before the expiry date. This request for exercise is submitted to the Exchange, which randomly assigns the exercise request to the sellers of the options, who are obligated to settle the terms of the contract within a specified time frame.

As in the case of futures contracts, option contracts can be also be settled by delivery of the underlying asset or cash. However, unlike futures cash settlement in option contract entails paying/receiving the difference between the strike price/exercise price and the price of the underlying asset either at the time of expiry of the contract or at the time of exercise / assignment of the option contract.

What are Index Futures and Index Option Contracts?
Futures contract based on an index i.e. the underlying asset is the index, are known as Index Futures Contracts. For example, futures contract on NIFTY Index and BSE-30 Index. These contracts derive their value from the value of the underlying index.

Similarly, the options contracts, which are based on some index, are known as Index options contract. However, unlike Index Futures, the buyer of Index Option Contracts has only the right but not the obligation to buy / sell the underlying index on expiry. Index Option Contracts are generally European Style options i.e. they can be exercised / assigned only on the expiry date.

An index, in turn derives its value from the prices of securities that constitute the index and is created to represent the sentiments of the market as a whole or of a particular sector of the economy. Indices that represent the whole market are broad based indices and those that represent a particular sector are sectoral indices.

In the beginning futures and options were permitted only on S&P Nifty and BSE Sensex. Subsequently, sectoral indices were also permitted for derivatives trading subject to fulfilling the eligibility criteria. Derivative contracts may be permitted on an index if 80% of the index constituents are individually eligible for derivatives trading. However, no single ineligible stock in the index shall have a weightage of more than 5% in the index. The index is required to fulfill the eligibility criteria even after derivatives trading on the index has begun. If the index does not fulfill the criteria for 3 consecutive months, then derivative contracts on such index would be discontinued.

By its very nature, index cannot be delivered on maturity of the Index futures or Index option contracts therefore, these contracts are essentially cash settled on Expiry.

Why mini derivative contract?
The minimum contract size for the mini derivative contract on Index (Sensex and Nifty) is Rs. 1 lakh at the time of its introduction in the market. The lower minimum contract size means that smaller investors are able to hedge their portfolio using these contracts with a lower capital outlay. This means a better hedge for portfolio, and also results in more liquidity in the market.

Why longer dated index options?
Longer dated derivatives products are useful for those investors who want to have a long term hedge or long term exposure in derivative market.  The premiums for longer term derivatives  products are higher than for standard options in the same stock because the increased expiration date gives the underlying asset more time to make a substantial move and for the investor to make a healthy profit. Presently, longer dated options on Sensex and Nifty with tenure of upto 3 years are available for the investors.

What is Bond Index?
A bond index is used to measure the performance of bond markets. The index is used as a benchmark against which investment managers measure their performance. It is also used as a measure to compare the performance of different asset classes. The government bond market is the most liquid segment of the bond market.

What is Volatility Index?
Volatility Index is a measure of expected stock market volatility, over a specified time period, conveyed by the prices of stock / index options. It depicts the collective sentiment of the market on the implied future volatility.

What is the structure of Derivative Markets in India?
Derivative trading in India takes can place either on a separate and independent Derivative Exchange or on a separate segment of an existing Stock Exchange. Derivative Exchange/Segment function as a Self-Regulatory Organisation (SRO) and SEBI acts as the oversight regulator. The clearing & settlement of all trades on the Derivative Exchange/Segment would have to be through a Clearing Corporation/House, which is independent in governance and membership from the Derivative Exchange/Segment. 

What are the various membership categories in the equity derivatives market?
The various types of membership in the derivatives market are as follows:

• Trading Member (TM) – A TM is a member of the derivatives exchange and can trade on his own behalf and on behalf of his clients.
• Clearing Member (CM) –These members are permitted to settle their own trades as well as the trades of the other non-clearing members known as Trading Members who have agreed to settle the trades through them.
• Self-clearing Member (SCM) – A SCM are those clearing members who can clear and settle their own trades only.

What are the requirements to be a member of the equity derivatives exchange/ clearing corporation?

• Balance Sheet Networth Requirements: SEBI has prescribed a networth requirement of Rs. 3 crores for clearing members. The clearing members are required to furnish an auditor's certificate for the networth every 6 months to the exchange. The networth requirement is Rs. 1 crore for a self-clearing member. SEBI has not specified any networth requirement for a trading member.
• Liquid Networth Requirements: Every clearing member (both clearing members and self-clearing members) has to maintain atleast Rs. 50 lakhs as Liquid Networth with the exchange / clearing corporation.
• Certification requirements: The Members are required to pass the certification programme approved by SEBI. Further, every trading member is required to appoint atleast two approved users who have passed the certification programme. Only the approved users are permitted to operate the derivatives trading terminal.

What are requirements for a Member with regard to the conduct of his business? The derivatives member is required to adhere to the code of conduct specified under the SEBI Broker Sub-Broker regulations. The following conditions stipulations have been laid by SEBI on the regulation of sales practices:

• Sales Personnel: The derivatives exchange recognizes the persons recommended by the Trading Member and only such persons are authorized to act as sales personnel of the TM. These persons who represent the TM are known as Authorised Persons.
• Know-your-client: The member is required to get the Know-your-client form filled by every one of client.
• Risk disclosure document: The derivatives member must educate his client on the risks of derivatives by providing a copy of the Risk disclosure document to the client.
• Member-client agreement: The Member is also required to enter into the Member-client agreement with all his clients.

Which derivative contracts are permitted by SEBI?
Derivative products have been introduced in a phased manner starting with Index Futures Contracts in June 2000. Index Options and Stock Options were introduced in June 2001 and July 2001 followed by Stock Futures in November 2001. Sectoral indices were permitted for derivatives trading in December 2002. Interest Rate Futures on a notional bond and T-bill priced off ZCYC have been introduced in June 2003 and exchange traded interest rate futures on a notional bond priced off a basket of Government Securities were permitted for trading in January 2004. During December 2007 SEBI permitted mini derivative (F&O) contract on Index (Sensex and Nifty). Further, in January 2008, longer tenure Index options contracts and Volatility Index and in April 2008, Bond Index was introduced. In addition to the above, during August 2008, SEBI permitted Exchange traded Currency Derivatives.

What is the eligibility criteria for stocks on which derivatives trading may be permitted?
A stock on which stock option and single stock future contracts are proposed to be introduced is required to fulfill the following broad eligibility criteria:-

• The stock shall be chosen from amongst the top 500 stock in terms of average daily market capitalisation and average daily traded value in the previous six month on a rolling basis.
• The stock’s median quarter-sigma order size over the last six months shall be not less than Rs.1 Lakh. A stock’s quarter-sigma order size is the mean order size (in value terms) required to cause a change in the stock price equal to one-quarter of a standard deviation.
• The market wide position limit in the stock shall not be less than Rs.50 crores.

A stock can be included for derivatives trading as soon as it becomes eligible. However, if the stock does not fulfill the eligibility criteria for 3 consecutive months after being admitted to derivatives trading, then derivative contracts on such a stock would be discontinued.

What is the lot size of contract in the equity derivatives market?
Lot size refers to number of underlying securities in one contract. The lot size is determined keeping in mind the minimum contract size requirement at the time of introduction of derivative contracts on a particular underlying.

For example, if shares of XYZ Ltd are quoted at Rs.1000 each and the minimum contract size is Rs.2 lacs, then the lot size for that particular scrips stands to be 200000/1000 = 200 shares i.e. one contract in XYZ Ltd. covers 200 shares.

What is corporate adjustment?
The basis for any adjustment for corporate action is such that the value of the position of the market participant on cum and ex-date for corporate action continues to remain the same as far as possible. This will facilitate in retaining the relative status of positions viz. in-the-money, at-the-money and out-of-the-money. Any adjustment for corporate actions is carried out on the last day on which a security is traded on a cum basis in the underlying cash market. Adjustments mean modifications to positions and/or contract specifications as listed below:

1. Strike price
2. Position
3. Market/Lot/ Multiplier

The adjustments are carried out on any or all of the above based on the nature of the corporate action. The adjustments for corporate action are carried out on all open, exercised as well as assigned positions.

The corporate actions are broadly classified under stock benefits and cash benefits. The various stock benefits declared by the issuer of capital are:

• Bonus
• Rights
• Merger/ demerger
• Amalgamation

• Splits
• Consolidations
• Hive-off
• Warrants, and
• Secured Premium Notes (SPNs) among others

The cash benefit declared by the issuer of capital is cash dividend.

What is the margining system in the equity derivatives market?
Two type of margins have been specified -

• Initial Margin - Based on 99% VaR and worst case loss over a specified horizon, which depends on the time in which Mark to Market margin is collected.
• Mark to Market Margin (MTM) - collected in cash for all Futures contracts and adjusted against the available Liquid Networth for option positions. In the case of Futures Contracts MTM may be considered as Mark to Market Settlement.

Dr. L.C Gupta Committee had recommended that the level of initial margin required on a position should be related to the risk of loss on the position. The concept of value-at-risk should be used in calculating required level of initial margins. The initial margins should be large enough to cover the one day loss that can be encountered on the position on 99% of the days. The recommendations of the Dr. L.C Gupta Committee have been a guiding principle for SEBI in prescribing the margin computation & collection methodology to the Exchanges. With the introduction of various derivative products in the Indian securities Markets, the margin computation methodology, especially for initial margin, has been modified to address the specific risk characteristics of the product. The margining methodology specified is consistent with the margining system used in developed financial & commodity derivative markets worldwide. The exchanges were given the freedom to either develop their own margin computation system or adapt the systems available internationally to the requirements of SEBI.

A portfolio based margining approach which takes an integrated view of the risk involved in the portfolio of each individual client comprising of his positions in all Derivative Contracts i.e. Index Futures, Index Option, Stock Options and Single Stock Futures, has been prescribed. The initial margin requirements are required to be based on the worst case loss of a portfolio of an individual client to cover 99% VaR over a specified time horizon.

The Initial Margin is Higher of
(Worst Scenario Loss +Calendar Spread Charges)
Or
Short Option Minimum Charge
The worst scenario loss are required to be computed for a portfolio of a client and is calculated by valuing the portfolio under 16 scenarios of probable changes in the value and the volatility of the Index/ Individual Stocks. The options and futures positions in a client’s portfolio are required to be valued by predicting the price and the volatility of the underlying over a specified horizon so that 99% of times the price and volatility so predicted does not exceed the maximum and minimum price or volatility scenario. In this manner initial margin of 99% VaR is achieved. The specified horizon is dependent on the time of collection of mark to market margin by the exchange.
The probable change in the price of the underlying over the specified horizon i.e. ‘price scan range’, in the case of Index futures and Index option contracts are based on three standard deviation (3σ ) where ‘σ ’ is the volatility estimate of the Index. The volatility estimate ‘σ ’, is computed as per the Exponentially Weighted Moving Average methodology. This methodology has been prescribed by SEBI. In case of option and futures on individual stocks the price scan range is based on three and a half standard deviation (3.5 σ) where ‘σ’ is the daily volatility estimate of individual stock.

If the mean value (taking order book snapshots for past six months) of the impact cost, for an order size of Rs. 0.5 million, exceeds 1%, the price scan range would be scaled up by square root three times to cover the close out risk. This means that stocks with impact cost greater than 1% would now have a price scan range of - Sqrt (3) * 3.5σ or approx. 6.06σ. For stocks with impact cost of 1% or less, the price scan range would remain at 3.5σ.

For Index Futures and Stock futures it is specified that a minimum margin of 5% and 7.5% would be charged. This means if for stock futures the 3.5 σ value falls below 7.5% then a minimum of 7.5% should be charged. This could be achieved by adjusting the price scan range.
The probable change in the volatility of the underlying i.e. ‘volatility scan range’ is fixed at 4% for Index options and is fixed at 10% for options on Individual stocks. The volatility scan range is applicable only for option products.

Calendar spreads are offsetting positions in two contracts in the same underlying across different expiry. In a portfolio based margining approach all calendar-spread positions automatically get a margin offset. However, risk arising due to difference in cost of carry or the ‘basis risk’ needs to be addressed. It is therefore specified that a calendar spread charge would be added to the worst scenario loss for arriving at the initial margin. For computing calendar spread charge, the system first identifies spread positions and then the spread charge which is 0.5% per month on the far leg of the spread with a minimum of 1% and maximum of 3%. Presently, calendar spread position on Exchange traded equity derivatives has been granted calendar spread treatment till the expiry of the near month contract.

In a portfolio of futures and options, the non-linear nature of options make short option positions most risky. Especially, short deep out of the money options, which are highly susceptible to, changes in prices of the underlying. Therefore a short option minimum charge has been specified. The short option minimum charge is 3%

and 7.5 % of the notional value of all short Index option and stock option contracts respectively. The short option minimum charge is the initial margin if the sum of the worst –scenario loss and calendar spread charge is lower than the short option minimum charge.

To calculate volatility estimates the exchange are required to uses the methodology specified in the Prof J.R Varma Committee Report on Risk Containment Measures for Index Futures. Further, to calculate the option value the exchanges can use standard option pricing models - Black-Scholes, Binomial, Merton, Adesi-Whaley.

The initial margin is required to be computed on a real time basis and has two components:-

• The first is creation of risk arrays taking prices at discreet times taking latest prices and volatility estimates at the discreet times, which have been specified.
• The second is the application of the risk arrays on the actual portfolio positions to compute the portfolio values and the initial margin on a real time basis.

The initial margin so computed is deducted from the available Liquid Networth on a real time basis.

CONDITIONS FOR LIQUID NETWORTH
Liquid net worth means the total liquid assets deposited with the clearing house towards initial margin and capital adequacy; LESS initial margin applicable to the total gross open position at any given point of time of all trades cleared through the clearing member.

The following conditions are specified for liquid net worth:

• Liquid net worth of the clearing member should not be less than Rs 50 lacs at any point of time.
• Mark to market value of gross open positions at any point of time of all trades cleared through the clearing member should not exceed the specified exposure limit for each product.

Liquid Assets
At least 50% of the liquid assets should be in the form of cash equivalents viz. cash, fixed deposits, bank guarantees, T bills, units of money market mutual funds, units of gilt funds and dated government securities. Liquid assets will include cash, fixed deposits, bank guarantees, T bills, units of mutual funds, dated government securities or Group I equity securities which are to be pledged in favor of the exchange.

Collateral Management
Collateral Management consists of managing, maintaining and valuing the collateral in the form of cash, cash equivalents and securities deposited with the exchange. The

following stipulations have been laid down to the clearing corporation on the valuation and management of collateral:

• At least weekly marking to market is required to be carried out on all securities.
• Debt securities of only investment grade can be accepted.10% haircut with weekly mark to market will be applied on debt securities.
• Total exposure of clearing corporation to the debt or equity of any company not to exceed 75% of the Trade Guarantee Fund or 15% of its total liquid assets whichever is lower.
• Units of money market mutual funds and gilt funds shall be valued on the basis of its Net Asset Value after applying a hair cut of 10% on the NAV and any exit load charged by the mutual fund.
• Units of all other mutual funds shall be valued on the basis of its NAV after applying a hair cut equivalent to the VAR of the units NAV and any exit load charged by the mutual fund.
• Equity securities to be in demat form. Only Group I securities would be accepted. The securities are required to be valued / marked to market on a daily basis after applying a haircut equivalent to the respective VAR of the equity security.

Mark to Market Margin
Options – The value of the option are calculated as the theoretical value of the option times the number of option contracts (positive for long options and negative for short options). This Net Option Value is added to the Liquid Networth of the Clearing member. Thus MTM gains and losses on options are adjusted against the available liquid networth. The net option value is computed using the closing price of the option and are applied the next day.
Futures – The system computes the closing price of each series, which is used for computing mark to market settlement for cumulative net position. If this margin is collected on T+1 in cash, then the exchange charges a higher initial margin by multiplying the price scan range of 3 σ & 3.5 σ with square root of 2, so that the initial margin is adequate to cover 99% VaR over a two days horizon. Otherwise if the Member arranges to pay the Mark to Market margins by the end of T day itself, then the initial margins would not be scaled up. Therefore, the Member has the option to pay the MTM margins either at the end of T day or on T+1 day.

Summary of parameters specified for Initial Margin Computation

MARGIN COLLECTION
Initial Margin - is adjusted from the available Liquid Networth of the Clearing Member on an online real time basis.
Mark to Market Margins-
Futures contracts: The open positions (gross against clients and net of proprietary / self trading) in the futures contracts for each member are marked to market to the daily settlement price of the Futures contracts at the end of each trading day. The daily settlement price at the end of each day is the weighted average price of the last half an hour of the futures contract. The profits / losses arising from the difference between the trading price and the settlement price are collected / given to all the clearing members.
Option Contracts: The marked to market for Option contracts is computed and collected as part of the SPAN Margin in the form of Net Option Value. The SPAN Margin is collected on an online real time basis based on the data feeds given to the system at discrete time intervals.
Client Margins
Clearing Members and Trading Members are required to collect initial margins from all their clients. The collection of margins at client level in the derivative markets is essential as derivatives are leveraged products and non-collection of margins at the

client level would provide zero cost leverage. In the derivative markets all money paid by the client towards margins is kept in trust with the Clearing House / Clearing
Corporation and in the event of default of the Trading or Clearing Member the amounts paid by the client towards margins are segregated and not utilised towards the dues of the defaulting member.

Therefore, Clearing members are required to report on a daily basis details in respect of such margin amounts due and collected from their Trading members / clients clearing and settling through them. Trading members are also required to report on a daily basis details of the amount due and collected from their clients. The reporting of the collection of the margins by the clients is done electronically through the system at the end of each trading day. The reporting of collection of client level margins plays a crucial role not only in ensuring that members collect margin from clients but it also provides the clearing corporation with a record of the quantum of funds it has to keep in trust for the clients.

What are the exposure limits in equity derivatives market?
It has been prescribed that the notional value of gross open positions at any point in time in the case of Index Futures and all Short Index Option Contracts shall not exceed 33 1/3 (thirty three one by three) times the available liquid networth of a member, and in the case of Stock Option and Stock Futures Contracts, the exposure limit shall be higher of 5% or 1.5 sigma of the notional value of gross open position.

In the case of interest rate futures, the following exposure limit is specified:

• The notional value of gross open positions at any point in time in futures contracts on the notional 10 year bond should not exceed 100 times the available liquid networth of a member.
• The notional value of gross open positions at any point in time in futures contracts on the notional T-Bill should not exceed 1000 times the available liquid networth of a member.

What are the position limits in equity derivatives market?

The position limits specified are as under-
Client / Customer level position limits:
For index based products there is a disclosure requirement for clients whose position exceeds 15% of the open interest of the market in index products.
For stock specific products the gross open position across all derivative contracts on a particular underlying of a customer/client should not exceed the higher of –

• 1% of the free float market capitalisation (in terms of number of shares).

Or

• 5% of the open interest in the derivative contracts on a particular underlying stock (in terms of number of contracts).

This position limits are applicable on the combine position in all derivative contracts on an underlying stock at an exchange. The exchanges are required to achieve client level position monitoring in stages.

The client level position limit for interest rate futures contracts is specified at Rs.100 crore or 15% of the open interest, whichever is higher.
Trading Member Level Position Limits:
For Index options the Trading Member position limits are Rs. 250 cr or 15% of the total open interest in Index Options whichever is higher and for Index futures the Trading Member position limits are Rs. 250 cr or 15% of the total open interest in Index Futures whichever is higher.
For stocks specific products, the trading member position limit is 20% of the market wide limit subject to a ceiling of Rs. 50 crore. In Interest rate futures the Trading member position limit is Rs. 500 Cr or 15% of open interest whichever is higher.

It is also specified that once a member reaches the position limit in a particular underlying then the member shall be permitted to take only offsetting positions (which result in lowering the open position of the member) in derivative contracts on that underlying. In the event that the position limit is breached due to the reduction in the overall open interest in the market, the member are required to take only offsetting positions (which result in lowering the open position of the member) in derivative contract in that underlying and fresh positions shall not be permitted. The position limit at trading member level is required to be computed on a gross basis across all clients of the Trading member.
Market wide limits:
There are no market wide limits for index products. For stock specific products the market wide limit of open positions (in terms of the number of underlying stock) on an option and futures contract on a particular underlying stock would be lower of –

• 30 times the average number of shares traded daily, during the previous calendar month, in the cash segment of the Exchange,

Or

• 20% of the number of shares held by non-promoters i.e. 20% of the free float, in terms of number of shares of a company.

Summary of Position Limits

What are the requirements for a FII and its sub-account to invest in equity derivatives market?
A SEBI registered FIIs and its sub-account are required to pay initial margins, exposure margins and mark to market settlements in the derivatives market as required by any other investor. Further, the FII and its sub-account are also subject to position limits for trading in derivative contracts. The FII and sub-account position limits for the various derivative products are as under:

What are the requirements for a NRI to invest in equity derivatives market?
NRIs are permitted in invest in exchange traded derivative contracts subject to the margin and other requirements which are in place for other investors. In addition, a NRI is subject to the following position limits:

What are Currency Futures?
Currency futures are contracts to buy or sell a specific underlying currency at a specific time in the future, for a specific price. Currency futures are exchange-traded contracts and they are standardized in terms of delivery date, amount and contract terms.
Currency future contracts allow investors to hedge against foreign exchange risk. Since these contracts are marked-to-market daily, investors can--by closing out their position--exit from their obligation to buy or sell the currency prior to the contract's delivery date.

What are the parameters for initial margin, exposure margin and what are the position limits specified for exchange traded currency futures?

What are the eligibility criteria for members of the currency futures segment?
The trading member is subject to a balance sheet networth requirement of Rs. 1 crore while the clearing member is subject to a balance sheet networth requirement of Rs. 10 crores. The clearing member is subject to a liquid networth requirement of Rs. 50 lakhs.

What are the eligibility criteria for setting up of currency futures segment in a recognized stock exchange?
A recognized stock exchange having nationwide terminals or a new exchange recognized by SEBI may set up currency futures segment after obtaining SEBI’s approval. The currency futures segment should fulfill the following eligibility conditions for approval:

1. The trading should take place through an online screen-based trading system,     which also has a disaster recovery site.
2. The clearing of the currency derivatives market should be done by an independent Clearing Corporation, which satisfies the eligibility for a clearing corporation.
3. The exchange must have an online surveillance capability which monitors positions, prices and volumes in real time so as to deter market manipulation.
4. The exchange shall have a balance sheet networth of atleast Rs. 100 crores.
5. Information about trades, quantities, and quotes should be disseminated by the exchange in real time to at least two information vending networks which are accessible to investors in the country.
6. The per-half-hour capacity of the computers and the network should be at least 4 to 5 times of the anticipated peak load in any half hour, or of the actual peak load seen in any half-hour during the preceding six months, whichever is higher. This shall be reviewed from time to time on the basis of experience.
7. The segment should have at least 50 members to start currency derivatives trading.
8. The exchange should have arbitration and investor grievances redressal mechanism operative from all the four areas/regions of the country.
9. The exchange should have adequate inspection capability.
10. If already existing, the exchange should have a satisfactory record of monitoring its members, handling investor complaints and preventing irregularities in trading.

What measures have been specified by SEBI to protect the rights of investor in Derivatives Market?
The measures specified by SEBI include:

• Investor's money has to be kept separate at all levels and is permitted to be used only against the liability of the Investor and is not available to the trading member or clearing member or even any other investor.
• The Trading Member is required to provide every investor with a risk disclosure document which will disclose the risks associated with the derivatives trading so that investors can take a conscious decision to trade in derivatives.
• Investor would get the contract note duly time stamped for receipt of the order and execution of the order. The order will be executed with the identity of the client and without client ID order will not be accepted by the system. The investor could also demand the trade confirmation slip with his ID in support of the contract note. This will protect him from the risk of price favour, if any, extended by the Member.
• In the derivative markets all money paid by the Investor towards margins on all open positions is kept in trust with the Clearing House/Clearing corporation and in the event of default of the Trading or Clearing Member the amounts paid by the client towards margins are segregated and not utilised towards the default of the member. However, in the event of a default of a member, losses suffered by the Investor, if any, on settled / closed out position are compensated from the Investor Protection Fund, as per the rules, bye-laws and regulations of the derivative segment of the exchanges.  

The Exchanges are required to set up arbitration and investor grievances redressal mechanism operative from all the four areas / regions of the country.

 

To enable you to easily understand important terms, frequently used in derivatives trading, we have a few phrases listed below. Click on any of them to get an explanation:

Anticipatory Hedge
A trader expects to make a spot transaction at a future date and opens a futures position now to protect against a change in the spot price.

Arbitrage
The simultaneous purchase of one asset against the sale of the same or equivalent asset in two different markets to create a riskless profit due to price discrepancies.

Arbitrage band
The band around the no-arbitrage price within which arbitrage transactions are not worthwhile.

Arbitrage Channel
See arbitrage band.

Arbitrage risk
While the arbitrage transaction is riskless in theory, in practice, some risks may be present.

Ask price
The price at which the market maker is willing to sell. Also called the offer price.

Back Contract
See deferred contract.

Backwardation
This occurs when the spot price exceeds the current price of a futures contract. The opposite of contango.

Basis
The difference between the cash price of a financial instrument and the price of a particular futures contract relating to that instrument. Also known as a crude basis or simple basis.

Basic risk
The possibility that the value of the basis will change over time.

Basic risk
A market in which prices are falling.

Bear spread
A calendar spread designed to profit in a bear market.

Beta
A measure of responsiveness of a security or portfolio to movements in the stock market as a whole. Measures systematic risk.

Bid-ask bounce
In the absence of new information, the transaction prices for a security will fluctuate between the bid and the ask price, depending on whether the trade was initiated by a buyer or a seller.

Bid-ask spread
The difference between the ask price and bid price.

Bid price
The price at which a market maker is willing to buy.

Broker
A person who acts as an agent for others in buying and selling futures contracts in return for a commission.

Bull market
A market in which prices are rising.

Bull spread
A calendar spread designed to profit from a bull market.

Buy-and-hold
A passive strategy in which a trader buys a security (or portfolio), which is then held for a period of time without revision.

Buying in
See liquidation.

Calendar spread
The simultaneous purchase and sale of futures contracts for different delivery months of the same financial instrument. Also called an intracommodity spread, a horizontal spread or a time spread.

CAPM
Capital Assets Pricing Model. The equilibrium expected return on an asset depends on the riskless interest rate, the expected return on the market and the asset’s beta (B) value.

Carrying costs
See carrying charges.

Carrying charges
The total cost of carrying an asset forwards in time, including storage, insurance and financing costs.

Cascade theory
The stock market crash of October 1987 was caused by a fall in stock market price, which led portfolio insurers to sell index futures, resulting in a drop in their price, and, via index arbitrage, a further fall in stock market prices, etc.

Cascade theory
An arbitrage transaction where the trader holds a long position in the underlying asset and a short position in the corresponding futures contract.

Cash market
In commodities markets this term is used to refer to the market in a particular grade and location of the underlying asset. For index futures there is only one underlying grade and location, and so the cash market is synonymous with the spot market.

Cash price
See spot price.

Cash settlement
At delivery time, instead of the physical transfer of the underlying asset, there is a final marking to the market at the EDSP and the positions are closed out.

CFTC
Commodity Futures Trading Commission. An independent US federal agency which has regulated futures trading in the United States since 21st April 1975.

Cheap
See Underpriced.

Circuit breaker
A trading halt when the price movement exceeds some present limit.

Clearing house
An organisation connected with futures exchange through which all contracts are reconciled, settled, guaranteed and later either offset or fulfilled through delivery or cash settlement. Its function is to manage the margin and delivery systems, as well as to guarantee performance of exchange traded contracts.

Clearing member
A member of the clearing house.

Close
The time period at the end of the trading session during which that day’s settlement price is determined.

Close out
See liquidation.

Closing Price
The last price of the trading period for a security.

Commission
A fee charged by a broker to a customer when a position is liquidated. See round trip.

Commodity pool
See future fund.

Commodity pool operator
The firm managing a commodity pool. This terminology is common in the U.S.

Commodity trading adviser
Professional traders who conduct individually managed accounts on behalf of investors. This terminology is common in the U.S.

Composite hedge
A single spot position is hedged using a number of different futures.

Compulsory Close-Out
A customer’s open positions in futures contracts are sqaured-up by the member firm holding the account or the Clearing House, usually after the customer fails to meet margin calls. Also see Forced liquidation.

Condor spread
A bull (bear) calendar spread in two different maturities is matched by a bear (bull) calendar spread in another two maturities. This requires there to be at least four outstanding maturities.

Contagion
Mistakes in setting prices in one market are transmitted to another.

Contango
This exists when the spot price is less than the current price of a futures contract. The opposite of backwardation.

Continuous compounding
Interest is accurued continuously rather than at discrete intervals. The interest is assumed to be added to the capital sum and so interest is then also payable on the interest received.

Contract
The standard unit of trading for futures markets.

Contract month
See delivery month.

Contract multiplier
The monetary value that is multiplied by the index value to determine the market value of the futures contract.

Contract specification
The standard terms of the futures contract to be traded.e g. size of the contract, tick size, settlement and margining methodology, trading times, delivery procedures.

Convergence
The movement to equality of the spot and futures prices as the delivery date approaches.

Corner
A few people gain control of all available supplies of the underlying asset.

Cost of carry
The cost of holding a stock of the underlying e g the costs of storing, insuring and financing the asset.

Cost of carry price
The futures prices given by the cost of carrying an equivalent spot position until delivery.

Counterparty
The other party (buyer or seller ) to a transaction.

Counterparty risk
The risk the counterparty will not fulfil the terms of the contract. Also called default risk.

Covering
See liquidation.

Cross hedge
Hedging a risk is one asset by initiating a position in a different but related asset.

Crossing
A situation where the broker acts for both the buyer and seller. All cross trades must be transacted on the trading floor, or through the screen market. This is currently not allowed by SEBI in India.

Crowd
The group of people standing in the futures pit.

Crude basis
See basis.

Cum dividend
A share is cum dividend when the purchaser receives the next dividend payment.

Day order
An order to trade futures contracts that automatically expires at the end of that day’s trading session.

Day trades
Trades that are opened and closed on the same day.

Default risk
The risk that the counterparty will fail to meet their obligations under a contract.

Deferred contract
Futures contracts other than the near contract.

Delivery
The transfer of ownership of an actual financial instrument, or final cash payment inlieu thereof, in settlement of a futures contract under the specific terms and procedures established by the exchange. Also see settlement.

Delivery day
The day on which the futures contract matures. Also known as expiry day.

Delivery month
The calendar month on which the futures contract matures, resulting in delivery or cash settlement of the specified financial instrument. Also known as expiration month.

Delivery price
The price fixed by the clearing house at which deliveries on futures contracts are invoiced. Also known as the expiry price or the settlement price.

Derivative
A financial instrument designed to replicate an underlying security for the purpose of transferring risk.

Discrete compounding
Interest payments are made periodically. The interest is assumed to be added to the capital sum and so interest is then payable on the interest received.

Double auction market
This occurs when the price is determined by competitive bidding between both buyer and sellers, as in futures markets.

Dual capacity
A floor trader is allowed to trade on his or her own behalf, as well as an agent for others.

Dual listing
Futures contracts on the same underlying asset are traded on more than one exchange.

Dynamic hedge
An investment strategy in which a long position in shares is hedged by selling futures. The futures position is adjusted frequently so that it replicates a purchased put option.

Efficient frontier
Feasible combinations of expected profit and risk which, for each level of risk, have maximum profit.

Eligible margin
The cash or other collateral which may be accepted as cover for margin obligations.

EDSP
Exchange Delivery Settlement Price. This is the price at which the delivery or cash settlement takes place, expressed in index points. This terminology is common in the U.S.

Equity swap
A contract between two parties by which they swap the returns from an equity portfolio and an investment at a fixed or variable interest rate.

Excess return
The return on a security beyond that which could have been earned on riskless asset.

Ex-dividend
A share is ex-dividend when the purchaser does not receive the next dividend payment.

Execution risk
The risk that prices may move between the time an order is initiated and executed.

Expiration
The date that any futures contract (or option) ceases to exist.

Expiration month
See delivery month.

Fair value
The no-arbitrage price of a futures contract. Also known as theoretical value.

Fair value range
See arbitrage band.

Far contract
The future that is furthest from its delivery month i. e. has the longest maturity.

Fill or kill order
An order to trade futures contracts which must be executed immediately. If not it is cancelled.

Financial engineering
The process of designing new financial instruments, especially derivative securities.

Float capitalisation
The value of that portion of the firm’s equity that is available for trading, and so excludes shares in the hands of controlling investors.

Floor trader
A person on the floor of an exchange who executes orders in the open outcry system.

Forced liquidation
A customer’s open positions in futures contracts are offset by the brokerage firm holding the account, usually after the customer fails to meet margin calls. Also called compulsory close-out.

Forward contract
An agreement between two parties to trade an asset at a specified future date and price. This is an OTC product.

Forward months
Futures contracts other than the near contract.

Front month
See near contract.

Front running
Brokers trade on their own behalf, ahead of their customers order’s. This was only banned in Japan in December 1992.

Fundamental Analysis
The application of economic analysis to publicly available information to predict price movements.

Futures contract
A legal, transferable standardised contract that represents an agreement to buy or sell a quantity of a standardised asset at a predetermined delivery date. This is an exchange traded product.

Futures fund
They raise money from investors and pool this capital into a fund which is invested in futures contracts. A popular form is a 90/10 fund.

Futures and options fund
U K unit trusts that can invest up to 10 percent of their funds in futures and options.

Futures option
An option written on a futures contract.

Geared futures and options fund
U K unit trusts that can invest up to 20 percent of their funds in futures and options and have the potential to lose all the money in the fund.

Generalised hedge
A number of different spot positions are hedged using a variety of different futures.

Hedge
A spread between a spot asset and a futures position that reduces risk.

Hedge portfolio
The portfolio of shares whose risk is being hedged away.

Hedge ratio
The number of futures contracts bought or sold divided by the number of spot contracts whose risk is being hedged.

Hedging
The purchase or sale of futures contracts to offset possible changes in the value of assets or cost of liabilities currently held, or expected to be held at some future date.

Holding period
The time period over which an investment is held.

Horizontal spread
See calendar spread.

Implementation risk
The risk that new information may arrive after an investors has decided to trade and before the order is submitted.

Implied volatility
The variance of returns on an asset that is implied by equating the observed and theoretical prices of an option on that asset.

Index fund
An institutional investment portfolio that aims to replicate the performance of a chosen market index.

Index option
An option written on a stock index.

Index participation
The trading of baskets of shares corresponding to those in some specified market index. The buyer of the index participation pays immediately in exchange for a promise by the seller to deliver the shares (or their cash equivalent) at one of a number of subsequent dates, chosen by the buyer. Also know as an Exchange Traded Fund (ETF).

Infrequent trading
If trading is not continuous it is infrequent, infrequent trading may be either non-synchronous trading or non-trading.

Initial Margin
The ‘good faith’ deposit of the cash or securities which a user of futures market must make with his or her broker when purchasing or selling futures contracts, as a guarantee of contract fulfilment.

Inside information
Private and confidential information, usually acquired through a position of trust, that is likely to have an impact on security prices when made public.

Insider trading
Dealing on the basis of inside information.

Intercommodity spread
The simultaneous purchase and sale of futures contracts in different financial instruments.

Interdelivery spread
See calendar spread.

Intermarket spread
A spread involving futures contracts traded on different exchanges.

Intermonth spread
See calendar spread.

Intracommodity spread
See calendar spread.

Intramarket spread
A spread involving future contracts traded on the same exchange.

Invertmarket spread
A market in which the price of a stock index futures is higher the closer is the contract to delivery.

Kerb trading
Unofficial trading when the market has closed.

Leg
One of the two positions constituting a spread.

Leverage effect
When the price of a share rises and the value of the firm’s outstanding debt is fixed, the ratio of debt to equity falls, i.e. its leverage (or gearing) falls. This makes return on the share less risky. A reverse argument applies for price falls.

Lifting a leg
Liquidating one side of a spread or arbitrage position prior to liquidating the other side. Also called ‘legging out’.

Limit down
This occurs when the futures price has moved down to the lower price limit.

Limit move
The price has increased or decreased by the maximum amount permitted by the price limits.

Limit order
An order to buy or sell at a specific price (or better), to be executed when and if the market price reaches the specified price.

Limit order book
A list of the outstanding limit orders.

Limit price
See price limit.

Limit up
This occurs when the price has moved up to the upper price limit.

Liquidation
Any transaction that offsets or closes out a previously established long or short position; also known as buying in or covering.

Liquidity
The degree to which a market can accommodate a large volume of business without moving the price, i.e. market impact.

Local
A floor trader who executes trades on his or her own account in the open outcry system.

Long
A market position established by buying one or more futures contracts not yet close out through an offsetting sale; the opposite of shot.

Long hedge
A hedge involving a long futures position and a short spot position.

Long the basic
The purchase of the underlying asset and sale of contracts in the corresponding futures contract.

Lot
See contract.

Macro hedging
A firm hedges the combined exposure of all its assets and liabilities. See also micro hedging.

Maintenance margin
The minimum amount which a person is required to keep in their margin account.

Margin
A deposit of funds to provide collateral for an investment position. See also initial margin, variation margin and maintenance margin.

Margin call
A request for the payment of additional funds into a person’s margin account.

Market capitalisation
This is calculated by multiplying the number of a company’s shares issued by the share price.

Market efficiency
The degree to which current prices reflect a set of information.

Market-if-touched order
An order to buy futures contracts which becomes a market order if the market reaches a specified price below the current price, or to sell if the market price reaches a specific level above the current price. Opposite of a s order.

Market impact
See liquidity.

Market maker
A dealer who makes firm bids and offers at which he or she will trade.

Market-on-close order
An order to buy or sell at a price as close as possible to the closing price for that day.

Market-on-open
A market order to be executed during the opening.

Market order
An order to buy or sell for immediate execution at the best obtainable price.

Market portfolio
A market value weighted portfolio consisting of every share traded on the exchange.

Market risk
The possibility of gain or loss due to movements in the general level of the stock market. Also see systemic risk.

Marking to the market
The daily revaluation of open positions to reflect profits and losses based on closing market prices at the end of the trading day.

Matching
The process by which buy and sell transactions are reconciled, before being passed to the clearing house.

Maturity
The length of time before delivery.

Micro hedging
A firm hedges only specific transactions rather than all its assets and liabilities. See also macro hedging.

Minimum price movement
The smallest possible price change. See also point and tick size.

Mispricing
It usually refers to the actual less the no-arbitrage futures price, and may be deflated by either the spot price or the no-arbitrage futures price. In a few cases the mispricing incorporates transactions costs.

Momentum trader
A trader who sells when the market falls and buys when the market rises. This behaviour tends to amplify price movements. Also known as a positive feedback trader.

Mutual fund
This is a type investment company that sells its shares (called units) to the public and uses the proceeds to invest in other companies.

National futures Association
A self-regulating US body which registers and regulates those employed in the futures brokerage industry.

Naïve hedge ratio
A one-for-one hedge ratio.

Near contract
The future that is nearest to its delivery month i.e. has the shortest maturity.

Net Position
The difference between the long and short open positions in any one future held by an individual or group.

Non – Synchronicity
The stock trades at least once every interval, but not necessarily at the close of each interval. See non-trading.

Non trading
The stock does not trade during every interval. See non-synchronicity.

Normal backwardation
This occurs when the expected price of a futures contract at delivery exceeds the current price of the future.

Normal market
A market in which the price of a stock index futures contract is lower the closer is the contract to delivery.

Novation
The legal word for the conversion of a futures contract between a buyer and seller into two separate contracts, each with the clearing house as counterparty.

Odd lot
A quantity of shares that does not correspond to that in which trading normally takes place.

Offer price
See ask price.

Offset
See liquidation.

Open interest
The cumulative number of either long or short contracts which have been initiated on an exchange, and have not been offset.

Open outcry
The method trading on many futures exchanges whereby bids and offers are audible to all other participants on the floor of the exchange (or pit) in a competitive public action.

Open positions
Contracts which have been initiated and are not yet offset by a subsequent sale of purchase, or by making or taking delivery.

Original margin
The initial margin required to cover a new futures position.

Out trade
A trade for which there is not a matching record by the two parties. This may be because the price, quantity, maturity, counter party or side (long – short) fail to match.

Overbought
A view that the market price has risen too strictly in relation to the underline fundamental factors.

Overnight Trade
A trade which is not liquidated on the same day in which it was established.

Overpriced
The actual futures price exceeds the no-arbitrage futures price.

Oversold
A view that the market price has declined too steeply in relation to the underlying fundamental factors.

Over-the-counter(OTC) market
A market where dealing does not take place at an organised exchange.

Perfect hedge
A hedge where the change in the value of the future contracts is identical to the change in the value of the other asset or liability.

Physical delivery
Settlement of a futures contract by the supply or receipt of the asset underlying the contract.

Pit
An octagonal or hexagonal area on the trading floor of an exchange, surrounded by a tier of steps upon which traders and brokers stand while executing futures trades in the open outcry system.

Point
This can mean the minimum permissable price change, or it can mean a price change of 100 basis points. For index point are simply the units of measurement of the index. Currently for the FT-SE 100 the minimum price movements is 0.5 index points.

Portfolio insurance
An investment strategy employing various combinations of shares, options, futures and debt that is designed to provide a minimum or floor value to the portfolio.

Position
A market commitment. Also see net position.

Position limit
A restriction on the maximum number of contracts that can be held by a single trader at any one time.

Position trading
A trading strategy in which a position is held for longer than one day.

Positive feedback tader
See momentum trader.

Price discover
The process by which a market (usually the futures market) reflects new information before another related market (usually the spot mrket).

Price limit
The maximum and minimum prices, as specified by the exchange, between which transactions may take place during a single trading session.

Price range
The difference between the highest and lowest pricing during a given period.

Price relative
The price at time t + l divided by the price at time t.

Programme trading
The simultaneous trading of a basket of shares as part of a plane or strategy. The NYSE definition require the simultaneous trading of at least fifteen stocks with a total value of over $1 million.

Punching and settlement price
A manipulator first establishes a long (short) position in index futures, and then buys (sells) shares to push the final settlement price up (down).

Pyramiding
The use of profits on a previously established position as margin for adding to that position.

Quasi-futures contract
This is the same as a futures contract, except that the payments of variation margin do not involve the full daily price change. Instead, the traders pays(or receives) each day the present value of the daily price change if it were paid on delivery day; a smaller sum.

Queue
The sequence of potential arbitrageurs, in order of increasing transactions costs.

Random walk
The theory that changes in the variable (for example, share returns) are at random; that is, they are independently and identically distributed over time.

Realised bid-ask price
The difference between the prices at which scalpers have bought and sold.

Reportable position
The number of futures contracts above which one must report daily to the exchange or the CFTC the size of the position by delivery month and purpose of trading.

Reserve cash and carry
An arbitrage transaction where the trader holds a short position in the underlying asset and a long position in the corresponding futures contract.

Rich
See overpriced.

Ring
See pit.

Risk premium
The additional return risk-averse investors require for assuming risk.

Roll over
Liquidation for a futures position, and the establishment of a similar position in a more distant delivery month. This is also called a switch. When a hedger switches their futures position to a more distant delivery month this can be called ‘rolling the hedge forwards’.

Round lot
A quantity of shares that corresponds to that in which trading normally takes place.

Round trip
The purchase (sale) of a futures contract and the subsequent offsetting sale (purchase). Transactions costs are normally quted on a ‘round trip’ basis.

Round turn
See round trip.

Rule 80a in U.S.
When the NYSE moves down (up) by more than some preset limit, selling (buying) shares (not just short selling) as part of an index arbitrage transaction can be execute only if the last price movement was up (down). This rule was introduced in 1990.

Scalp
To trade for small gains, normally by establishing and liquidating a futures position quickly, often within minutes, but always within the same day.

Scanning range
The largest price movement in the underlying security for which the clearing house requires cover.

SEBI Securities and Exchange Board of India
The regulatory body for all participants in the securities and derivatives markets in India.

SEC
Securities and Exchange Commission. A federal agency charged with the regulation of all US equity and options markets.

Security market line
A line showing the relationship between a security’s beta and its expected return.

Settlement
The process by which clearing members close positions.

Settlement date
See delivery date.

Settlement price
The price which the clearing house uses to determine the daily variation margin payments. It may differ from the price of the last transaction.

Sharpe’s measure
A measure of the risk adjusted performance of an investment. It is calculated as the excess return on the investment divided by the standard deviation of investment returns.

Short
A market position established by selling one or more futures contracts not yet closed out through an offsetting purchase in anticipation of falling prices; the opposite of long.

Short hedge
A hedge involving a short futures position and a long spot position.

Short sale
A trader sells shares he or she does not own This is equivalent to a negative holding of the share.

Short the basis
The purchase of a futures contract as a hedge against a commitment to sell the underlying asset.

Simple basis
See basis.

Size effect
This exists when the return of small firms exceed the risk adjusted returns predicted by the CAPM.

SPAN
Standard Portfolio Analysis of Risk. This is a system for calculating initial margins on portfolios of options and futures developed by the CME, and used by them since 16 December 1988, and by LIFFE from 2 April 1991.

Specialist
A floor trader charged with the making of a fair and orderly market in particular shares or options.

Speculation
Trading on anticipated price changes, where the trader does not hold another position which will offset any such price movements.

Spiders
An example of an ETF, Standard and Poor’s Depositary Receipts (SPDRs) were introduced on 29 January 1993 by AMEX. They represent shares in a trust consisting of a basket of shares that is designed to track the S&P500 index. The trust has a life of 25 years, at which point it will be distributed to share holders.

Spot market
The market in which the asset underlying the futures contract is traded e.g. the stock market.

Spot month
See delivery month.

Spot price
A derivation of ‘on the spot’ usually referring to the cash market price of a financial instrument available for immediate delivery.

Spread
The simultaneous purchase of one futures contract and sale of another, in the expectation that the price relationship between the two will change so that the subsequent offsetting sale and purchase will yield a net profit.

Spread basis
The difference in the prices of the near and far contracts in a spread.

Spread margin
A reduced margin payment for the holder of a spread position.

Spread ratio
The number of futures contracts bought, divided by the number of futures contracts sold.

Stack hedge
A large position in an existing futures contract is partly rolled over into a later contract month, possibly several times. This procedure may be used to hedge a series of payments or receipts.

Stale prices
A price is stale if it refers to the price of a trade that took place some time ago. See infrequent trading.

S order
A market order to buy when the market price has touched a specified level above the current price, or a market order to sell when the market price has touched a specified level below the current price. Also known as a s-loss order. Opposite of a market-if-touched order.

Straddle
For futures contracts, this is a synonym for a spread.

Strengthening of the basis
This occurs when the futures price declines relative to the spot price.

Strike price
See exercise price.

Strip hedge
A trader takes the same position (long or short) in a future for a series of delivery dares. This may be used to hedge a series of payments or receipts.

Switch
See roll over.

Synthetic futures
A combination of a long call option and a short put option, or debt and the underlying asset, that replicates the behaviour of a long futures contract.

Systematic Risk
Risk inherent in the market as a whole which cannot be diversified away. It is measured for each firm by a ‘beta’ value. Also known as market risk.

Tail risk
The risk created by marking to the market.

Tailing factor
The correction factor by which the hedge ratio is multiplied to allow for tail risk.

Tailing the hedge
Correcting the size of hedge to allow for the risks of marking to the market.

Tax timing option
Capital gain (losses) on shares are taxable when realised. The tax timing option refers to the fact that the owner can choose when to liquidate his or her position in the shares, and hence when the tax liability (or loss) occurs.

Technical analysis
The prediction of prices by examining past prices, volume and open interest .

Term structure of futures prices
The relationship between futures prices on the same underlying asset, but with a different time to maturity.

Theoretical value
See fair value.

Thin market
A market with few trades.

TIMS
Theoritical Intermarket Margining System. This another system for calculating performance bond (initial margin) requirements for options. It is developed by the Options Clearing Corporation OCC).

Tick size
Minimum permitted movement in the quotation. Measured in index points.

Tick price
See minimum price movement.

Time spread
See calendar spread.

Tracking error
The deviations between a portfolio’s performance and that of the portfolio whose performance it is desired to mimic.

Trading lag
The time delay between when an order is initiated and executed.

Trading limit
The maximum number of contracts that a person can trade in a single day.

Triple witching hour
That time every 3 months when four different contracts reach maturity – stock index futures contracts, stock index options on index futures and some options on index futures and some options on individual stocks.

Underlying assets
The security, stock, commodity or index on which a futures contract is based.

Underpriced
The actual futures price is less than the no-arbitrage futures price.

Unsystematic risk
Risk due to event which affect individual companies, not the market as whole. It can be removed by holding a well diversified portfolio.

Unwind
See liquidation.

Uptick
An increase of one tick in the price of a security.

VaR
Value at Risk. A risk management methodology, which attempts to measure the maximum loss possible on a particular position, with a specified level of certainty or confidence.

Value basis
The actual futures price less the no-arbitrage futures price.

Value trader
A trader who buys when assets look underpriced, and sells when assets look overpriced. Such a trader tends to buy when there is a large drop in prices, and sell when there is a large rise, and so tends to stabilise prices.

Variation margin
The gain or losses on open contracts, which are calculated by reference to the settlement price at the end of each trading day and are credited or debited by the clearing house to the clearing member’s margin accounts and by those members to or from the appropriate customers margin accounts.

Volatility
A market is volatile when it is prices fluctuate a lot. Academics often choose to measure the volatility of a variable by its variance.

Volume
The number of transactions in a futures contract during a specified period of time.

Weakening of the basis
This occurs when the futures price rises relative to the spot price.est of the week.

Zero-sum game
This is when the gains (losses) of the long positions are exactly equal to the losses (gains) of the short positions. This is true for the market as a whole for all futures products.

90/10 fund
A sum is invested in fixed interest securities to guarantee the initial investment at a specified date (e.g. 90 percent of the money), and the remainder (e.g. 10 percent) is used to trade futures.

Real estate is a legal term that encompasses land along with anything permanently affixed to the land, such as buildings, specifically property that is stationary, or fixed in location. Real estate law is the body of regulations and legal codes which pertain to such matters under a particular jurisdiction.

The Indian Real Estate Industry has witnessed dramatic changes over the last two years. The integration of the Indian economy with the global economy has led to an increase in corporate activities. This has led to a huge increase in demand for commercial and retail space.

Real estate is often considered synonymous with real property also sometimes called realty.

Title of Real Estate

• Lease Hold
• Free Hold

Types of Real Estate

• Land: Agriculture, NA, Commercial
• Buildings: Residential, Commercial, Social, Sports, Entertainment etc.

Common Types of measurement

• Sq. Mtr.
• Guntha
• Acre
• Carpet
• Built up
• Super Built up

Cost of investing in Real Estate

• Registration Amount
• Stamp Duty
• Local Municipal Taxes
• Maintenance
• Amenity Charges etc.

Highlights

• Demand for residential space has grown by 30% pa for the past five years
• In the past few years, real estate prices have increased by 50%-100%
• Altogether 162 deductions and exemptions have been outlined for those intending to invest in real estate

Indian real estate has huge potential demand in almost every sector especially commercial, residential, retail, industrial, hospitality, healthcare etc.

Commercial office space requirement is led by the burgeoning outsourcing and Information Technology Industry. The leaders of the IT/ITES world have set up or are setting up their centers in India. Estimated demand from IT/ITES sector alone is expected to be 150mn sq.ft. of space across the major cities by 2010.

In residential sector there is housing shortage of 19.4 million units out of which 6.7 million are in urban India.

The main growth thrust is coming due to

• Favourable demographics,
• Increasing purchasing power,
• Existence of customer friendly banks & housing finance companies,
• Professionalism in real estate and
• Favourable reforms initiated by the government to attract global investors.

Income Tax Benefits

The residential property should be a long-term capital asset i.e. it should be held by the assessee for a period of 36 months, prior to the date of the transfer.

Concession is available by way of exemption from income tax on capital gains arising on transfer of a residential property. The exemptions are provided in Sections 54 and 54EC of the Income-tax Act (the Act).

The exemption is available on re-investment of the capital gains in specified assets by the assessee. The exemption under Section 54 of the Act is available to an assessee who is either an individual or a Hindu Undivided Family (HUF). The exemption under Section 54EC is available to any assessee.

Under the provisions of Section 54 of the Act, the assessee should, within a period of one year before or 2 years after the date on which the transfer took place, have purchased or within a period of 3 years, after the date of transfer, constructed a residential house. Under the provisions of Section 54EC of the Act, the assessee should invest the capital gains in the specified capital asset, within a period of 6 months, after the date of such a transfer.

Under the provisions of Section 54 of the Act, the capital gains should be re-invested in the construction or purchase of another residential property. Under the provisions of Section 54EC of the Act, the capital gains should be re-invested in 'long-term specified asset'. For the purpose of this provision, long-term specified asset means any bond redeemable after 3 years, issued on or after 1 April 2000, by National Bank for Agriculture and Rural Development or by National Highways Authority of India.

Major Concerns

• Unaffordability
• Increase in loan tenure
• Increase in EMI to Income Ratio

Precautions to be taken:

Generally one copy of the exchange agreement is made and registered and then there are various practical problems.

• Assuming there is one Flat - A owned by Person AA and he wants to exchange it with Flat B owned by Person BB. In the Exchange Agreement the should be the clause where it states that original agreement will be considered original agreement for Flat A and will remain with its new owner Person BB and second copy will be considered original agreement for Flat B and will remain with its new owner Person AA
• Agreements should be made in duplicate. The original agreement will be charged with full stamp duty and second copy will be charged with Rs.20
• Both agreements must be registered. The orginal agreement will be charged full registration fees and second copy will be charged a nominal amount.
• Both the persons must keep their respective copies and will be free from each other in all respects.

The market is rife with speculations on the expected direction of property prices, with almost an equal probability of prices staying at current levels, or going up even further, or coming down.

One must keep in mind while buying a property

• Locality: Transport, schools, hospitals, market, business district, entertainment centres, hotels, restaurants, pollution levels
• Quoted area: Carpet, Built Up Area and super Built Up Area
• Vehicle parking space
• Quality of construction
• Reputation of the builder or seller
• Sufficient water and electric supply, other utilities
• Cost components: price, stamp duty, registration charges, transfer fees, monthly outgoings and society charges, costs of utilities.
• Potential for resale or renting out of the property
• Any other distinguishing features or advantages of the property

Checklist for buying residential or commercial property

• Market Trends about prevalent rates of property in the vicinity and last known transactions
• Identify the property you wish to purchase
• Formulate commercial terms: Distinguish between terms and conditions of the contract that are negotiable and those, which are fixed e.g. Price, payment schedule, time of completion etc.
• Avail of services of a professional: List your requirements with a reputed intermediary
• Ask for photocopies of the all deeds of title related to the property to be purchased:  Examine the deeds to establish the ownership of the property by seller, preferably through an advocate. Ascertain the survey number, village and registration district of the property as these details are required for registration of the sale. Previous encumbrances and loans, if any on the property must be cleared before completion of purchase of the property. The title of the Vendor to the property must be clear and marketable.
• Finalise commercial terms of purchase of the property: Ascertain transfer fees, stamp duty and registration charges to be paid on purchase of the property.
• Ascertain outgoings to be for the property: Property tax, water and electricity charges, society charges, maintenance charges.
• Request Vendor to obtain, if applicable, consent, permission, sanction, no objection certificate of various authorities such as the (a) society (b) the income tax authority (c) Municipal Corporation (d) the competent authority under the Urban Land Ceiling and Regulation Act (e) any other authority
• If you require a loan for making payment of the consideration amount: Ask for a pre approval letter from the lending institution
• Permanent Account Number of Vendor and Purchaser: Under Income Tax laws Payment of stamp duty on the formal agreement or document for transfer of the property, signing by both the Vendor and Purchaser and registration
• After payment of the entire sale price, take over legal possession of the property along with documents of title in original from the Vendor of the property
• Change name of the holder of the property to the purchaser in the records of the society, Electricity Company, municipal corporation, Index II etc.

Going forward as and when real estate mutual funds are introduced for retail investors, they need to look into the real estate investment manager, who has the skill sets of managing risk and returns using local knowledge, experience and relationships. This will be the guiding principle to deliver long-term sustainable returns to investors in the years ahead.

The client would be offered following different execution models

Fee Based Model

1. Financial Plan: Indicating required savings to meet desired goals in required Asset Allocation
2. Mailers and Messages: Updating with current market trends, indices and informing about available new or concurrent schemes
3. Periodic Reports: Showing current status of the executed plan on regular intervals or on demand* (*Charges apply)
4. Annual Review by the advisor: Restructuring the plan if required

Charges

• First Meeting chargeable on hourly basis.
• Following charges shall be discussed on case to case basis.

 

Commission Based Model

1. Mailers and Messages: Updating with current market trends, indices and informing about available new or concurrent schemes
2. Periodic Reports: Showing current status on regular intervals or on demand* (*Charges apply)

Charges

• First Meeting: Nil
• Following charges: Nil

Declaration

A commodity is anything for which there is demand, but which is supplied without qualitative differentiation across a market. In other words, copper is copper. Rice is rice. Stereos, on the other hand, have many levels of quality. And, the better a stereo is, the more it will cost. Whereas, the price of copper is universal, and fluctuates daily based on global supply and demand

One of the characteristics of a commodity good is that its price is determined as a function of its market as a whole. Well-established physical commodities have actively traded spot and derivative markets. Generally, these are basic resources and agricultural products such as iron ore, crude oil, coal, ethanol, sugar, coffee beans, soybeans, aluminum, rice, wheat, gold and silver.

Commoditization occurs as a goods or services market loses differentiation across its supply base, often by the diffusion of the intellectual capital necessary to acquire or produce it efficiently. As such, goods that formerly carried premium margins for market participants have become commodities, such as generic pharmaceuticals and silicon chips.

Types of Commodities

• Agriculture: Food Grains
• Live Stock: Meat etc.
• Metal: Base, Precious, Rare
• Minerals
• Energy: Crude, Ethanol, Oil, Gas, Power etc.
• Plastic
• Chemical etc.

Commodity Markets

• Spot: Local State, National, International
• Derivative: Exchange Traded, OTC

Expected returns from a commodity in form of

• Hedging
• Arbitrage
• Trading Profits

Costs of investing in Commodity:                                                         

• Broking Charges
• VAT
• Securities Transaction Tax (STT)
• Service Tax

 
Highlights

• Commodity is highly volatile due to it’s dependence on nature or production and demand supply
• Commodity remains in perishable existence
• Limited/Unlimited liability

A physical substance, such as food, grains, and metals, that is interchangeable with another product of the same type, and that investors buy or sell, usually through spot or futures contracts.

The price of the commodity is subject to supply and demand. Risk is actually the reason exchange trading of the basic agricultural products began. For example, a farmer risks the cost of producing a product ready for market at sometime in the future because he doesn't know what the selling price will be.

Difference between Cash and Future market:

• Cash market is the market for buying and selling physical commodity at a negotiated price. Delivery of the commodity takes place immediately.
  
  
• Futures market is the market for buying and selling standardized contract of the commodity at a pre-determined price. Delivery of the commodity takes place during a future delivery period of the contract if the option of delivery is exercised.

Approach

 

Valuation: Two common measures of value are:

• Market price: The price at which traders are willing to buy or sell the contract
• Arbitrage-free price: No risk-free profits can be made by trading in these contract

DO’S

• Go through all rules, regulations, bye-laws and disclosures made by the exchanges.
• Trade only through - Trading Member (TM) registered with SEBI or authorized person of TM registered with the exchange.
• While dealing with an authorized person, ensure that the contract note has been issued by the TM of the authorized person only.
• While dealing with an authorized person, pay the brokerage/payments/margins etc. to the TM only
• Ensure that for every executed trade you receive duly signed contract note from your TM highlighting the details of the trade along with your unique client-id.
• Obtain receipt for collateral deposited with Trading Member (TM) towards margin.
• Go through details of Client-Trading Member Agreement.
• Know your rights and duties vis-à-vis those of TM/ Clearing Member.
• Be aware of the risk associated with your positions in the market and margin calls on them.
• Collect / pay mark to market margins on your futures position on a daily basis from / to your Trading member.

DON’TS

• Do not start trading before reading and understanding the Risk Disclosure Documents
• Do not trade on any product without knowing the risk and rewards associated with it

An actual physical commodity that is delivered at the completion of a contract, as opposed to a futures contract on that commodity; A futures contract will specify the number of units of the cash commodity that must be delivered, and also the specific features of the cash commodity.

Participants in Commodity trading:

• Hedgers: Hedgers are interested in transferring risk associated with transacting or carrying underlying physical asset.
• Speculators: Speculators are interested in making money by taking a view on future price movements. Commodity futures allow speculators to create high leveraged positions to undertake calculative risk, with the objective of correctly predicting the market movement.
• Arbitragers: Arbitragers are interested in locking in a minimum risk profit by simultaneously entering into transactions in two or more markets. Arbitragers lock in profit when they spot cash and carry arbitrage opportunity; or reverse cash and carry arbitrage opportunity

Analysis of a commodity value:

• Fundamental analysis is the study of the factors that affect supply and demand of any particular asset class. Gathering and interpreting information pertaining to demand and supply of commodities is important in understanding commodity price behaviour. To gain a better understanding of the demand-supply dynamics, we need to know the laws of demand and supply and how these factors affect the final price. General economic principle says demand and supply determine price. This is true for the commodity market too. But factors affecting demand and supply are diverse and independent, having different origin. Therefore, prices of commodity fluctuate so often that it becomes difficult to determine the exact price at a particular point of time.
  
  
  • Production and consumption
  • Import and export
  • Distance between consuming centre and producing centre
  • Cost of transportation
  • Means of transportation
  • Usual trade practice
  • Cultivation period
  • Impact of weather and technology on crop cultivation
  • Scope and potential of production and consumption for a particular commodity and its rivalry with other similar kind of commodity that may be, in turn, a near substitute for it
  • Value chain of the commodity and influence of stakeholders at different levels in value chain
  • Taxation, such as sales tax, import tax, export tax, custom duty, octroi
  • Import and export regulations
  • Inflation
  • Foreign currency exchange rate
  • Government interference
  • Presence of organized institutions
  • Groups and their influence on trading community pertaining to particular commodity
    
    
• Technical analysis involves using quasi-statistical techniques and formal statistics to identify the trend and pattern of time series data. Usually price data is put on chart and inference is made out based on some principles that are called indicators. Technical Analysis involves forecasting of future financial price movements based on the study of the behaviour of historical price movements.
  
  Technical analysis does not result in absolute predictions about the future. Instead, it helps anticipating what is "likely" to happen to prices over time. A wide variety of charts and tools are used to show price over time.
  
  Technical analysis is based on patterns of historical price movement. Combining fundamental and technical analysis will give us a better understanding of the market forces that are affecting the price movements in financial markets.
  
  Technical analyst uses following information for charting purpose.
  
  
  • Open, High, Low and Closing price
  • Open Interest
  • Volume

The client would be offered following different execution models

Fee Based Model

1. Financial Plan: Indicating required savings to meet desired goals in required Asset Allocation
2. Mailers and Messages: Updating with current market trends, indices and informing about available new or concurrent schemes
3. Periodic Reports: Showing current status of the executed plan on regular intervals or on demand* (*Charges apply)
4. Annual Review by the advisor: Restructuring the plan if required

Charges

• First Meeting chargeable on hourly basis
• Following charges shall be discussed on case to case basis.

 

Commission Based Model

Mailers and Messages: Updating with current market trends, indices and informing about available new or concurrent schemes
Periodic Reports: Showing current status on regular intervals or on demand* (*Charges apply)

Charges

• First Meeting: Nil
• Following charges: Nil

Declaration

What is a commodity market?
A commodity market facilitates trading in various commodities. It may be a spot or a derivatives market. In spot market, commodities are bought and sold for immediate delivery, whereas in derivatives market, various financial instruments based on commodities are traded. These financial instruments such as 'futures' are traded in exchanges.

What are commodity futures?
A commodity futures contract is an agreement between two parties to buy or sell the commodity at a future date at today's future price. Futures contracts differ from forward contracts in the sense that they are standardized and exchange traded. In other words, the parties to the contracts do not decide the terms of futures contracts; but they merely accept terms standardized by the Exchange.

Is the concept of trading in commodity futures new in India?
Commodity futures market was very much there in earlier times in India. In fact it was one the most vibrant markets till the early 70s. But due to numerous restrictions the market could not develop further. Now that most of these restrictions have been removed, there is enormous scope for the development and growth of the commodity futures market in the country.

Who regulates the commodity market?
Just as SEBI regulates the stock market, Forward Markets Commission (FMC) regulates commodity market.

Which are the major commodity exchanges in India?
There are 24 commodity exchanges in India. There are three national level commodity exchanges to trade in all permitted commodities. They are: -

Multi Commodity Exchange of India Ltd, Mumbai (MCX) www.mcxindia.com
MCX is an independent and de-mutualised multi commodity exchange. MCX features amongst the world's top three bullion exchanges and top four energy exchanges. Its key shareholders are Financial Technologies (I) Ltd., State Bank of India and it's associates, National Bank for Agriculture and Rural Development (NABARD), National Stock Exchange of India Ltd. (NSE), Fid Fund (Mauritius) Ltd. - an affiliate of Fidelity International, Corporation Bank, Union Bank of India, Canara Bank, Bank of India, Bank of Baroda, HDFC Bank and SBI Life Insurance Co. Ltd.

National Commodity and Derivative Exchange, Mumbai (NCDEX) www.ncdex.com
A consortium of institutions promotes NCDEX. These include the ICICI Bank Limited (ICICI Bank), Life Insurance Corporation of India (LIC), National Bank for Agriculture and Rural Development (NABARD) and National Stock Exchange of India Limited (NSE).

National Multi Commodity Exchange of India Ltd, Ahmedabad (NMCE) www.nmce.com
It is the first de-mutualised electronic multi-commodity Exchange of India. Some of its key promoters are Central Warehousing Corporation (CWC), National Agricultural Co Operative Marketing Federation of India Limited (NAFED), Gujarat Agro Industries Corporation Limited (GAIC) and Punjab National Bank (PNB).

Why invest in commodities?
Transparency and Fair Price Discovery: Trading in commodity futures is transparent and a process of fair price discovery is ensured through large-scale participation. The large participation also reflects views and expectations of a wider section of people concerned with that commodity. Online Platform: Producers, traders and processors, exporters/importers get an online platform through MCX / NCDEX for price risk management.

Hedging: It provides a platform for producers to hedge their positions according to their exposure in physical commodity

No Insider Trading: Dealing in commodities is free from the evils of insider trading. Besides, there are no company specific risks as those seen in stock markets.
Simple Economics: Commodity trading is about the simple economics of demand and supply. More the demand for a commodity higher is its price and vice versa.
Trade on Low Margin: Commodity Futures traders are required to deposit low margins, roughly 5 to 10% of the total value of the contract, much lower compared to other asset classes. The low margin, which again varies across exchanges and commodities, facilitates the taking of large positions at lower capital.
Seasonality Patterns: Quite often provide clue to both short and long term players.
No Counter party Risk: Much like the exchanges in the equity market, Commodity Futures market have Clearing Houses, which guarantee that the terms of the contracts are fulfilled, thereby eliminating the counter party risk.

Wide Participation: The emergence of online trading would enable growth in the commodity market, much akin to the one seen in the equity market. It would also ensure bringing the market closer to both, the user and the trader.

Evolved Pricing: The rise in participation would decrease the risk of cartelisation, ensuring a holistic view on the commodity. Hence, pricing would be more practical and less irrational leading to Fair Price Discovery Mechanism.

Who invests in commodities?
a. Investors.
b. Producers / Farmers.
c. Importers / Exporters.
d. Commodity financers.
e. Agricultural credit providing agencies.
f. Hedgers, speculators, arbitrageurs.
g. Large scale consumers. For e.g. refiners, jewelers, textile mills
h. Corporate having risk exposure in commodities

Give the Comparison between Commodities and Equities?

What are the trading hours?
Commodity Exchanges (MCX and NCDEX) function from 10.00 am to 11.55 pm (Agri-commodities up to 5 pm only) from Monday to Friday. On Saturday the trading hours are 10.00 am to 2.00 pm.

What are the tradable commodities?

Do physical deliveries happen in commodity futures exchanges?
The exchanges, in order to maintain the futures prices in line with the spot market, have made available provisions of settlement of contracts by physical delivery. They also make sure that the futures and spot prices coincide during the settlement so that the fair price discovery mechanism is in place.

Is delivery mandatory in commodity futures contract trading?
It's not mandatory. However there is always a provision for delivery in commodity futures trading to ensure that the future prices are in conformity with the underlying. The right for delivery is normally with the seller; the buyer/seller has to express his intention for delivery about five to seven days before the expiry. However provisions vary from exchange to exchange and commodity to commodity. The market lot for delivery is different for few commodities (higher than the trading lot). The contracts that are not assigned for delivery will be settled in cash.

How many months contract will be available for futures trading?
Normally, at the NCDEX three consecutive calendar month contracts will be available. The MCX is providing different number of contracts for different commodities. For example, in gold there are six contracts in a year (February, April, June, August, October and December) but at a time only three contracts are open for trading.

How will the clearing and settlement take place?
The clearing and settlement will take place through institutions/banks arranged by the exchanges. NCDEX has tied up with NSCCL for clearing purpose. The clearing banks are Canara Bank, HDFC, ICICI and UTI Bank. MCX has tied up with HDFC Bank, BOI, UTI Bank, UBI and IndusInd Bank for providing clearing and settlement facilities.

What is the settlement date?
MTM will be cash-settled by exchange on T+1 basis i.e., next working day after the trading day. However in case of delivery, the settlement date may be five to seven days after the expiry as per contract specifications and exchange rules. The settlement procedure is also available on the related exchange site.

How do I know which quality is being traded in futures as Commodities have many qualities?
The quality specification of each commodity is mentioned in the contract. Each participant will be trading in that particular quality only.

Is Sales Tax applicable on all trades?
If the trade is squared off sales tax is not applicable. The sales tax is applicable only if a trade results into delivery for the seller. Normally it’s the seller’s responsibility to collect and pay the sales tax. The sales tax is applicable at the place of delivery.

Is Sales Tax Registration Compulsory?
Those who want to give (seller) physical delivery need to have sales tax registration number.

Are options also allowed in commodity derivatives?
Options in goods are presently prohibited under Section 19 of the Forward Contracts (Regulation) Act, 1952. No exchange or person can organize or enter into or make or perform options in goods. However the market expects the government to permit options trading in commodities soon.

Abandon: To elect not to exercise or offset a long option position.

Accommodation Trading: Non-competitive trading entered into by a trader, usually to assist another with illegal trades.

Actuals: The physical or cash commodity, as distinguished from a futures contract. See Cash and Spot Commodity.

Agency Bond: A debt security issued by a government-sponsored enterprise such as Fannie Mae or Freddie Mac, designed to resemble a US Treasury bond.

Agency Note: A debt security issued by a government-sponsored enterprise such as Fannie Mae or Freddie Mac, designed to resemble a US Treasury note.

Aggregation: The principle under which all futures positions owned or controlled by one trader (or group of traders acting in concert) are combined to determine reporting status and compliance with speculative position limits. See CFTC Backgrounder: Speculative Limits, Hedging, and Aggregation.

Agricultural Trade Option Merchant: Any person that is in the business of soliciting or entering option transactions involving an enumerated agricultural commodity that are not conducted or executed on or subject to the rules of an exchange.

Allowances: The discounts (premiums) allowed for grades or locations of a commodity lower (higher) than the par (or basis) grade or location specified in the futures contract. See Differentials.
American Option: An option that can be exercised at any time prior to or on the expiration date. See European Option.

Approved Delivery Facility: Any bank, stockyard, mill, storehouse, plant, elevator, or other depository that is authorized by an exchange for the delivery of commodities tendered on futures contracts.

Arbitrage: A strategy involving the simultaneous purchase and sale of identical or equivalent commodity futures contracts or other instruments across two or more markets in order to benefit from a discrepancy in their price relationship. In a theoretical efficient market, there is a lack of opportunity for profitable arbitrage. See Spread.

Arbitration: A process for settling disputes between parties that is less structured than court proceedings. NFA ’s arbitration program provides a forum for resolving futures-related disputes between NFA members or between NFA members and customers. Other forums for customer complaints include the American Arbitration Association.

Artificial Price: A futures price that has been affected by a manipulation and is thus higher or lower than it would have been if it reflected the forces of supply and demand.

Asian Option: An exotic option whose payoff depends on the average price of the underlying asset during some portion of the life of the option.

Ask: The price level of an offer, as in bid-ask spread.

Assignable Contract: A contract that allows the holder to convey his rights to a third party. Exchange-traded contracts are not assignable.

Assignment: Designation by a clearing organization of an option writer who will be required to buy (in the case of a put) or sell (in the case of a call) the underlying futures contract or security when an option has been exercised, especially if it has been exercised early.

Associated Person (AP): An individual who solicits or accepts (other than in a clerical capacity) orders, discretionary accounts, or participation in a commodity pool, or supervises any individual so engaged, on behalf of a Futures Commission Merchant, an Introducing Broker, a Commodity Trading Advisor, a Commodity Pool Operator, or an Agricultural Trade Option Merchant.

At-the-Market: An order to buy or sell a futures contract at whatever price is obtainable when the order reaches the trading facility. See Market Order.

At-the-Money: When an option's strike price is the same as the current trading price of the underlying commodity, the option is at-the-money.

Auction Rate Security: A debt security, typically issued by a municipality, in which the yield is reset on each payment date via a Dutch auction.

Audit Trail: The record of trading information identifying, for example, the brokers participating in each transaction, the firms clearing the trade, the terms and time or sequence of the trade, the order receipt and execution time and, ultimately, and when applicable, the customers involved.

Automatic Exercise: A provision in an option contract specifying that it will be exercised automatically on the expiration date if it is in-the-money by a specified amount, absent instructions to the contrary.

Back Months: Futures delivery months other than the spot or front month (also called deferred months).

Back Office: The department in a financial institution that processes and deals and handles delivery, settlement and regulatory procedures.

Back pricing: Fixing the price of a commodity for which the commitment to purchase has been made in advance. The buyer can fix the price relative to any monthly or periodic delivery using the futures markets.

Back Spread: A delta-neutral ratio spread in which more options are bought than sold. A back spread will be profitable if volatility increases. See Delta.

Backwardation: Market situation in which futures prices are progressively lower in the distant delivery months. For instance, if the gold quotation for January is $360.00 per ounce and that for June is $355.00 per ounce, the backwardation for five months against January is $5.00 per ounce. (Backwardation is the opposite of contango ). See Inverted Market.

Banker's Acceptance: A draft or bill of exchange accepted by a bank where the accepting institution guarantees payment. Used extensively in foreign trade transactions.

Basis: The difference between the spot or cash price of a commodity and the price of the nearest futures contract for the same or a related commodity. Basis is usually computed in relation to the futures contract next to expire and may reflect different time periods, product forms, grades , or locations.

Basis Grade: The grade of a commodity used as the standard or par grade of a futures contract.

Basis Point: The measurement of a change in the yield of a debt security. One basis point equals 1/100 of one percent.

Basis Quote: Offer or sale of a cash commodity in terms of the difference above or below a futures price (e.g., 10 cents over December corn).

Basis Risk: The risk associated with an unexpected widening or narrowing of basis between the time a hedge position is established and the time that it is lifted.

Basis Swap: A swap whose cash settlement price is calculated based on the basis between a futures contract and the spot price of the underlying commodity or a closely related commodity on a specified date.

Bear: One who expects a decline in prices. The opposite of a bull. A news item is considered bearish if it is expected to result in lower prices.

Bear Market: A market in which prices generally are declining over a period of months or years. Opposite of Bull Market.

Bear Market Rally: A temporary rise in prices during a bear market. See Correction.

Bear Spread: (1) A strategy involving the simultaneous purchase and sale of options of the same class and expiration date, but different strike prices. In a bear spread, the option that is purchased has a lower delta than the option that is bought. For example, in a call bear spread, the purchased option has a higher exercise price than the option that is sold. Also called Bear Vertical Spread. (2) The simultaneous purchase and sale of two futures contracts in the same or related commodities with the intention of profiting from a decline in prices but at the same time limiting the potential loss if this expectation does not materialize. In agricultural products, this is accomplished by selling a nearby delivery and buying a deferred delivery

Bear Vertical Spread: See Bear Spread.

Beta (Beta Coefficient): A measure of the variability of rate of return or value of a stock or portfolio compared to that of the overall market, typically used as a measure of riskiness.

Bid: An offer to buy a specific quantity of a commodity at a stated price.

Bid-Ask Spread: The difference between the bid price and the ask or offer price.

Blackboard Trading: The practice, no longer used, of buying and selling commodities by posting prices on a blackboard on a wall of a commodity exchange.

Black-Scholes Model: An option pricing model initially developed by Fischer Black and Myron Scholes for securities options and later refined by Black for options on futures.

Block Trade: A large transaction that is negotiated off a trading floor or facility and then executed on an exchange’s trading facility, as permitted under exchange rules. For more information, see CFTC Advisory: Alternative Execution, or Block Trading, Procedures for the Futures Industry.

Board Order: See Market-if-Touched Order.

Board of Trade: Any organized exchange or other trading facility for the trading of futures and/or option contracts..

Boiler Room: An enterprise that often is operated out of inexpensive, low-rent quarters (hence the term "boiler room"), that uses high pressure sales tactics (generally over the telephone), and possibly false or misleading information to solicit generally unsophisticated investors.

Booking the Basis: A forward pricing sales arrangement in which the cash price is determined either by the buyer or seller within a specified time. At that time, the previously-agreed basis is applied to the then-current futures quotation.

Book Transfer: A series of accounting or bookkeeping entries used to settle a series of cash market transactions.

Box Spread: An option position in which the owner establishes a long call and a short put at one strike price and a short call and a long put at another strike price, all of which are in the same contract month in the same commodity.

Break: A rapid and sharp price decline.

Broad-Based Security Index: Any index of securities that does not meet the legal definition of Narrow-Based Security Index.

Broker: A person paid a fee or commission for executing buy or sell orders for a customer. In commodity futures trading, the term may refer to: (1) Floor Broker — a person who actually executes orders on the trading floor of an exchange; (2) Account Executive or Associated Person — the person who deals with customers in the offices of Futures Commission Merchants; or (3) the Futures Commission Merchant.

Broker Association: Two or more persons with exchange trading privileges who (1) share responsibility for executing customer orders; (2) have access to each other's unfilled customer orders as a result of common employment or other types of relationships; or (3) share profits or losses associated with their brokerage or trading activity.

Bucketing: Directly or indirectly taking the opposite side of a customer's order into a broker's own account or into an account in which a broker has an interest, without open and competitive execution of the order on an exchange. Also called “trading against.”

Bucket Shop: A brokerage enterprise that “books" (i.e., takes the opposite side of) retail customer orders without actually having them executed on an exchange.

Bull: One who expects a rise in prices. The opposite of bear. A news item is considered bullish if it is expected to result in higher prices.

Bullion: Bars or ingots of precious metals, usually cast in standardized sizes.

Bull Market: A market in which prices generally are rising over a period of months or years. Opposite of Bear Market.

Bull Spread: (1) A strategy involving the simultaneous purchase and sale of options of the same class and expiration date but different strike prices. In a bull vertical spread, the purchased option has a higher delta than the option that is sold. For example, in a call bull spread, the purchased option has a lower exercise price than the sold option. Also called Bull Vertical Spread. (2) The simultaneous purchase and sale of two futures contracts in the same or related commodities with the intention of profiting from a rise in prices but at the same time limiting the potential loss if this expectation is wrong. In agricultural commodities, this is accomplished by buying the nearby delivery and selling the deferred.

Bull Vertical Spread: See Bull Spread.

Buoyant: A market in which prices have a tendency to rise easily with a considerable show of strength.

Bunched Order: A discretionary order entered on behalf of multiple customers.

Butterfly Spread: A three-legged option spread in which each leg has the same expiration date but different strike prices. For example, a butterfly spread in soybean call options might consist of one long call at a $5.50 strike price, two short calls at a $6.00 strike price, and one long call at a $6.50 strike price.

Buyer: A market participant who takes a long futures position or buys an option. An option buyer is also called a taker, holder, or owner.

Buyer's Call: A purchase of a specified quantity of a specific grade of a commodity at a fixed number of points above or below a specified delivery month futures price with the buyer allowed a period of time to fix the price either by purchasing a futures contract for the account of the seller or telling the seller when he wishes to fix the price. See Seller’s Call.

Buyer's Market: A condition of the market in which there is an abundance of goods available and hence buyers can afford to be selective and may be able to buy at less than the price that previously prevailed. See Seller's Market.

Buying Hedge (or Long Hedge): Hedging transaction in which futures contracts are bought to protect against possible increases in the cost of commodities. See Hedging.

Buy (or Sell) On Close: To buy (or sell) at the end of the trading session within the closing price range.

Buy (or Sell) On Opening: To buy (or sell) at the beginning of a trading session within the open price range.
 
"Cost and Freight" paid to a point of destination and included in the price quoted; same as C.A.F.

Calendar Spread: (1) The purchase of one delivery month of a given futures contract and simultaneous sale of a different delivery month of the same futures contract; (2) the purchase of a put or call option and the simultaneous sale of the same type of option with typically the same strike price but a different expiration date. Also called a Horizontal Spread or Time Spread.

Call: (1) An option contract giving the buyer the right but not the obligation to purchase a commodity or other asset or to enter into a long futures position; (2) a period at the opening and the close of some futures markets in which the price for each futures contract is established by auction; or (3) the requirement that a financial instrument be returned to the issuer prior to maturity, with principal and accrued interest paid off upon return. See Buyer’s Call, Seller’s Call.

Call Around Market: A market, commonly used for options on futures on European exchanges, in which brokers contact each other outside of the exchange trading facility to arrange block trades.

Call Cotton: Cotton bought or sold on call. See Buyer’s Call, Seller’s Call.

Called: Another term for exercised when an option is a call. In the case of an option on a physical, the writer of a call must deliver the indicated underlying commodity when the option is exercised or called. In the case of an option on a futures contract, a futures position will be created that will require margin, unless the writer of the call has an offsetting position.

Call Rule: An exchange regulation under which an official bid price for a cash commodity is competitively established at the close of each day's trading. It holds until the next opening of the exchange.

Capping: Effecting transactions in an instrument underlying an option shortly before the option's expiration date to depress or prevent a rise in the price of the instrument so that previously written call options will expire worthless, thus protecting premiums previously received. See Pegging.

Carrying Broker: An exchange member firm, usually a Futures Commission Merchant, through whom another broker or customer elects to clear all or part of its trades.

Carrying Charges: Cost of storing a physical commodity or holding a financial instrument over a period of time. These charges include insurance, storage, and interest on the deposited funds, as well as other incidental costs. It is a carrying charge market when there are higher futures prices for each successive contract maturity. If the carrying charge is adequate to reimburse the holder, it is called a "full charge." See Negative Carry, Positive Carry, and Contango.

Cash Commodity: The physical or actual commodity as distinguished from the futures contract, sometimes called Spot Commodity or Actuals.

Cash Forward Sale: See Forward Contract.

Cash Market: The market for the cash commodity (as contrasted to a futures contract) taking the form of: (1) an organized, self-regulated central market (e.g., a commodity exchange); (2) a decentralized over-the-counter market; or (3) a local organization, such as a grain elevator or meat processor, which provides a market for a small region.

Cash Price: The price in the marketplace for actual cash or spot commodities to be delivered via customary market channels.

Cash Settlement: A method of settling certain futures or option contracts whereby the seller (or short) pays the buyer (or long) the cash value of the commodity traded according to a procedure specified in the contract. Also called Financial Settlement, especially in energy derivatives.

CCC: See Commodity Credit Corporation.

CD: See Certificate of Deposit.

CEA: Commodity Exchange Act or Commodity Exchange Authority.

Certificate of Deposit (CD): A time deposit with a specific maturity evidenced by a certificate. Large-denomination CDs are typically negotiable.

CFTC: See Commodity Futures Trading Commission.

CFO: Cancel Former Order.

Certificated or Certified Stocks: Stocks of a commodity that have been inspected and found to be of a quality deliverable against futures contracts, stored at the delivery points designated as regular or acceptable for delivery by an exchange. In grain, called "stocks in deliverable position." See Deliverable Stocks.

Changer: Formerly, a clearing member of both the Mid-America Commodity Exchange (MidAm) and another futures exchange who, for a fee, would assume the opposite side of a transaction on MidAm by taking a spread position between MidAm and the other futures exchange that traded an identical, but larger, contract. Through this service, the changer provided liquidity for MidAm and an economical mechanism for arbitrage between the two markets. MidAm was a subsidiary of the Chicago Board of Trade (CBOT). MidAm was closed by the CBOT in 2003 after all MidAm contracts were delisted on MidAm and relisted on the CBOT as Mini contracts. The CBOT still uses changers for former MidAm contracts that are traded on an open outcry platform.

Charting: The use of graphs and charts in the technical analysis of futures markets to plot trends of price movements, average movements of price, volume of trading, and open interest.

Chartist: Technical trader who reacts to signals derived from graphs of price movements.

Cheapest-to-Deliver: Usually refers to the selection of a class of bonds or notes deliverable against an expiring bond or note futures contract. The bond or note that has the highest implied repo rate is considered cheapest to deliver.

Chooser Option: An exotic option that is transacted in the present, but that at some specified future date is chosen to be either a put or a call option.

Churning: Excessive trading of a discretionary account by a person with control over the account for the purpose of generating commissions while disregarding the interests of the customer.

Circuit Breakers: A system of coordinated trading halts and/or price limits on equity markets and equity derivative markets designed to provide a cooling-off period during large, intraday market declines. The first known use of the term circuit breaker in this context was in the Report of the Presidential Task Force on Market Mechanisms (January 1988), which recommended that circuit breakers be adopted following the market break of October 1987.

C.I.F: Cost, insurance, and freight paid to a point of destination and included in the price quoted.

Class (of options): Options of the same type (i.e., either puts or calls, but not both) covering the same underlying futures contract or other asset (e.g., a March call with a strike price of 62 and a May call with a strike price of 58).

Clearing: The procedure through which the clearing organization becomes the buyer to each seller of a futures contract or other derivative, and the seller to each buyer for clearing members.

Clearing Association: See Clearing Organization.

Clearing House: See Clearing Organization.

Clearing Member: A member of a Clearing Organization. All trades of a non-clearing member must be processed and eventually settled through a clearing member.

Clearing Organization: An entity through which futures and other derivative transactions are cleared and settled. It is also charged with assuring the proper conduct of each contract’s delivery procedures and the adequate financing of trading. A clearing organization may be a division of a particular exchange, an adjunct or affiliate thereof, or a freestanding entity. Also called a clearing house, multilateral clearing organization, or clearing association. See Derivatives Clearing Organization.

Clearing Price: See Settlement Price.

Close: The exchange-designated period at the end of the trading session during which all transactions are considered made "at the close." See Call.

Closing-Out: Liquidating an existing long or short futures or option position with an equal and opposite transaction. Also known as Offset.

Closing Price (or Range): The price (or price range) recorded during trading that takes place in the final period of a trading session’s activity that is officially designated as the "close."

Combination: Puts and calls held either long or short with different strike prices and/or expirations. Types of combinations include straddles and strangles.

Commercial: An entity involved in the production, processing, or merchandising of a commodity.

Commercial Grain Stocks: Domestic grain in store in public and private elevators at important markets and grain afloat in vessels or barges in lake and seaboard ports.

Commercial Paper: Short-term promissory notes issued in bearer form by large corporations, with maturities ranging from 5 to 270 days. Since the notes are unsecured, the commercial paper market generally is dominated by large corporations with impeccable credit ratings.

Commission: (1) The charge made by a futures commission merchant for buying and selling futures contracts; or (2) the fee charged by a futures broker for the execution of an order. Note: when capitalized, the Commission usually refers to the CFTC.

Commitments of Traders Report (COT): A weekly report from the CFTC providing a breakdown of each Tuesday's open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC. Open interest is broken down by aggregate commercial, non-commercial, and non-reportable holdings. See CFTC Backgrounder : The Commitments of Traders Report (COT).

Commitments: See Open Interest.

Commodity: A commodity, as defined in the Commodity Exchange Act, includes the agricultural commodities enumerated in Section 1a(4) of the Commodity Exchange Act and all other goods and articles, except onions as provided in Public Law 85-839 (7 U.S.C. § 13-1), a 1958 law that banned futures trading in onions, and all services, rights, and interests in which contracts for future delivery are presently or in the future dealt in.

Commodity Credit Corporation: A government-owned corporation established in 1933 to assist American agriculture. Major operations include price support programs, foreign sales, and export credit programs for agricultural commodities.

Commodity Exchange Act: The Commodity Exchange Act, 7 U.S.C. § 1, et seq., provides for the federal regulation of commodity futures and options trading. See Commodity Futures Modernization Act.

Commodity Exchange Authority: A regulatory agency of the US Department of Agriculture established to administer the Commodity Exchange Act prior to 1975. The Commodity Exchange Authority was the predecessor of the Commodity Futures Trading Commission.

Commodity Exchange Commission: A commission consisting of the Secretary of Agriculture, Secretary of Commerce, and the Attorney General, responsible for administering the Commodity Exchange Act prior to 1975.

Commodity Futures Modernization Act: The Commodity Futures Modernization Act of 2000 (CFMA), Pub. L. No. 106-554, 114 Stat. 2763, reauthorized the Commodity Futures Trading Commission for five years and overhauled the Commodity Exchange Act to create a flexible structure for the regulation of futures and options trading. Significantly, the CFMA codified an agreement between the CFTC and the Securities and Exchange Commission to repeal the 18-year-old ban on the trading of single stock futures.

Commodity Futures Trading Commission(CFTC): The Federal regulatory agency established by the Commodity Futures Trading Act of 1974 to administer the Commodity Exchange Act.

Commodity-Linked Bond: A bond in which payment to the investor is dependent to a certain extent on the price level of a commodity, such as crude oil, gold, or silver, at maturity.

Commodity Option: An option on a commodity or a futures contract.

Commodity Pool: An investment trust, syndicate, or similar form of enterprise operated for the purpose of trading commodity futures or option contracts. Typically thought of as an enterprise engaged in the business of investing the collective or “pooled” funds of multiple participants in trading commodity futures or options, where participants share in profits and losses on a pro rata basis. See CFTC Backgrounder : Commodity Trading Advisors and Commodity Pool Operators.

Commodity Pool Operator (CPO): A person engaged in a business similar to an investment trust or a syndicate and who solicits or accepts funds, securities, or property for the purpose of trading commodity futures contracts or commodity options. The CPO either itself makes trading decisions on behalf of the pool or engages a commodity trading advisor to do so. See CFTC Backgrounder: Commodity Trading Advisors and Commodity Pool Operators.

Commodity Price Index: Index or average, which may be weighted, of selected commodity prices, intended to be representative of the markets in general or a specific subset of commodities, e.g., grains or livestock.

Commodity Trading Advisor (CTA): A person who, for pay, regularly engages in the business of advising others as to the value of commodity futures or options or the advisability of trading in commodity futures or options, or issues analyses or reports concerning commodity futures or options. See CFTC Backgrounder: Commodity Trading Advisors and Commodity Pool Operators.

Commodity Swap: A swap in which the payout to at least one counterparty is based on the price of a commodity or the level of a commodity index.

Confirmation Statement: A statement sent by a futures commission merchant to a customer when a futures or options position has been initiated which typically shows the price and the number of contracts bought and sold. See P&S (Purchase and Sale).

Congestion: (1) A market situation in which shorts attempting to cover their positions are unable to find an adequate supply of contracts provided by longs willing to liquidate or by new sellers willing to enter the market, except at sharply higher prices (see Squeeze, Corner ); (2) in technical analysis, a period of time characterized by repetitious and limited price fluctuations.

Consignment: A shipment made by a producer or dealer to an agent elsewhere with the understanding that the commodities in question will be cared for or sold at the highest obtainable price. Title to the merchandise shipped on consignment rests with the shipper until the goods are disposed of according to agreement.

Contango: Market situation in which prices in succeeding delivery months are progressively higher than in the nearest delivery month; the opposite of backwardation.

Contract: (1) A term of reference describing a unit of trading for a commodity future or option; (2) an agreement to buy or sell a specified commodity, detailing the amount and grade of the product and the date on which the contract will mature and become deliverable.

Contract Grades: Those grades of a commodity that have been officially approved by an exchange as deliverable in settlement of a futures contract.

Contract Market: A board of trade or exchange designated by the Commodity Futures Trading Commission to trade futures or options under the Commodity Exchange Act. A contract market can allow both institutional and retail participants and can list for trading futures contracts on any commodity, provided that each contract is not readily susceptible to manipulation. Also called Designated Contract Market. See Derivatives Transaction Execution Facility.

Contract Month: See Delivery Month.

Contract Size: The actual amount of a commodity represented in a contract.

Contract Unit: See Contract Size.

Controlled Account: An account for which trading is directed by someone other than the owner. Also called a Managed Account or a Discretionary Account.

Convergence: The tendency for prices of physicals and futures to approach one another, usually during the delivery month. Also called a "narrowing of the basis ".

Conversion: A position created by selling a call option, buying a put option, and buying the underlying instrument (for example, a futures contract), where the options have the same strike price and the same expiration. See Reverse Conversion.

Conversion Factors: Numbers published by futures exchanges to determine invoice prices for debt instruments deliverable against bond or note futures contracts. A separate conversion factor is published for each deliverable instrument. Invoice price = Contract Size X Futures Settlement Price X Conversion Factor + Accrued Interest.

Core Principle: A provision of the Commodity Exchange Act with which a Contract Market, Derivatives Transaction Execution Facility, or Derivatives Clearing Organization must comply on an ongoing basis. There are 18 Core Principles for Contract Markets, nine Core Principles for DTEFs, and 14 Core Principles for DCOs.

Corner: (1) Securing such relative control of a commodity that its price can be manipulated, that is, can be controlled by the creator of the corner; or (2) in the extreme situation, obtaining contracts requiring the delivery of more commodities than are available for delivery. See Squeeze, Congestion.

Corn-Hog Ratio: See Feed Ratio.

Correction: A temporary decline in prices during a bull market that partially reverses the previous rally. See Bear Market Rally.

Cost of Tender: Total of various charges incurred when a commodity is certified and delivered on a futures contract.

COT: See Commitments of Traders Report.

Counterparty: The opposite party in a bilateral agreement, contract, or transaction, such as a swap. In the retail foreign exchange (or forex) context, the party to which a retail customer sends its funds; lawfully, the party must be one of those listed in Section 2(c)(2)(B)(ii)(I)-(VI) of the Commodity Exchange Act.

Counterparty Risk: The risk associated with the financial stability of the party entered into contract with. Forward contracts impose upon each party the risk that the counterparty will default, but futures contracts executed on a designated contract market are guaranteed against default by the clearing organization.

Counter-Trend Trading: In technical analysis, the method by which a trader takes a position contrary to the current market direction in anticipation of a change in that direction.

Coupon (Coupon Rate): A fixed dollar amount of interest payable per annum, stated as a percentage of principal value, usually payable in semiannual installments.

Cover: (1) Purchasing futures to offset a short position (same as Short Covering); see Offset, Liquidation ; (2) to have in hand the physical commodity when a short futures sale is made, or to acquire the commodity that might be deliverable on a short sale.

Covered Option: A short call or put option position that is covered by the sale or purchase of the underlying futures contract or other underlying instrument. For example, in the case of options on futures contracts, a covered call is a short call position combined with a long futures position. A covered put is a short put position combined with a short futures position.

Cox-Ross-Rubinstein Option Pricing Model: An option pricing model developed by John Cox, Stephen Ross, and Mark Rubinstein that can be adopted to include effects not included in the Black-Scholes Model (e.g., early exercise and price supports).

CPO: See Commodity Pool Operator.

Crack Spread: (1) In energy futures, the simultaneous purchase of crude oil futures and the sale of petroleum product futures to establish a refining margin. See Gross Processing Margin. (2) Calculation showing the theoretical market value of petroleum products that could be obtained from a barrel of crude after the oil is refined or cracked. This does not necessarily represent the refining margin because a barrel of crude yields varying amounts of petroleum products.

Credit Default Option: A put option that makes a payoff in the event the issuer of a specified reference asset defaults. Also called Default Option.

Credit Default Swap: A bilateral over-the-counter (OTC) contract in which the seller agrees to make a payment to the buyer in the event of a specified credit event in exchange for a fixed payment or series of fixed payments; the most common type of credit derivative ; also called Credit Swap; similar to Credit Default Option.

Credit Derivative: An over-the-counter (OTC) derivative designed to assume or shift credit risk, that is, the risk of a credit event such as a default or bankruptcy of a borrower. For example, a lender might use a credit derivative to hedge the risk that a borrower might default or have its credit rating downgraded. Common credit derivatives include Credit Default Options, Credit Default Swaps, Credit Spread Options, Downgrade Options, and Total Return Swaps.

Credit Event: An event such as a debt default or bankruptcy that will affect the payoff on a credit derivative, as defined in the derivative agreement.

Credit Rating: A rating determined by a rating agency that indicates the agency’s opinion of the likelihood that a borrower such as a corporation or sovereign nation will be able to repay its debt. The rating agencies include Standard & Poor’s, Fitch, and Moody’s.

Credit Spread: The difference between the yield on the debt securities of a particular corporate or sovereign borrower (or a class of borrowers with a specified credit rating) and the yield of similar maturity Treasury debt securities.

Credit Spread Option: An option whose payoff is based on the credit spread between the debt of a particular borrower and similar maturity Treasury debt.

Credit Swap: See Credit Default Swap.

Crop Year: The time period from one harvest to the next, varying according to the commodity (e.g., July 1 to June 30 for wheat; September 1 to August 31 for soybeans).

Cross-Hedge: Hedging a cash market position in a futures or option contract for a different but price-related commodity.

Cross-Margining: A procedure for margining related securities, options, and futures contracts jointly when different clearing organizations clear each side of the position.

Cross Rate: In foreign exchange, the price of one currency in terms of another currency in the market of a third country. For example, the exchange rate between Japanese yen and Euros would be considered a cross rate in the US market.

Cross Trading: Offsetting or noncompetitive match of the buy order of one customer against the sell order of another, a practice that is permissible only when executed in accordance with the Commodity Exchange Act, CFTC regulations, and rules of the exchange.

Crush Spread: In the soybean futures market, the simultaneous purchase of soybean futures and the sale of soybean meal and soybean oil futures to establish a processing margin. See Gross Processing Margin, Reverse Crush Spread.

CTA: See Commodity Trading Advisor.

CTI (Customer Type Indicator) Codes: These consist of four identifiers that describe transactions by the type of customer for which a trade is effected. The four codes are: (1) trading by a person who holds trading privileges for his or her own account or an account for which the person has discretion; (2) trading for a clearing member’s proprietary account; (3) trading for another person who holds trading privileges who is currently present on the trading floor or for an account controlled by such other person; and (4) trading for any other type of customer. Transaction data classified by the above codes are included in the trade register report produced by a clearing organization.

Curb Trading: Trading by telephone or by other means that takes place after the official market has closed and that originally took place in the street on the curb outside the market. Under the Commodity Exchange Act and CFTC rules, curb trading is illegal. Also known as kerb trading.

Currency Swap: A swap that involves the exchange of one currency (e.g., US dollars) for another (e.g., Japanese yen) on a specified schedule.

Current Delivery Month: See Spot Month.
the rules of an exchange.

Day Ahead: See Next Day.

Day Order: An order that expires automatically at the end of each day's trading session. There may be a day order with time contingency. For example, an "off at a specific time" order is an order that remains in force until the specified time during the session is reached. At such time, the order is automatically canceled.

Day Trader: A trader, often a person with exchange trading privileges, who takes positions and then offsets them during the same trading session prior to the close of trading.

DCM: Designated Contract Market.

Dealer: An individual or firm that acts as a market maker in an instrument such as a security or foreign currency.

Deck: The orders for purchase or sale of futures and option contracts held by a floor broker... Also referred to as an Order Book.

Declaration Date: See Expiration Date.

Declaration (of Options): See Exercise.

Default: Failure to perform on a futures contract as required by exchange rules, such as failure to meet a margin call, or to make or take delivery.

Default Option: See Credit Default Option.

Deferred Futures: See Back Months.

Deliverable Grades: See Contract Grades.

Deliverable Stocks: Stocks of commodities located in exchange-approved storage, for which receipts may be used in making delivery on futures contracts. In the cotton trade, the term refers to cotton certified for delivery. Also see Certificated or Certified Stocks.

Deliverable Supply: The total supply of a commodity that meets the delivery specifications of a futures contract. See Economically Deliverable Supply.

Delivery: The tender and receipt of the actual commodity, the cash value of the commodity, or of a delivery instrument covering the commodity (e.g., warehouse receipts or shipping certificates), used to settle a futures contract. See Notice of Delivery, Delivery Notice.

Delivery, Current: Deliveries being made during a present month. Sometimes current delivery is used as a synonym for nearby delivery.

Delivery Date: The date on which the commodity or instrument of delivery must be delivered to fulfill the terms of a contract.

Delivery Instrument: A document used to effect delivery on a futures contract, such as a warehouse receipt or shipping certificate.

Delivery Month: The specified month within which a futures contract matures and can be settled by delivery or the specified month in which the delivery period begins.

Delivery, Nearby: The nearest traded month, the front month. In plural form, one of the nearer trading months.

Delivery Notice: The written notice given by the seller of his intention to make delivery against an open short futures position on a particular date. This notice, delivered through the clearing organization, is separate and distinct from the warehouse receipt or other instrument that will be used to transfer title. Also called Notice of Intent to Deliver or Notice of Delivery.

Delivery Option: A provision of a futures contract that provides the short with flexibility in regard to timing, location, quantity, or quality in the delivery process.

Delivery Point: A location designated by a commodity exchange where stocks of a commodity represented by a futures contract may be delivered in fulfillment of the contract. Also called Location.

Delivery Price: The price fixed by the clearing organization at which deliveries on futures are invoiced—generally the price at which the futures contract is settled when deliveries are made. Also called Invoice Price.

Delta: The expected change in an option's price given a one-unit change in the price of the underlying futures contract or physical commodity. For example, an option with a delta of 0.5 would change $.50 when the underlying commodity moves $1.00.

Delta Margining or Delta-Based Margining: An option margining system used by some exchanges that equates the changes in option premiums with the changes in the price of the underlying futures contract to determine risk factors upon which to base the margin requirements.

Delta Neutral: Refers to a position involving options that is designed to have an overall delta of zero.

Deposit: The initial outlay required of a client by a futures position to open a futures position, returnable upon liquidation of that position. See also margin.

Depository Receipt: See Vault Receipt.

Derivative: A financial instrument, traded on or off an exchange, the price of which is directly dependent upon (i.e., "derived from") the value of one or more underlying securities, equity indices, debt instruments, commodities, other derivative instruments, or any agreed upon pricing index or arrangement (e.g., the movement over time of the Consumer Price Index or freight rates). Derivatives involve the trading of rights or obligations based on the underlying product, but do not directly transfer property. They are used to hedge risk or to exchange a floating rate of return for fixed rate of return. Derivatives include futures, options, and swaps. For example, futures contracts are derivatives of the physical contract and options on futures are derivatives of futures contracts.

Derivatives Clearing Organization: A clearing organization or similar entity that, in respect to a contract (1) enables each party to the contract to substitute, through novation or otherwise, the credit of the derivatives clearing organization for the credit of the parties; (2) arranges or provides, on a multilateral basis, for the settlement or netting of obligations resulting from such contracts; or (3) otherwise provides clearing services or arrangements that mutualize or transfer among participants in the derivatives clearing organization the credit risk arising from such contracts.

Derivatives Transaction Execution Facility (DTEF): A board of trade that is registered with the CFTC as a DTEF. A DTEF is subject to fewer regulatory requirements than a Contract Market. To qualify as a DTEF, an exchange can only trade certain commodities (including excluded commodities and other commodities with very high levels of deliverable supply) and generally must exclude retail participants (retail participants may trade on DTEFs through Futures Commission Merchants with adjusted net capital of at least $20 million or registered Commodity Trading Advisors that direct trading for accounts containing total assets of at least $25 million). See Derivatives Transaction Execution Facilities.

Designated Contract Market: See Contract Market.

Designated Self-Regulatory Organization (DSRO): Self-regulatory organizations (i.e., the commodity exchanges and registered futures associations) must enforce minimum financial and reporting requirements for their members, among other responsibilities outlined in the CFTC 's regulations. When a Futures Commission Merchant (FCM) is a member of more than one SRO, the SROs may decide among themselves which of them will assume primary responsibility for these regulatory duties and, upon approval of the plan by the Commission, be appointed the "designated self-regulatory organization" for that FCM.

Diagonal Spread: A spread between two call options or two put options with different strike prices and different expiration dates. See Horizontal Spread, Vertical Spread.

Differentials: The discount (premium) allowed for grades or locations of a commodity lower (higher) than the par of basis grade or location specified in the futures contact. See Allowances.

Directional Trading: Trading strategies designed to speculate on the direction of the underlying market, especially in contrast to volatility trading.

Disclosure Document: A statement that must be provided to prospective customers that describes trading strategy, potential risk, commissions, fees, performance and other relevant information.

Discount: (1) The amount a price would be reduced to purchase a commodity of lesser grade; ( 2) sometimes used to refer to the price differences between futures of different delivery months, as in the phrase "July at a discount to May," indicating that the price for the July futures is lower than that of May.

Discretionary Account: An arrangement by which the holder of an account gives written power of attorney to someone else, often a Commodity Trading Advisor, to buy and sell without prior approval of the holder; often referred to as a "managed account" or controlled account.

DRT ("Disregard Tape") or Not-Held Order: Absent any restrictions, a "DRT" (Not-Held Order) means any order giving the floor broker complete discretion over price and time in execution of an order, including discretion to execute all, some, or none of this order.

Distant or Deferred Months: See Back Month.

Dominant Future: That future having the largest amount of open interest.

Double Hedging: As used by the CFTC, it implies a situation where a trader holds a long position in the futures market in excess of the speculative position limit as an offset to a fixed price sale, even though the trader has an ample supply of the commodity on hand to fill all sales commitments.

DSRO: See Designated Self-Regulatory Organization.

DTEF: See Derivatives Transaction Execution Facility.

Dual Trading: Dual trading occurs when: (1) a floor broker executes customer orders and, on the same day, trades for his own account or an account in which he has an interest; or (2) a FCM carries customer accounts and also trades or permits its employees to trade in accounts in which it has a proprietary interest, also on the same trading day.

Dutch Auction: An auction of a debt instrument (such as a Treasury note) in which all successful bidders receive the same yield (the lowest yield that results in the sale of the entire amount to be issued).

Duration: A measure of a bond's price sensitivity to changes in interest rates.

Ease Off: A minor and/or slow decline in the price of a market.

ECN: Electronic Communications Network, frequently used for creating electronic stock or futures markets.

Economically Deliverable Supply: That portion of the deliverable supply of a commodity that is in position for delivery against a futures contract, and is not otherwise unavailable for delivery. For example, Treasury bonds held by long-term investment funds are not considered part of the economically deliverable supply of a Treasury bond futures contract.

Efficient Market: In economic theory, an efficient market is one in which market prices adjust rapidly to reflect new information. The degree to which the market is efficient depends on the quality of information reflected in market prices. In an efficient market, profitable arbitrage opportunities do not exist and traders cannot expect to consistently outperform the market unless they have lower-cost access to information that is reflected in market prices or unless they have access to information before it is reflected in market prices. See Random Walk.

EFP: See Exchange for Physical.

Electronic Trading Facility: A trading facility that operates by an electronic or telecommunications network instead of a trading floor and maintains an automated audit trail of transactions.

Eligible Commercial Entity: An eligible contract participant or other entity approved by the CFTC that has a demonstrable ability to make or take delivery of an underlying commodity of a contract; incurs risks related to the commodity; or is a dealer that regularly provides risk management, hedging services, or market-making activities to entities trading commodities or derivative agreements, contracts, or transactions in commodities.

Eligible Contract Participant: An entity, such as a financial institution, insurance company, or commodity pool, that is classified by the Commodity Exchange Act as an eligible contract participant based upon its regulated status or amount of assets. This classification permits these persons to engage in transactions (such as trading on a Derivatives Transaction Execution Facility) not generally available to non-eligible contract participants, i.e., retail customers.

Elliot Wave: (1) A theory named after Ralph Elliot, who contended that the stock market tends to move in discernible and predictable patterns reflecting the basic harmony of nature and extended by other technical analysts to futures markets; (2) in technical analysis, a charting method based on the belief that all prices act as waves, rising and falling rhythmically.

E-Local: A person with trading privileges at an exchange with an electronic trading facility who trades electronically (rather than in a pit or ring) for his or her own account, often at a Trading Arcade.

E-Mini: A mini contract that is traded exclusively on an electronic trading facility. E-Mini is a trademark of the Chicago Mercantile Exchange.

Emergency: Any market occurrence or circumstance which requires immediate action and threatens or may threaten such things as the fair and orderly trading in, or the liquidation of, or delivery pursuant to, any contracts on a contract market.

Enumerated Agricultural Commodities: The commodities specifically listed in Section 1a(3) of the Commodity Exchange Act : wheat, cotton, rice, corn, oats, barley, rye, flaxseed, grain sorghums, mill feeds, butter, eggs, Solanum tuberosum (Irish potatoes), wool, wool tops, fats and oils (including lard, tallow, cottonseed oil, peanut oil, soybean oil, and all other fats and oils), cottonseed meal, cottonseed, peanuts, soybeans, soybean meal, livestock, livestock products, and frozen concentrated orange juice.

Equity: As used on a trading account statement, refers to the residual dollar value of a futures or option trading account, assuming it was liquidated at current prices.

Euro: The official currency of most members of the European Union.

Eurocurrency: Certificates of Deposit (CDs), bonds, deposits, or any capital market instrument issued outside of the national boundaries of the currency in which the instrument is denominated (for example, Eurodollars, Euro-Swiss francs, or Euroyen).

Eurodollars: US dollar deposits placed with banks outside the US. Holders may include individuals, companies, banks, and central banks.

European Option: An option that may be exercised only on the expiration date. See American Option.

Even Lot: A unit of trading in a commodity established by an exchange to which official price quotations apply. See Round Lot.

Exchange: A central marketplace with established rules and regulations where buyers and sellers meet to trade futures and options contracts or securities. Exchanges include designated contract markets and derivatives transaction execution facilities.

Exchange for Physicals (EFP): A transaction in which the buyer of a cash commodity transfers to the seller a corresponding amount of long futures contracts, or receives from the seller a corresponding amount of short futures, at a price difference mutually agreed upon. In this way, the opposite hedges in futures of both parties are closed out simultaneously. Also called Exchange of Futures for Cash, AA (Against Actuals), or Ex-Pit transactions.

Exchange of Futures for Cash: See Exchange for Physicals.

Exchange of Futures for Swaps (EFS): A privately negotiated transaction in which a position in a physical delivery futures contract is exchanged for a cash-settled swap position in the same or a related commodity, pursuant to the rules of a futures exchange. See Exchange for Physicals.

Exchange Rate: The price of one currency stated in terms of another currency.

Exchange Risk Factor: The delta of an option as computed daily by the exchange on which it is traded.

Excluded Commodity: In general, the Commodity Exchange Act defines an excluded commodity as: any financial instrument such as a security, currency, interest rate, debt instrument, or credit rating; any economic or commercial index other than a narrow-based commodity index; or any other value that is out of the control of participants and is associated with an economic consequence. See the CEA definition of excluded commodity.

Exempt Board of Trade: A trading facility that trades commodities (other than securities or securities indexes) having a nearly inexhaustible deliverable supply and either no cash market or a cash market so liquid that any contract traded on the commodity is highly unlikely to be susceptible to manipulation . An exempt board of trade’s contracts must be entered into by parties that are eligible contract participants.

Exempt Commercial Market: An electronic trading facility that trades exempt commodities on a principal-to-principal basis solely between persons that are eligible commercial entities.

Exempt Commodity: The Commodity Exchange Act defines an exempt commodity as any commodity other than an Excluded Commodity or an agricultural commodity. Examples include energy commodities and metals.

Exempt Foreign Firm: A foreign firm that does business with US customers only on foreign exchanges and is exempt from registration under CFTC regulations based upon compliance with its home country’s regulatory framework (also known as a “Rule 30.10 firm”). See CFTC Backgrounder : Regulatory and Self-Regulatory Authorities That Have Received Exemptions Under CFTC Rule 30.10.

Exercise: To elect to buy or sell, taking advantage of the right (but not the obligation) conferred to the owner of an option contract.

Exercise Price (Strike Price): The price, specified in the option contract, at which the underlying futures contract, security, or commodity will move from seller to buyer.

Exotic Options: Any of a wide variety of options with non-standard payout structures or other features, including Asian options and Lookback options. Exotic options are mostly traded in the over-the-counter market.

Expiration Date: The date on which an option contract automatically expires; the last day an option may be exercised.

Extrinsic Value: See Time Value.

Ex-Pit: See Transfer Trades and Exchange for Physicals.

FAB (Five Against Bond) Spread: A futures spread trade involving the buying (selling) of a five-year Treasury note futures contract and the selling (buying) of a long-term (15-30 year) Treasury bond futures contract.

Fannie Mae: A corporation (government-sponsored enterprise) created by Congress to support the secondary mortgage market; it purchases and sells residential mortgages insured by the Federal Home Administration (FHA) or guaranteed by the Veteran's Administration (VA). Formerly the Federal National Mortgage Association. See Freddie Mac.

FAN (Five Against Note) Spread: A futures spread trade involving the buying (selling) of a five-year Treasury note futures contract and the selling (buying) of a ten-year Treasury note futures contract.

Fast Market: Transactions in the pit or ring take place in such volume and with such rapidity that price reporters behind with price quotations insert "FAST" and show a range of prices. Also called a fast tape.

Feed Ratio: The relationship of the cost of feed, expressed as a ratio to the sale price of animals, such as the corn-hog ratio. These serve as indicators of the profit margin or lack of profit in feeding animals to market weight.

FIA: See Futures Industry Association.

Fibonacci Numbers: A number sequence discovered by a thirteenth century Italian mathematician Leonardo Fibonacci (ca 1170-1250), who introduced Arabic numbers to Europe, in which the sum of any two consecutive numbers equals the next highest number – i.e., following this sequence: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55 and so on. The ratio of any number to its next highest number approaches 0.618 after the first four numbers. These numbers are used by technical analysts to determine price objectives from percentage retracements.

Fictitious Trading: Wash trading, bucketing, cross trading, or other schemes which give the appearance of trading but actually no bona fide, competitive trade has occurred.

Fill: The execution of an order.

Fill or Kill Order (FOK): An order that demands immediate execution or cancellation. Typically involving a designation, added to an order, instructing the broker to offer or bid (as the case may be) one time only; if the order is not filled immediately, it is then automatically cancelled.

Final Settlement Price: The price at which a cash-settled futures contract is settled at maturity, pursuant to a procedure specified by the exchange.

Financial Instruments: As used by the CFTC, this term generally refers to any futures or option contract that is not based on an agricultural commodity or a natural resource. It includes currencies, equity securities, fixed income securities, and indexes of various kinds.

Financial Settlement: Cash settlement, especially for energy derivatives.

First Notice Day: The first day on which notices of intent to deliver actual commodities against futures market positions can be received. First notice day may vary with each commodity and exchange.

Fix, Fixing: See Gold Fixing.

Fixed Income Security: A security whose nominal (or current dollar) yield is fixed or determined with certainty at the time of purchase, typically a debt security.

Floor Broker: A person with exchange trading privileges who, in any pit, ring, post, or other place provided by an exchange for the meeting of persons similarly engaged, executes for another person any orders for the purchase or sale of any commodity for future delivery.

Floor Trader: A person with exchange trading privileges who executes his own trades by being personally present in the pit or ring for futures trading. See Local.

F.O.B. (Free On Board): Indicates that all delivery, inspection and elevation, or loading costs involved in putting commodities on board a carrier have been paid.

Forced Liquidation: The situation in which a customer's account is liquidated (open positions are offset) by the brokerage firm holding the account, usually after notification that the account is under-margined due to adverse price movements and failure to meet margin calls.

Force Majeure: A clause in a supply contract that permits either party not to fulfill the contractual commitments due to events beyond their control. These events may range from strikes to export delays in producing countries.

Foreign Exchange: Trading in foreign currency.

Forex: Refers to the OTC market for foreign exchange transactions. Also called the foreign exchange market.

Forwardation: See Contango.

Forward Contract: A cash transaction common in many industries, including commodity merchandising, in which a commercial buyer and seller agree upon delivery of a specified quality and quantity of goods at a specified future date. Terms may be more “personalized” than is the case with standardized futures contracts (i.e., delivery time and amount are as determined between seller and buyer). A price may be agreed upon in advance, or there may be agreement that the price will be determined at the time of delivery.

Forward Market: The over-the-counter market for forward contracts.

Forward Months: Futures contracts, currently trading, calling for later or distant delivery. See Deferred Futures, Back Months.

Freddie Mac: A corporation (government-sponsored enterprise) created by Congress to support the secondary mortgage market; it purchases and sells residential mortgages insured by the Federal Home Administration (FHA) or guaranteed by the Veterans Administration (VA). Formerly the Federal Home Loan Mortgage Corporation. See Fannie Mae.

Front Month: The Spot or Nearby Delivery Month, the nearest traded contract month. See Back Month.

Front Running: With respect to commodity futures and options, taking a futures or option position based upon non-public information regarding an impending transaction by another person in the same or related future or option. Also known as trading ahead.

Front Spread: A delta-neutral ratio spread in which more options are sold than bought. Also called Ratio Vertical Spread. A front spread will increase in value if volatility decreases.

Full Carrying Charge, Full Carry: See Carrying Charges.

Fund of Funds: A commodity pool that invests in other commodity pools rather than directly in futures and options contracts.

Fundamental Analysis: Study of basic, underlying factors that will affect the supply and demand of the commodity being traded in futures contracts. See Technical Analysis.

Fungibility: The characteristic of interchangeability. Futures contracts for the same commodity and delivery month traded on the same exchange are fungible due to their standardized specifications for quality, quantity, delivery date, and delivery locations.

Futures: See Futures Contract.

Futures Commission Merchant (FCM): Individuals, associations, partnerships, corporations, and trusts that solicit or accept orders for the purchase or sale of any commodity for future delivery on or subject to the rules of any exchange and that accept payment from or extend credit to those whose orders are accepted.

Futures Contract: An agreement to purchase or sell a commodity for delivery in the future: (1) at a price that is determined at initiation of the contract; (2) that obligates each party to the contract to fulfill the contract at the specified price; (3) that is used to assume or shift price risk; and (4) that may be satisfied by delivery or offset.

Futures-equivalent: A term frequently used with reference to speculative position limits for options on futures contracts. The futures-equivalent of an option position is the number of options multiplied by the previous day's risk factor or delta for the option series. For example, ten deep out-of-money options with a delta of 0.20 would be considered two futures-equivalent contracts. The delta or risk factor used for this purpose is the same as that used in delta-based margining and risk analysis systems.

Futures Industry Association(FIA): A membership organization for Futures Commission Merchants (FCMs) which, among other activities, offers education courses on the futures markets, disburses information, and lobbies on behalf of its members.

Futures Option: An option on a futures contract.

Futures Price: (1) Commonly held to mean the price of a commodity for future delivery that is traded on a futures exchange; (2) the price of any futures contract.

Gamma: A measurement of how fast the delta of an option changes, given a unit change in the underlying futures price; the “delta of the delta.”

Ginzy Trading: A non-competitive trade practice in which a floor broker, in executing an order—particularly a large order—will fill a portion of the order at one price and the remainder of the order at another price to avoid an exchange's rule against trading at fractional increments or "split ticks."

Give Up: A contract executed by one broker for the client of another broker that the client orders to be turned over to the second broker. The broker accepting the order from the customer collects a fee from the carrying broker for the use of the facilities. Often used to consolidate many small orders or to disperse large ones.

Gold Certificate: A certificate attesting to a person's ownership of a specific amount of gold bullion.

Gold Fixing (Gold Fix): The setting of the gold price at 10:30 AM (first fixing) and 3:00 PM (second fixing) in London by representatives of the London Gold Market.

Gold/Silver Ratio: The number of ounces of silver required to buy one ounce of gold at current spot prices.

Good This Week Order (GTW): Order which is valid only for the week in which it is placed.

Good 'Till Canceled Order (GTC): Order which is valid at any time Open Order.

GPM: See Gross Processing Margin.

Grades: Various qualities of a commodity.

Grading Certificates: A formal document setting forth the quality of a commodity as determined by authorized inspectors or graders.

Grain Futures Act: Federal statute that provided for the regulation of trading in grain futures, effective June 22, 1923; administered by the US Department of Agriculture; amended in 1936 by the Commodity Exchange Act.

Grantor: The maker, writer, or issuer of an option contract who, in return for the premium paid for the option, stands ready to purchase the underlying commodity (or futures contract) in the case of a put option or to sell the underlying commodity (or futures contract) in the case of a call option.

Gross Processing Margin (GPM): Refers to the difference between the cost of a commodity and the combined sales income of the finished products that result from processing the commodity. Various industries have formulas to express the relationship of raw material costs to sales income from finished products. See Crack Spread, Crush Spread, and Spark Spread.

GTC: See Good 'Till Canceled Order.

GTW: See Good This Week Order.

Guaranteed Introducing Broker: An Introducing Broker that has entered into a guarantee agreement with a Futures Commission Merchant, whereby the FCM agrees to be jointly and severally liable for all of the Introducing Broker’s obligations under the Commodity Exchange Act. By entering into the agreement, the Introducing Broker is relieved from the necessity of raising its own capital to satisfy minimum financial requirements. In contrast, an independent Introducing Broker must raise its own capital to meet minimum financial requirements.

Haircut: In computing the value of assets for purposes of capital, segregation, or margin requirements, a percentage reduction from the stated value (e.g., book value or market value) to account for possible declines in value that may occur before assets can be liquidated.

Hand Held Terminal: A small computer terminal used by floor brokers or floor traders on an exchange to record trade information and transmit that information to the clearing organization.

Hardening: (1) Describes a price which is gradually stabilizing; (2) a term indicating a slowly advancing market.

Head and Shoulders: In technical analysis, a chart formation that resembles a human head and shoulders and is generally considered to be predictive of a price reversal. A head and shoulders top (which is considered predictive of a price decline) consists of a high price, a decline to a support level, a rally to a higher price than the previous high price, a second decline to the support level, and a weaker rally to about the level of the first high price. The reverse (upside-down) formation is called a head and shoulders bottom (which is considered predictive of a price rally).

Heavy: A market in which prices are demonstrating either an inability to advance or a slight tendency to decline.

Hedge Exemption: An exemption from speculative position limits for bona fide hedgers and certain other persons who meet the requirements of exchange and CFTC rules.

Hedge Fund: A private investment fund or pool that trades and invests in various assets such as securities, commodities, currency, and derivatives on behalf of its clients, typically wealthy individuals. Some Commodity Pool Operators operate hedge funds.

Hedge Ratio: Ratio of the value of futures contracts purchased or sold to the value of the cash commodity being hedged, a computation necessary to minimize basis risk.

Hedging: Taking a position in a futures market opposite to a position held in the cash market to minimize the risk of financial loss from an adverse price change; or a purchase or sale of futures as a temporary substitute for a cash transaction that will occur later. One can hedge either a long cash market position (e.g., one owns the cash commodity) or a short cash market position (e.g., one plans on buying the cash commodity in the future).

Henry Hub: A natural gas pipeline hub in Louisiana that serves as the delivery point for New York Mercantile Exchange natural gas futures contracts and often serves as a benchmark for wholesale natural gas prices across the U.S.

Historical Volatility: A statistical measure of the volatility of a futures contract, security, or other instrument over a specified number of past trading days.

Hog-Corn Ratio: See Feed Ratio.

Horizontal Spread (also called Time Spread or Calendar Spread): An option spread involving the simultaneous purchase and sale of options of the same class and strike prices but different expiration dates. See Diagonal Spread, Vertical Spread.

Hybrid Instruments: Financial instruments that possess, in varying combinations, characteristics of forward contracts, futures contracts, option contracts, debt instruments, bank depository interests, and other interests. Certain hybrid instruments are exempt from CFTC regulation.

IB: See Introducing Broker.

Implied Repo Rate: The rate of return that can be obtained from selling a debt instrument futures contract and simultaneously buying a bond or note deliverable against that futures contract with borrowed funds. The bond or note with the highest implied repo rate is cheapest to deliver.

Implied Volatility: The volatility of a futures contract, security, or other instrument as implied by the prices of an option on that instrument, calculated using an options pricing model.

Index Arbitrage: The simultaneous purchase (sale) of stock index futures and the sale (purchase) of some or all of the component stocks that make up the particular stock index to profit from sufficiently large intermarket spreads between the futures contract and the index itself. Also see Arbitrage, Program Trading.

Indirect Bucketing: Also referred to as Indirect Trading Against. Refers to when a floor broker effectively trades opposite his customer in a pair of non-competitive transactions by buying (selling) opposite an accommodating trader to fill a customer order and by selling (buying) for his personal account opposite the same accommodating trader. The accommodating trader assists the floor broker by making it appear that the customer traded opposite him rather than opposite the floor broker.

Inflation-Indexed Debt Instrument: Generally a debt instrument (such as a bond or note) on which the payments are adjusted for inflation and deflation. In a typical inflation-indexed instrument, the principal amount is adjusted monthly based on an inflation index such as the Consumer Price Index.

Initial Deposit: See Initial Margin.

Initial Margin: Customers' funds put up as security for a guarantee of contract fulfillment at the time a futures market position is established. See Original Margin.

In Position: Refers to a commodity located where it can readily be moved to another point or delivered on a futures contract. Commodities not so situated are "out of position." Soybeans in Mississippi are out of position for delivery in Chicago, but in position for export shipment from the Gulf of Mexico.

In Sight: The amount of a particular commodity that arrives at terminal or central locations in or near producing areas. When a commodity is "in sight," it is inferred that reasonably prompt delivery can be made; the quantity and quality also become known factors rather than estimates.

Instrument: A tradable asset such as a commodity, security, or derivative, or an index or value that underlies a derivative or could underlie a derivative.

Intercommodity Spread: A spread in which the long and short legs are in two different but generally related commodity markets. Also called an intermarket spread. See Spread.

Interdelivery Spread: A spread involving two different months of the same commodity. Also called an intracommodity spread. See Spread.

Interest Rate Futures: Futures contracts traded on fixed income securities such as US Treasury issues, or based on the levels of specified interest rates such as LIBOR (London Interbank Offered Rate). Currency is excluded from this category, even though interest rates are a factor in currency values.

Interest Rate Swap: A swap in which the two counterparties agree to exchange interest rate flows. Typically, one party agrees to pay a fixed rate on a specified series of payment dates and the other party pays a floating rate that may be based on LIBOR (London Interbank Offered Rate) on those payment dates. The interest rates are paid on a specified principal amount called the notional principal.

Intermarket Spread: See Spread and Intercommodity Spread.

Intermediary: A person who acts on behalf of another person in connection with futures trading, such as a Futures Commission Merchant, Introducing Broker, Commodity Pool Operator, Commodity Trading Advisor, or Associated Person.

International Swaps and Derivatives Association (ISDA): A New York-based group of major international swaps dealers, that publishes the Code of Standard Wording, Assumptions and Provisions for Swaps, or Swaps Code, for US dollar interest rate swaps as well as standard master interest rate, credit, and currency swap agreements and definitions for use in connection with the creation and trading of swaps.

In-The-Money: A term used to describe an option contract that has a positive value if exercised. A call with a strike price of $390 on gold trading at $400 is in-the-money 10 dollars. See Intrinsic Value.

Intracommodity Spread: See Spread and Interdelivery Spread.

Intrinsic Value: A measure of the value of an option or a warrant if immediately exercised, that is the extent to which it is in-the-money. The amount by which the current price for the underlying commodity or futures contract is above the strike price of a call option or below the strike price of a put option for the commodity or futures contract.

Introducing Broker (or IB): A person (other than a person registered as an Associated Person of a Futures Commission Merchant) who is engaged in soliciting or in accepting orders for the purchase or sale of any commodity for future delivery on an exchange who does not accept any money, securities, or property to margin, guarantee, or secure any trades or contracts that result therefrom.

Inverted Market: A futures market in which the nearer months are selling at prices higher than the more distant months; a market displaying "inverse carrying charges," characteristic of markets with supply shortages. See Backwardation.

Invisible Supply: Uncounted stocks of a commodity in the hands of wholesalers, manufacturers, and producers that cannot be identified accurately; stocks outside commercial channels but theoretically available to the market. See Visible Supply.

Invoice Price: The price fixed by the clearing house at which deliveries on futures are invoiced—generally the price at which the futures contract is settled when deliveries are made. Also called Delivery Price.

ISDA: See International Swaps and Derivatives Association.

Job Lot: A form of contract having a smaller unit of trading than is featured in a regular contract.

Kerb Trading or Dealing: See Curb Trading.

Large Order Execution (LOX) Procedures: Rules in place at the Chicago Mercantile Exchange that authorize a member firm that receives a large order from an initiating party to solicit counterparty interest off the exchange floor prior to open execution of the order in the pit and that provide for special surveillance procedures. The parties determine a maximum quantity and an "intended execution price." Subsequently, the initiating party's order quantity is exposed to the pit; any bids (or offers) up to and including those at the intended execution price are hit (acceptable). The unexecuted balance is then crossed with the contraside trader found using the LOX procedures.

Large Traders: A large trader is one who holds or controls a position in any one future or in any one option expiration series of a commodity on any one exchange equaling or exceeding the exchange or CFTC-specified reporting level.

Last Notice Day: The final day on which notices of intent to deliver on futures contracts may be issued.

Last Trading Day: Day on which trading ceases for the maturing (current) delivery month.

Leaps: Long-dated, exchange-traded options. Stands for “Long-term Equity Anticipation Securities.”

Leverage: The ability to control large dollar amounts of a commodity or security with a comparatively small amount of capital.

LIBOR: The London Interbank Offered Rate. The rate of interest at which banks borrow funds from other banks, in marketable size, in the London interbank market. LIBOR rates are disseminated by the British Bankers Association. Some interest rate futures contracts, including Eurodollar futures, are cash settled based on LIBOR.

Licensed Warehouse: A warehouse approved by an exchange from which a commodity may be delivered on a futures contract. See Regular Warehouse.

Life of Contract: Period between the beginning of trading in a particular futures contract and the expiration of trading. In some cases, this phrase denotes the period already passed in which trading has already occurred. For example, "The life-of-contract high so far is $2.50." Same as Life of Delivery or Life of the Future.

Limit (Up or Down): The maximum price advance or decline from the previous day's settlement price permitted during one trading session, as fixed by the rules of an exchange. In some futures contracts, the limit may be expanded or removed during a trading session a specified period of time after the contract is locked limit. See Daily Price Limit.

Limit Move: See Locked Limit.

Limit Only: The definite price stated by a customer to a broker restricting the execution of an order to buy for not more than, or to sell for not less than, the stated price.

Limit Order: An order in which the customer specifies a minimum sale price or maximum purchase price, as contrasted with a market order, which implies that the order should be filled as soon as possible at the market price.

Liquidation: The closing out of a long position. The term is sometimes used to denote closing out a short position, but this is more often referred to as covering. See Cover, Offset.

Liquid Market: A market in which selling and buying can be accomplished with minimal effect on price.

Local: An individual with exchange trading privileges who trades for his own account, traditionally on an exchange floor, and whose activities provide market liquidity. See Floor Trader, E-Local.

Location: A Delivery Point for a futures contract.

Locked-In: A hedged position that cannot be lifted without offsetting both sides of the hedge (spread). See Hedging. Also refers to being caught in a limit price move.

Locked Limit: A price that has advanced or declined the permissible limit during one trading session, as fixed by the rules of an exchange. Also called Limit Move.

London Gold Market: Refers to the dealers who set (fix) the gold price in London. See Gold Fixing.

Long: (1) One who has bought a futures contract to establish a market position; (2) a market position that obligates the holder to take delivery; (3) one who owns an inventory of commodities. See Short.

Long Hedge: See Buying Hedge.

Long the Basis: A person or firm that has bought the spot commodity and hedged with a sale of futures is said to be long the basis.

Lookalike Option: An over-the-counter option that is cash settled based on the settlement price of a similar exchange-traded futures contract on a specified trading day.

Lookalike Swap: An over-the-counter swap that is cash settled based on the settlement price of a similar exchange-traded futures contract on a specified trading day.

Lookback Option: An exotic option whose payoff depends on the minimum or maximum price of the underlying asset during some portion of the life of the option.

Lot: A unit of trading. See Even Lot, Job Lot, and Round Lot.

Macro Fund: A hedge fund that specializes in strategies designed to profit from expected macroeconomic events.

Maintenance Margin: See Margin.

Managed Account: See Controlled Account and Discretionary Account.

Manipulation: Any planned operation, transaction, or practice that causes or maintains an artificial price. Specific types include corners and squeezes as well as unusually large purchases or sales of a commodity or security in a short period of time in order to distort prices, and putting out false information in order to distort prices.

Many-to-Many: Refers to a trading platform in which multiple participants have the ability to execute or trade commodities, derivatives, or other instruments by accepting bids and offers made by multiple other participants. In contrast to one-to-many platforms, many-to-many platforms are considered trading facilities under the Commodity Exchange Act. Traditional exchanges are many-to-many platforms.

Margin: The amount of money or collateral deposited by a customer with his broker, by a broker with a clearing member, or by a clearing member with a clearing organization. The margin is not partial payment on a purchase. Also called Performance Bond. (1) Initial margin is the amount of margin required by the broker when a futures position is opened; (2) Maintenance margin is an amount that must be maintained on deposit at all times. If the equity in a customer's account drops to or below the level of maintenance margin because of adverse price movement, the broker must issue a margin call to restore the customer's equity to the initial level. See Variation Margin. Exchanges specify levels of initial margin and maintenance margin for each futures contract, but Futures Commission Merchants may require their customers to post margin at higher levels than those specified by the exchange. Futures margin is determined by the SPAN margining system, which takes into account all positions in a customer’s portfolio.

Margin Call: (1) A request from a brokerage firm to a customer to bring margin deposits up to initial levels; (2) a request by the clearing organization to a clearing member to make a deposit of original margin, or a daily or intra-day variation margin payment because of adverse price movement, based on positions carried by the clearing member.

Market-if-Touched (MIT) Order: An order that becomes a market order when a particular price is reached. A sell MIT is placed above the market; a buy MIT is placed below the market. Also referred to as a board order. Compare to Stop Order.

Market Maker: A professional securities dealer or person with trading privileges on an exchange who has an obligation to buy when there is an excess of sell orders and to sell when there is an excess of buy orders. By maintaining an offering price sufficiently higher than their buying price, these firms are compensated for the risk involved in allowing their inventory of securities to act as a buffer against temporary order imbalances. In the futures industry, this term is sometimes loosely used to refer to a floor trader or local who, in speculating for his own account, provides a market for commercial users of the market. Occasionally a futures exchange will compensate a person with exchange trading privileges to take on the obligations of a market maker to enhance liquidity in a newly listed or lightly traded futures contract. See Specialist System.

Market-on-Close: An order to buy or sell at the end of the trading session at a price within the closing range of prices. See Stop-Close-Only Order.

Market-on-Opening: An order to buy or sell at the beginning of the trading session at a price within the opening range of prices.

Market Order: An order to buy or sell a futures contract at whatever price is obtainable at the time it is entered in the ring, pit, or other trading platform. See At-the-Market Limit Order.

Mark-to-Market: Part of the daily cash flow system used by US futures exchanges to maintain a minimum level of margin equity for a given futures or option contract position by calculating the gain or loss in each contract position resulting from changes in the price of the futures or option contracts at the end of each trading session. These amounts are added or subtracted to each account balance.

Maturity: Period within which a futures contract can be settled by delivery of the actual commodity.

Maximum Price Fluctuation: See Limit (Up or Down) and Daily Price Limit.

Member Rate: Commission charged for the execution of an order for a person who is a member of or has trading privileges at the exchange.

Mini: Refers to a futures contract that has a smaller contract size than an otherwise identical futures contract.

Minimum Price Contract: A hybrid commercial forward contract for agricultural products that includes a provision guaranteeing the person making delivery a minimum price for the product. For agricultural commodities, these contracts became much more common with the introduction of exchange-traded options on futures contracts, which permit buyers to hedge the price risks associated with such contracts.

Minimum Price Fluctuation (Minimum Tick): Smallest increment of price movement possible in trading a given contract.

Minimum Tick: See Minimum Price Fluctuation.

MOB Spread: A spread between the municipal bond futures contract and the treasury bond contract, also known as munis over bonds.

Momentum: In technical analysis, the relative change in price over a specific time interval. Often equated with speed or velocity and considered in terms of relative strength.

Money Market: The market for short-term debt instruments.

Multilateral Clearing Organization: See Clearing Organization.

Naked Option: The sale of a call or put option without holding an equal and opposite position in the underlying instrument. Also referred to as an uncovered option, naked call, or naked put.

Narrow-Based Security Index: In general, the Commodity Exchange Act defines a narrow-based security index as an index of securities that meets one of the following four requirements (1) it has nine or fewer components; (2) one component comprises more than 30 percent of the index weighting; (3) the five highest weighted components comprise more than 60 percent of the index weighting, or (4) the lowest weighted components comprising in the aggregate 25 percent of the index’s weighting have an aggregate dollar value of average daily volume over a six-month period of less than $50 million ($30 million if there are at least 15 component securities). However, the legal definition in Section 1a(25) of the CEA contains several exceptions to this provision. See Broad-Based Security Index, Security Future.

National Futures Association (NFA): A self-regulatory organization whose members include Futures Commission Merchants, Commodity Pool Operators, Commodity Trading Advisors, Introducing Brokers, commodity exchanges, commercial firms, and banks, that is responsible—under CFTC oversight—for certain aspects of the regulation of FCMs, CPOs, CTAs, IBs, and their Associated Persons, focusing primarily on the qualifications and proficiency, financial condition, retail sales practices, and business conduct of these futures professionals. NFA also performs arbitration and dispute resolution functions for industry participants.

Nearbys: The nearest delivery months of a commodity futures market.

Nearby Delivery Month: The month of the futures contract closest to maturity; the front month or lead month.

Negative Carry: The cost of financing a financial instrument (the short-term rate of interest), when the cost is above the current return of the financial instrument. See Carrying Charges and Positive Carry.

Net Asset Value (NAV): The value of each unit of participation in a commodity pool.

Net Position: The difference between the open long contracts and the open short contracts held by a trader in any one commodity.

NFA: National Futures Association.

Next Day: A spot contract that provides for delivery of a commodity on the next calendar day or the next business day. Also called Day Ahead.

NOB (Note Against Bond) Spread: A futures spread trade involving the buying (selling) of a ten-year Treasury note futures contract and the selling (buying) of a Treasury bond futures contract.

Non-Member Traders: Speculators and hedgers who trade on the exchange through a member or a person with trading privileges but who do not hold exchange memberships or trading privileges.

Nominal Price (or Nominal Quotation): Computed price quotation on a futures or option contract for a period in which no actual trading took place, usually an average of bid and asked prices or computed using historical or theoretical relationships to more active contracts.

Notice Day: Any day on which notices of intent to deliver on futures contracts may be issued.

Notice of Intent to Deliver: A notice that must be presented by the seller of a futures contract to the clearing organization prior to delivery. The clearing organization then assigns the notice and subsequent delivery instrument to a buyer. Also Notice of Delivery.

Notional Principal: In an interest rate swap, forward rate agreement, or other derivative instrument, the amount or, in a currency swap, each of the amounts to which interest rates are applied in order to calculate periodic payment obligations. Also called the notional amount, the contract amount, the reference amount, and the currency amount.

NYMEX Lookalike: A lookalike swap or lookalike option that is based on a futures contract traded on the New York Mercantile Exchange (NYMEX).

NYMEX Swap: A lookalike swap that is based on a futures contract traded on the New York Mercantile Exchange (NYMEX).

OCO: See One Cancels the Other Order.

Offer: An indication of willingness to sell at a given price; opposite of bid, the price level of the offer may be referred to as the ask.

Off Exchange: See Over-the-Counter.

Offset: Liquidating a purchase of futures contracts through the sale of an equal number of contracts of the same delivery month, or liquidating a short sale of futures through the purchase of an equal number of contracts of the same delivery month. See Closing Out and Cover.

Omnibus Account: An account carried by one Futures Commission Merchant, the carrying FCM, for another Futures Commission Merchant, the originating FCM, in which the transactions of two or more persons, who are customers of the originating FCM, are combined and carried by the carrying FCM. Omnibus account titles must clearly show that the funds and trades therein belong to customers of the originating FCM. An originating broker must use an omnibus account to execute or clear trades for customers at a particular exchange where it does not have trading or clearing privileges.

On Track (or Track Country Station): (1) A type of deferred delivery in which the price is set f.o.b. seller's location, and the buyer agrees to pay freight costs to his destination; (2) commodities loaded in railroad cars on tracks.

One Cancels the Other (OCO) Order: A pair of orders, typically limit orders, whereby if one order is filled, the other order will automatically be cancelled. For example, an OCO order might consist of an order to buy 10 calls with a strike price of 50 at a specified price or buy 20 calls with a strike price of 55 (with the same expiration date) at a specified price.

One-to-Many: Refers to a proprietary trading platform in which the platform operator posts bids and offers for commodities, derivatives, or other instruments and serves as a counterparty to every transaction executed on the platform. In contrast to many-to-many platforms, one-to-many platforms are not considered trading facilities under the Commodity Exchange Act.

Opening Price (or Range): The price (or price range) recorded during the period designated by the exchange as the official opening.

Opening: The period at the beginning of the trading session officially designated by the exchange during which all transactions are considered made "at the opening."

Open Interest: The total number of futures contracts long or short in a delivery month or market that has been entered into and not yet liquidated by an offsetting transaction or fulfilled by delivery. Also called Open Contracts or Open Commitments.

Open Order (or Orders): An order that remains in force until it is canceled or until the futures contracts expire. See Good 'Till Canceled and Good This Week orders.

Open Outcry: A method of public auction, common to most US commodity exchanges, where trading occurs on a trading floor and traders may bid and offer simultaneously either for their own accounts or for the accounts of customers. Transactions may take place simultaneously at different places in the trading pit or ring. At most exchanges outside the US, open outcry has been replaced by Electronic Trading Platforms. See Specialist System.

Open Trade Equity: The unrealized gain or loss on open futures positions.

Option: A contract that gives the buyer the right, but not the obligation, to buy or sell a specified quantity of a commodity or other instrument at a specific price within a specified period of time, regardless of the market price of that instrument. Also see Put and Call.

Option Buyer: The person who buys calls, puts, or any combination of calls and puts.

Option Writer: The person who originates an option contract by promising to perform a certain obligation in return for the price or premium of the option. Also known as Option Grantor or Option Seller.

Option Pricing Model: A mathematical model used to calculate the theoretical value of an option. Inputs to option pricing models typically include the price of the underlying instrument, the option strike price, the time remaining till the expiration date, the volatility of the underlying instrument, and the risk-free interest rate (e.g., the Treasury bill interest rate). Examples of option pricing models include Black-Scholes and Cox-Ross-Rubinstein.

Original Margin: Term applied to the initial deposit of margin money each clearing member firm is required to make according to clearing organization rules based upon positions carried, determined separately for customer and proprietary positions; similar in concept to the initial margin or security deposit required of customers by exchange rules. See Initial Margin.

OTC: See Over-the-Counter.

Out of Position: See In Position.

Out-Of-The-Money: A term used to describe an option that has no intrinsic value. For example, a call with a strike price of $400 on gold trading at $390 is out-of-the-money 10 dollars.

Outright: An order to buy or sell only one specific type of futures contract; an order that is not a spread order.

Out Trade: A trade that cannot be cleared by a clearing organization because the trade data submitted by the two clearing members or two traders involved in the trade differs in some respect (e.g., price and/or quantity). In such cases, the two clearing members or traders involved must reconcile the discrepancy, if possible, and resubmit the trade for clearing. If an agreement cannot be reached by the two clearing members or traders involved, the dispute would be settled by an appropriate exchange committee.

Overbought: A technical opinion that the market price has risen too steeply and too fast in relation to underlying fundamental factors. Rank and file traders who were bullish and long have turned bearish.

Overnight Trade: A trade which is not liquidated during the same trading session during which it was established.

Oversold: A technical opinion that the market price has declined too steeply and too fast in relation to underlying fundamental factors; rank and file traders who were bearish and short have turned bullish.

Over-the-Counter (OTC): The trading of commodities, contracts, or other instruments not listed on any exchange. OTC transactions can occur electronically or over the telephone. Also referred to as Off-Exchange.
 
P&S (Purchase and Sale Statement): A statement sent by a Futures Commission Merchant to a customer when any part of a futures position is offset, showing the number of contracts involved, the prices at which the contracts were bought or sold, the gross profit or loss, the commission charges, the net profit or loss on the transactions, and the balance. FCMs also send P&S Statements whenever any other event occurs that alters the account balance including when the customer deposits or withdraws margin and when the FCM places excess margin in interest bearing instruments for the customer’s benefit.

Paper Profit or Loss: The profit or loss that would be realized if open contracts were liquidated as of a certain time or at a certain price.

Par: (1) Refers to the standard delivery point(s) and/or quality of a commodity that is deliverable on a futures contract at contract price. Serves as a benchmark upon which to base discounts or premiums for varying quality and delivery locations; (2) in bond markets, an index (usually 100) representing the face value of a bond.

Path Dependent Option: An option whose valuation and payoff depends on the realized price path of the underlying asset, such as an Asian option or a Lookback option.

Pay/Collect: A shorthand method of referring to the payment of a loss (pay) and receipt of a gain (collect) by a clearing member to or from a clearing organization that occurs after a futures position has been marked-to-market. See Variation Margin.

Pegged Price: The price at which a commodity has been fixed by agreement.

Pegging: Effecting transactions in an instrument underlying an option to prevent a decline in the price of the instrument shortly prior to the option’s expiration date so that previously written put options will expire worthless, thus protecting premiums previously received. See Capping.

Performance Bond: See Margin.

Pip: The smallest price unit of a commodity or currency.

Pit: A specially constructed area on the trading floor of some exchanges where trading in a futures contract or option is conducted. On other exchanges, the term ring designates the trading area for commodity contract.

Pit Brokers: See Floor Broker.

Point-and-Figure: A method of charting that uses prices to form patterns of movement without regard to time. It defines a price trend as a continued movement in one direction until a reversal of a predetermined criterion is met.

Point Balance: A statement prepared by Futures Commission Merchants to show profit or loss on all open contracts using an official closing or settlement price, usually at calendar month end.

Ponzi Scheme: Named after Charles Ponzi, a man with a remarkable criminal career in the early 20th century, the term has been used to describe pyramid arrangements whereby an enterprise makes payments to investors from the proceeds of a later investment rather than from profits of the underlying business venture, as the investors expected, and gives investors the impression that a legitimate profit-making business or investment opportunity exists, where in fact it is a mere fiction.

Pork Bellies: One of the major cuts of the hog carcass that, when cured, becomes bacon.

Portfolio Insurance: A trading strategy that uses stock index futures and/or stock index options to protect stock portfolios against market declines.

Portfolio Margining: A method for setting margin requirements that evaluates positions as a group or portfolio and takes into account the potential for losses on some positions to be offset by gains on others. Specifically, the margin requirement for a portfolio is typically set equal to an estimate of the largest possible decline in the net value of the portfolio that could occur under assumed changes in market conditions. Sometimes referred to as Risked-Based Margining. Also see Strategy-Based Margining.

Position: An interest in the market, either long or short, in the form of one or more open contracts.

Position Accountability: A rule adopted by an exchange requiring persons holding a certain number of outstanding contracts to report the nature of the position, trading strategy, and hedging information of the position to the exchange, upon request of the exchange. See Speculative Position Limit.

Position Limit: See Speculative Position Limit.

Position Trader: A commodity trader who either buys or sells contracts and holds them for an extended period of time, as distinguished from a day trader, who will normally initiate and offset a futures position within a single trading session.

Positive Carry: The cost of financing a financial instrument (the short-term rate of interest), where the cost is less than the current return of the financial instrument. See Carrying Charges and Negative Carry.

Posted Price: An announced or advertised price indicating what a firm will pay for a commodity or the price at which the firm will sell it.

Prearranged Trading: Trading between brokers in accordance with an expressed or implied agreement or understanding, which is a violation of the Commodity Exchange Act and CFTC regulations.

Premium: (1) The payment an option buyer makes to the option writer for granting an option contract; (2) the amount a price would be increased to purchase a better quality commodity; (3) refers to a futures delivery month selling at a higher price than another, as "July is at a premium over May."

Price Basing: A situation where producers, processors, merchants, or consumers of a commodity establish commercial transaction prices based on the futures prices for that or a related commodity (e.g., an offer to sell corn at 5 cents over the December futures price). This phenomenon is commonly observed in grain and metal markets.

Price Discovery: The process of determining the price level for a commodity based on supply and demand conditions. Price discovery may occur in a futures market or cash market.

Price Movement Limit: See Limit (Up or Down).

Primary Market: (1) For producers, their major purchaser of commodities; (2) to processors, the market that is the major supplier of their commodity needs; and (3) in commercial marketing channels, an important center at which spot commodities are concentrated for shipment to terminal markets.

Program Trading: The purchase (or sale) of a large number of stocks contained in or comprising a portfolio. Originally called program trading when index funds and other institutional investors began to embark on large-scale buying or selling campaigns or "programs" to invest in a manner that replicates a target stock index, the term now also commonly includes computer-aided stock market buying or selling programs, and index arbitrage.

Prompt Date: The date on which the buyer of an option will buy or sell the underlying commodity (or futures contract) if the option is exercised.

Prop Shop: A proprietary trading group, especially one where the group's traders trade electronically at a physical facility operated by the group.

Proprietary Account: An account that a Futures Commission Merchant carries for itself or a closely related person, such as a parent, subsidiary or affiliate company, general partner, director, Associated Person, or an owner of ten percent or more of the capital stock. The FCM must segregate customer funds from funds related to proprietary accounts.

Proprietary Trading Group: An organization whose owners, employees and/or contractors trade in the name of accounts owned by the group and exclusively use the funds of the group for all of their trading activity.

Public: In trade parlance, non-professional speculators as distinguished from hedgers and professional speculators or traders.

Public Elevators: Grain elevators in which bulk storage of grain is provided to the public for a fee. Grain of the same grade but owned by different persons is usually mixed or commingled as opposed to storing it "identity preserved." Some elevators are approved by exchanges as regular (see Regular Warehouse) for delivery on futures contracts.

Purchase and Sale Statement: See P&S.

Put: An option contract that gives the holder the right but not the obligation to sell a specified quantity of a particular commodity or other interest at a given price (the "strike price") prior to or on a future date.

Pyramiding: The use of profits on existing positions as margin to increase the size of the position, normally in successively smaller increments.

Qualified Eligible Person (QEP) — The definition of QEP is too complex to summarize here; please see CFTC Rule 4.7(a)(2) and (a)(3), 17 C.F.R. §4.7(a)(2) and (a)(3) for the full definition.

Quick Order: See Fill or Kill Order.

Quotation: The actual price or the bid or ask price of either cash commodities or futures contracts.

Rally: An upward movement of prices.

Random Walk: An economic theory that market price movements move randomly. This assumes an efficient market. The theory also assumes that new information comes to the market randomly. Together, the two assumptions imply that market prices move randomly as new information is incorporated into market prices. The theory implies that the best predictor of future prices is the current price, and that past prices are not a reliable indicator of future prices. If the random walk theory is correct, Technical Analysis cannot work.

Range: The difference between the high and low price of a commodity, futures, or option contract during a given period.

Ratio Hedge: The number of options compared to the number of futures contracts bought or sold in order to establish a hedge that is neutral or delta neutral.

Ratio Spread: This strategy, which applies to both puts and calls, involves buying or selling options at one strike price in greater number than those bought or sold at another strike price. Ratio spreads are typically designed to be delta neutral. Back Spreads and Front Spreads are types of ratio spreads.

Ratio Vertical Spread: See Front Spread.

Reaction: A downward price movement after a price advance.

Recovery: An upward price movement after a decline.

Reference Asset: An asset, such as a corporate or sovereign debt instrument, that underlies a credit derivative.

Regular Warehouse: A processing plant or warehouse that satisfies exchange requirements for financing, facilities, capacity, and location and has been approved as acceptable for delivery of commodities against futures contracts. See Licensed Warehouse.

Replicating Portfolio: A portfolio of assets for which changes in value match those of a target asset. For example, a portfolio replicating a standard option can be constructed with certain amounts of the asset underlying the option and bonds. Sometimes referred to as a Synthetic Asset.

Repo or Repurchase Agreement: A transaction in which one party sells a security to another party while agreeing to repurchase it from the counterparty at some date in the future, at an agreed price. Repos allow traders to short-sell securities and allow the owners of securities to earn added income by lending the securities they own. Through this operation the counterparty is effectively a borrower of funds to finance further. The rate of interest used is known as the repo rate.

Reporting Level: Sizes of positions set by the exchanges and/or the CFTC at or above which commodity traders or brokers who carry these accounts must make daily reports about the size of the position by commodity, by delivery month, and whether the position is controlled by a commercial or non-commercial trader. See CFTC Backgrounder: The CFTC’s Large Trader Reporting System.

Resistance: In technical analysis, a price area where new selling will emerge to dampen a continued rise. See Support.

Resting Order: A limit order to buy at a price below or to sell at a price above the prevailing market that is being held by a floor broker. Such orders may either be day orders or open orders.

Retail Customer: A customer that does not qualify as an eligible contract participant under Section 1a(12) of the Commodity Exchange Act. An individual with total assets that do not exceed $10 million, or $5 million if the individual is entering into an agreement, contract, or transaction to manage risk, would be considered a retail customer.

Retender: In specific circumstances, some exchanges permit holders of futures contracts who have received a delivery notice through the clearing organization to sell a futures contract and return the notice to the clearing organization to be reissued to another long; others permit transfer of notices to another buyer. In either case, the trader is said to have retendered the notice.

Retracement: A reversal within a major price trend.

Reversal: A change of direction in prices. See Reverse Conversion.

Reverse Conversion or Reversal: With regard to options, a position created by buying a call option, selling a put option, and selling the underlying instrument (for example, a futures contract). See Conversion.

Reverse Crush Spread: The sale of soybean futures and the simultaneous purchase of soybean oil and meal futures. See Crush spread.

Riding the Yield Curve: Trading in an interest rate futures contract according to the expectations of change in the yield curve.

Ring: A circular area on the trading floor of an exchange where traders and brokers stand while executing futures trades. Some exchanges use pits rather than rings.

Risked-Based Margining: See Portfolio Margining

Risk Factor: See Delta.

Risk/Reward Ratio: The relationship between the probability of loss and profit. This ratio is often used as a basis for trade selection or comparison.

Roll-Over: A trading procedure involving the shift of one month of a straddle into another future month while holding the other contract month. The shift can take place in either the long or short straddle month. The term also applies to lifting a near futures position and re-establishing it in a more deferred delivery month.

Round Lot: A quantity of a commodity equal in size to the corresponding futures contract for the commodity. See Even Lot.

Round Trip Trading: See Wash Trading.

Round Turn: A completed transaction involving both a purchase and a liquidating sale, or a sale followed by a covering purchase.

Rules: The principles for governing an exchange. In some exchanges, rules are adopted by a vote of the membership, while in others, they can be imposed by the governing board.

Runners: Messengers or clerks who deliver orders received by phone clerks to brokers for execution in the pit.

Sample Grade: Usually the lowest quality of a commodity, too low to be acceptable for delivery in satisfaction of futures contracts.

Scale Down (or Up): To purchase or sell a scale down means to buy or sell at regular price intervals in a declining market. To buy or sell on scale up means to buy or sell at regular price intervals as the market advances.

Scalper: A speculator on the trading floor of an exchange who buys and sells rapidly, with small profits or losses, holding his positions for only a short time during a trading session. Typically, a scalper will stand ready to buy at a fraction below the last transaction price and to sell at a fraction above, e.g., to buy at the bid and sell at the offer or ask price, with the intent of capturing the spread between the two, thus creating market liquidity. See Day Trader, Position Trader.

Seasonality Claims: Misleading sales pitches that one can earn large profits with little risk based on predictable seasonal changes in supply or demand, published reports or other well-known events.

Seat: An instrument granting trading privileges on an exchange. A seat may also represent an ownership interest in the exchange.

Securities and Exchange Commission (SEC): The Federal regulatory agency established in 1934 to administer Federal securities laws.

Security: Generally, a transferable instrument representing an ownership interest in a corporation (equity security or stock) or the debt of a corporation, municipality, or sovereign. Other forms of debt such as mortgages can be converted into securities. Certain derivatives on securities (e.g., options on equity securities) are also considered securities for the purposes of the securities laws. Security Futures Products are considered to be both securities and futures products. Futures contracts on Broad-Based Securities Indexes are not considered securities.

Security Deposit: See Margin.

Security Future: A contract for the sale or future delivery of a single security or of a narrow-based security index.

Security Futures Product: A security future or any put, call, straddle, option, or privilege on any security future.

Self-Regulatory Organization (SRO): Exchanges and registered futures associations that enforce financial and sales practice requirements for their members. See Designated Self-Regulatory Organizations.

Seller's Call: Seller's Call, also referred to as call purchase, is the same as the buyer's call except that the seller has the right to determine the time to fix the price. See Buyer’s Call.

Seller's Market: A condition of the market in which there is a scarcity of goods available and hence sellers can obtain better conditions of sale or higher prices. See Buyer's Market.

Seller's Option: The right of a seller to select, within the limits prescribed by a contract, the quality of the commodity delivered and the time and place of delivery.

Selling Hedge (or Short Hedge): Selling futures contracts to protect against possible decreased prices of commodities. See Hedging.

Series (of Options): Options of the same type (i.e., either puts or calls, but not both), covering the same underlying futures contract or other underlying instrument, having the same strike price and expiration date.

Settlement: The act of fulfilling the delivery requirements of the futures contract.

Settlement Price: The daily price at which the clearing organization clears all trades and settles all accounts between clearing members of each contract month. Settlement prices are used to determine both margin calls and invoice prices for deliveries. The term also refers to a price established by the exchange to even up positions which may not be able to be liquidated in regular trading.

Shipping Certificate: A negotiable instrument used by several futures exchanges as the futures delivery instrument for several commodities (e.g., soybean meal, plywood, and white wheat). The shipping certificate is issued by exchange-approved facilities and represents a commitment by the facility to deliver the commodity to the holder of the certificate under the terms specified therein. Unlike an issuer of a warehouse receipt, who has physical product in store, the issuer of a shipping certificate may honor its obligation from current production or through-put as well as from inventories.

Shock Absorber: A temporary restriction in the trading of certain stock index futures contracts that becomes effective following a significant intraday decrease in stock index futures prices. Designed to provide an adjustment period to digest new market information, the restriction bars trading below a specified price level. Shock Absorbers are generally market specific and at tighter levels than circuit breakers.

Short: (1) The selling side of an open futures contract; (2) a trader whose net position in the futures market shows an excess of open sales over open purchases. See Long.

Short Covering: See Cover.

Short Hedge: See Selling Hedge.

Short Selling: Selling a futures contract or other instrument with the idea of delivering on it or offsetting it at a later date.

Short Squeeze: See Squeeze.

Short the Basis: The purchase of futures as a hedge against a commitment to sell in the cash or spot markets. See Hedging.

Single Stock Future: A futures contract on a single stock. Single stock futures were illegal in the US prior to the passage of the Commodity Futures Modernization Act. See Security Future, Security Futures Product.

Small Traders: Traders who hold or control positions in futures or options that are below the reporting level specified by the exchange or the CFTC.

Soft: (1) A description of a price that is gradually weakening; or (2) this term also refers to certain “soft” commodities such as sugar, cocoa, and coffee.

Sold-Out-Market: When liquidation of a weakly-held position has been completed, and offerings become scarce, the market is said to be sold out.

SPAN® (Standard Portfolio Analysis of Risk®): As developed by the Chicago Mercantile Exchange, the industry standard for calculating performance bond requirements (margins) on the basis of overall portfolio risk. SPAN calculates risk for all enterprise levels on derivative and non-derivative instruments at numerous exchanges and clearing organizations worldwide.

Spark Spread: The differential between the price of electricity and the price of natural gas or other fuel used to generate electricity, expressed in equivalent units. See Gross Processing Margin.

Specialist System: A type of trading commonly used for the exchange trading of securities in which one individual or firm acts as a market-maker in a particular security, with the obligation to provide fair and orderly trading in that security by offsetting temporary imbalances in supply and demand by trading for the specialist’s own account. See Open Outcry.

Speculative Bubble: A rapid run-up in prices caused by excessive buying that is unrelated to any of the basic, underlying factors affecting the supply or demand for a commodity or other asset. Speculative bubbles are usually associated with a "bandwagon" effect in which speculators rush to buy the commodity (in the case of futures, "to take positions") before the price trend ends, and an even greater rush to sell the commodity (unwind positions) when prices reverse.

Speculative Limit: See Speculative Position Limit.

Speculative Position Limit: The maximum position, either net long or net short, in one commodity future (or option) or in all futures (or options) of one commodity combined that may be held or controlled by one person (other than a person eligible for a hedge exemption) as prescribed by an exchange and/or by the CFTC. See CFTC Backgrounder: Speculative Limits, Hedging, and Aggregation.

Speculator: In commodity futures, an individual who does not hedge, but who trades with the objective of achieving profits through the successful anticipation of price movements.

Split Close: A condition that refers to price differences in transactions at the close of any market session.

Spot: Market of immediate delivery of and payment for the product.

Spot Commodity: (1) The actual commodity as distinguished from a futures contract; (2) sometimes used to refer to cash commodities available for immediate delivery. See Actuals or Cash Commodity.

Spot Month: The futures contract that matures and becomes deliverable during the present month. Also called Current Delivery Month.

Spot Price: The price at which a physical commodity for immediate delivery is selling at a given time and place. See Cash Price.

Spread (or Straddle): The purchase of one futures delivery month against the sale of another futures delivery month of the same commodity; the purchase of one delivery month of one commodity against the sale of that same delivery month of a different commodity; or the purchase of one commodity in one market against the sale of the commodity in another market, to take advantage of a profit from a change in price relationships. The term spread is also used to refer to the difference between the price of a futures month and the price of another month of the same commodity. A spread can also apply to options. See Arbitrage.

Squeeze: A market situation in which the lack of supplies tends to force shorts to cover their positions by offset at higher prices. Also see Congestion, Corner.

SRO: See Self-Regulatory Organization.

Stop-Close-Only Order: A stop order that can be executed, if possible, only during the closing period of the market. See also Market-on-Close Order.

Stop Limit Order: A stop limit order is an order that goes into force as soon as there is a trade at the specified price. The order, however, can only be filled at the stop limit price or better.

Stop Loss Order: See Stop Order.

Stop Order: This is an order that becomes a market order when a particular price level is reached. A sell stop is placed below the market, a buy stop is placed above the market. Sometimes referred to as Stop Loss Order. Compare to Market-if-touched Order.

Straddle: (1) See Spread; (2) an option position consisting of the purchase of put and call options having the same expiration date and strike price.

Strangle: An option position consisting of the purchase of put and call options having the same expiration date, but different strike prices.

Strategy-Based Margining: A method for setting margin requirements whereby the potential for gains on one position in a portfolio to offset losses on another position is taken into account only if the portfolio implements one of a designated set of recognized trading strategies as set out in the rules of an exchange or clearing organization. Also see Portfolio Margining.

Street Book: A daily record kept by Futures Commission Merchants and clearing members showing details of each futures and option transaction, including date, price, quantity, market, commodity, future, strike price, option type, and the person for whom the trade was made.

Strike Price (Exercise Price): The price, specified in the option contract, at which the underlying futures contract, security, or commodity will move from seller to buyer.

STRIPS (Separate Trading of Registered Interest and Principal Securities): A book-entry system operated by the Federal Reserve permitting separate trading and ownership of the principal and coupon portions of selected Treasury securities. It allows the creation of zero coupon Treasury securities from designated whole bonds.

Strong Hands: When used in connection with delivery of commodities on futures contracts, the term usually means that the party receiving the delivery notice probably will take delivery and retain ownership of the commodity; when used in connection with futures positions, the term usually means positions held by trade interests or well-financed speculators.

Support: In technical analysis, a price area where new buying is likely to come in and stem any decline. See Resistance.

Swap: In general, the exchange of one asset or liability for a similar asset or liability for the purpose of lengthening or shortening maturities, or raising or lowering coupon rates, to maximize revenue or minimize financing costs. This may entail selling one securities issue and buying another in foreign currency; it may entail buying a currency on the spot market and simultaneously selling it forward. Swaps also may involve exchanging income flows; for example, exchanging the fixed rate coupon stream of a bond for a variable rate payment stream, or vice versa, while not swapping the principal component of the bond. Swaps are generally traded over-the-counter.

Swaption: An option to enter into a swap—i.e., the right, but not the obligation, to enter into a specified type of swap at a specified future date.

Switch: Offsetting a position in one delivery month of a commodity and simultaneous initiation of a similar position in another delivery month of the same commodity, a tactic referred to as "rolling forward."

Synthetic Futures: A position created by combining call and put options. A synthetic long futures position is created by combining a long call option and a short put option for the same expiration date and the same strike price. A synthetic short futures contract is created by combining a long put and a short call with the same expiration date and the same strike price.

Systematic Risk: Market risk due to factors that cannot be eliminated by diversification.

Systemic Risk: The risk that a default by one market participant will have repercussions on other participants due to the interlocking nature of financial markets. For example, Customer A’s default in X market may affect Intermediary B’s ability to fulfill its obligations in Markets X, Y, and Z.

Taker: The buyer of an option contract.

T-Bond: See Treasury Bond.

Technical Analysis: An approach to forecasting commodity prices that examines patterns of price change, rates of change, and changes in volume of trading and open interest, without regard to underlying fundamental market factors. Technical analysis can work consistently only if the theory that price movements are a Random Walk is incorrect. See Fundamental Analysis.

Ted Spread: The difference between the price of the three-month US Treasury bill futures contract and the price of the three-month Eurodollar time deposit futures contract with the same expiration month.

Tender: To give notice to the clearing organization of the intention to initiate delivery of the physical commodity in satisfaction of a short futures contract. Also see Retender.

Tenderable Grades: See Contract Grades.

Terminal Elevator: An elevator located at a point of greatest accumulation in the movement of agricultural products that stores the commodity or moves it to processors.

Terminal Market: Usually synonymous with commodity exchange or futures market, specifically in the United Kingdom.

Tick: Refers to a minimum change in price up or down. An up-tick means that the last trade was at a higher price than the one preceding it. A down-tick means that the last price was lower than the one preceding it. See Minimum Price Fluctuation.

Time Decay: The tendency of an option to decline in value as the expiration date approaches, especially if the price of the underlying instrument is exhibiting low volatility. See Time Value.

Time-of-Day Order: This is an order that is to be executed at a given minute in the session. For example, "Sell 10 March corn at 12:30 p.m."

Time Spread: The selling of a nearby option and buying of a more deferred option with the same strike price. Also called Horizontal Spread.

Time Value: That portion of an option's premium that exceeds the intrinsic value. The time value of an option reflects the probability that the option will move into-the-money. Therefore, the longer the time remaining until expiration of the option, the greater its time value. Also called Extrinsic Value.

Total Return Swap: A type of credit derivative in which one counterparty receives the total return (interest payments and any capital gains or losses) from a specified reference asset and the other counterparty receives a specified fixed or floating cash flow that is not related to the creditworthiness of the reference asset. Also called Total Rate of Return Swap, or TR Swap.

To-Arrive Contract: A transaction providing for subsequent delivery within a stipulated time limit of a specific grade of a commodity.

Trade Option: A commodity option transaction in which the purchaser is reasonably believed by the writer to be engaged in business involving use of that commodity or a related commodity.

Trader: (1) A merchant involved in cash commodities; (2) a professional speculator who trades for his own account and who typically holds exchange trading privileges.

Trading Ahead: See Front Running.

Trading Arcade: A facility, often operated by a clearing member that clears trades for locals, where e-locals who trade for their own account can gather to trade on an electronic trading facility (especially if the exchange is all-electronic and there is no pit or ring).

Trading Facility: A person or group of persons that provides a physical or electronic facility or system in which multiple participants have the ability to execute or trade agreements, contracts, or transactions by accepting bids and offers made by other participants in the facility or system. See Many-to-Many.

Trading Floor: A physical trading facility where traders make bids and offers via open outcry or the specialist system.

Transaction: The entry or liquidation of a trade.

Transfer Trades: Entries made upon the books of Futures Commission Merchants for the purpose of: (1) transferring existing trades from one account to another within the same firm where no change in ownership is involved; (2) transferring existing trades from the books of one FCM to the books of another FCM where no change in ownership is involved. Also called Ex-Pit Transactions.

Transferable Option (or Contract): A contract that permits a position in the option market to be offset by a transaction on the opposite side of the market in the same contract.

Transfer Notice: A term used on some exchanges to describe a notice of delivery. See Retender.

Treasury Bills (or T-Bills): Short-term zero coupon US government obligations, generally issued with various maturities of up to one year.

Treasury Bonds (or T-Bonds): Long-term (more than ten years) obligations of the US government that pay interest semiannually until they mature, at which time the principal and the final interest payment is paid to the investor.

Treasury Notes: Same as Treasury Bonds except that Treasury Notes are medium-term (more than one year but not more than ten years).

Trend: The general direction, either upward or downward, in which prices have been moving.

Trendline: In charting, a line drawn across the bottom or top of a price chart indicating the direction or trend of price movement. If up, the trendline is called bullish; if down, it is called bearish.

Unable : Unless they are designated “GTC” (Good Until Canceled) or “Open,” all orders not filled by the end of a trading day are deemed “unable” and void.

Uncovered Option: See Naked Option.

Underlying Commodity: The cash commodity underlying a futures contract. Also, the commodity or futures contract on which a commodity option is based, and which must be accepted or delivered if the option is exercised.

Variable Price Limit: A price limit schedule, determined by an exchange, that permits variations above or below the normally allowable price movement for any one trading day.

Variation Margin: Payment made on a daily or intraday basis by a clearing member to the clearing organization based on adverse price movement in positions carried by the clearing member, calculated separately for customer and proprietary positions.

Vault Receipt: A document indicating ownership of a commodity stored in a bank or other depository and frequently used as a delivery instrument in precious metal futures contracts.

Vega: Coefficient measuring the sensitivity of an option value to a change in volatility.

Vertical Spread: Any of several types of option spread involving the simultaneous purchase and sale of options of the same class and expiration date but different strike prices, including bull vertical spreads, bear vertical spreads, back spreads, and front spreads. See Horizontal Spread and Diagonal Spread.

Visible Supply: Usually refers to supplies of a commodity in licensed warehouses. Often includes floats and all other supplies "in sight" in producing areas. See Invisible Supply.

Volatility: A statistical measurement of the rate of price change of a futures contract, security, or other instrument underlying an option. See Historical Volatility, Implied Volatility.

Volatility Quote Trading: Refers to the quoting of bids and offers on option contracts in terms of their implied volatility rather than as prices.

Volatility Spread: A delta-neutral option spread designed to speculate on changes in the volatility of the market rather than the direction of the market.

Volatility Trading: Strategies designed to speculate on changes in the volatility of the market rather than the direction of the market.

Volume of Trade: The number of contracts traded during a specified period of time. It may be quoted as the number of contracts traded or as the total of physical units, such as bales or bushels, pounds or dozens.  

Warehouse Receipt: A document certifying possession of a commodity in a licensed warehouse that is recognized for delivery purposes by an exchange.

Warrant: An issuer-based product that gives the buyer the right, but not the obligation, to buy (in the case of a call) or to sell (in the case of a put) a stock or a commodity at a set price during a specified period.

Warrant or Warehouse Receipt for Metals: Certificate of physical deposit, which gives title to physical metal in an exchange-approved warehouse.

Wash Sale: See Wash Trading.

Wash Trading: Entering into, or purporting to enter into, transactions to give the appearance that purchases and sales have been made, without incurring market risk or changing the trader's market position. The Commodity Exchange Act prohibits wash trading. Also called Round Trip Trading, Wash Sales.

Weak Hands: When used in connection with delivery of commodities on futures contracts, the term usually means that the party probably does not intend to retain ownership of the commodity; when used in connection with futures positions, the term usually means positions held by small speculators.

Weather Derivative: A derivative whose payoff is based on a specified weather event, for example, the average temperature in Chicago in January. Such a derivative can be used to hedge risks related to the demand for heating fuel or electricity.

Wild Card Option: Refers to a provision of any physical delivery Treasury Bond or Treasury Notes futures contract that permits shorts to wait until as late as 8:00 PM on any notice day to announce their intention to deliver at invoice prices that are fixed at 2:00 PM, the close of futures trading, on that day.

Winter Wheat: Wheat that is planted in the fall, lies dormant during the winter, and is harvested beginning about May of the next year.

Writer: The issuer, grantor, or seller of an option contract.

Yield Curve: A graphic representation of market yield for a fixed income security plotted against the maturity of the security. The yield curve is positive when long-term rates are higher than short-term rates.

Yield to Maturity: The rate of return an investor receives if a fixed income security is held to maturity.

Zero Coupon: Refers to a debt instrument that does not make coupon payments, but, rather, is issued at a discount to par and redeemed at par at maturity.

One’s life starts with one and ends with none. That’s the universal truth and proven hard fact.
Still one would always feel safe by possessing some thing that would give it cover in difficult times and accelerate growth in good times which is again a cycle in ones life. Of course it would like to enjoy these possessions with a sound Health without the fear of Death.

Stocks, Bonds, Cash, Precious Metal, Property these are the direct needs of ones safe financial life. But some how everybody can’t dream, somebody can’t afford and one can’t maintain these possessions.

Hence forth there is a need of a regulated reliable and organized route of money management.

Highlights:

• Wealth Management collectively means a thoughtful Diversified Portfolio
• Ignorance of Equity may be harmful; higher leverage to the same is more harmful
• Too much of derivative trading could well bring one towards bankruptcy
• Too much of Property could put your liquidity in danger
• No body can ever time the markets