Contango & Backwardation

Contango & Backwardation are linked with Futures market.

As we know Spot Price is the Current Market price of any asset and Futures price is the price predicted for future.

Lets take an example of Crude Oil:

When purchasing crude oil, if we take the delivery now, the space, insurance and other cost involved in storing the crude oil reduces to the supplier and hence the price is low for crude oil compared to future delivery.

The price for storage and other expenses increases for future delivery and henceforth the cost is higher. This is called Contango

Lets consider the demand is very high and the company cannot supply the crude oil to all its customers, in that case the futures price will be reduced and current spot price will be high.

similarly, when there is an operational concern like pipeline maintenance work or damage, the company cannot supply the crude oil immediately. In this scenario of Futures price is low pushing customers to get delivery in future period and spot price high. This is called Backwardation

Futures Price = Spot Price + Cost to Carry

In Contango, the cost to carry will be positive and in Backwardation, the cost to carry will be negative

Lets consider the same scenario in indices /stocks, currently Nifty spot price is 100 points higher than Nifty Futures, this indicates

1. The demand is very high for Nifty Buy

2. Short covering is probably happening due to sellers by start of May 2020, tend to buy back now

Best Regards,

B G Nareshkumar.

Nifty Volatility Index

Nifty Volatility Index is commonly referred as VIX or VI. From the Bid and Ask prices of Option contracts of NIFTY, VIX is defined. It is expected to have VIX under control or low as possible.

If the volatility is high then the prediction or assumption is very hard and it might result in loss. Hence the Nifty VIX is expected to be between 20 to 25.

Over the past decades, this volatility is under control, on an exceptional note VIX has gone above 80 during the Corona Virus period (March 2020 - April 2020).

The Strategies (Strangle &Straddle) will work and give profits only during the low VIX. If the VIX is high, then the loss will be very huge (it may even eat your capital).

Best Regards,

B G Nareshkumar

Share Split

Companies can decide on providing a share split to it shareholders in order to increase the number of shares. For example, if a company announces a split of 1:1 and if you have 100 shares, then after the record date the number of shares which you hold will be increased to 200. 

Face value of the share will be reduced accordingly. If the face value was 10 before the share split, considering the above scenario of 1:1, then the new face value will be 5.

Simultaneously the Current Market Price of the share will also be reduced appropriately. For example in above scenario, if the CMP of share before the split is Rs.1000, then the CMP of share after the split will be reduced to Rs.500. So the value of a shareholder do not change.

In most scenario, the CMP after the share split will slightly be on the upper side on the benefit of existing shareholders. For understanding purpose on the above scenario, the CMP will not be reduced to Rs. 500, instead it can be around Rs. 550.

The reason why companies go for Share split:

1. Company may think the CMP is high and retail / small investors cannot afford to buy the shares. If the share value is reduced, then it can attract more investors.

2. To raise the capital. When more investors come into picture, companies will have good cash flow.

3. Companies can go for expansion. When they get more cash flow, they can invest in new entity or can go for expansion.

Companies follow the dates for this process (Announcement Date, Record Date and Ex-Bonus Date). This is same as done for the bonus share distribution.

Best Regards,

B G Nareshkumar.

Bonus shares - Record Date & Ex-bonus Date

When a company planned to give a bonus to its shareholders, there are few dates which are to be considered by the traders and shareholders.

The company can announce the bonus on any ratio example 1:5 or 1:10 etc...

If company announces the bonus share in ratio 1:5, which means 1 share is given as bonus for every 5 shares held.

Announcement Date:
When the company is announcing the Bonus, it is the announcement date.

Record Date:
This is the date when company considers the list of shareholders who are eligible for bonuses. This means on this particular date we should be holding the shares in our account, if the shares are about to reflect in the Dmat account, those are not considered.

Ex-bonus Date:
This date is one day prior to Record date. In India the share reflect in our account in T+2 days. If we buy share one day prior to ex-bonus date, those share will reflect in our account on Record date and those will be accounted for bonuses. If we buy share on Ex-bonus date, those share will reflect in our account next date to the record date and those are not accounted.
So, share should be bought 1 day before to Ex-bonus date to be eligible for Bonuses.

All days are working days, no weekends or holidays are considered for calculation.

Best Regards,
B G Nareshkumar

ADR - American Depository Receipt

ADR commonly referred to American Depository Receipts.

ADR allows US investors to purchase shares from foreign stock exchanges. Most of the stocks across all exchanges get listed in ADR and the U.S Banks takes care of the transaction with the US investors.

Investors buy these shares in US dollars and they do not want to worry about the exchange price.

Those exchange rates are taken care by the U.S Banks who felicitate this transaction.

All these ADR’s can be traded on the American stock exchanges.

The dividends on these shares are paid in US Dollars.

Price of the share both in home and foreign country will be same or equivalent considering the exchange rates.

Sponsored ADR:
The foreign company will pay the cost for issuing the ADR and retain control over it. The US banks will handle the transaction with the investors.

Unsponsored ADR:
The US banks can issue unsponsored ADR but they don’t have any participation, involvement or permission from the foreign company. There can be several US Banks providing unsponsored ADR for the same foreign company. In this case the dividends can vary.

Best Regards,
B G Nareshkumar.

After Market Hours Trading

In India, Traders and Investors can place and close their positions between 9.15 am and 3.30 pm. Nifty and Sensex also allow people to trade after and before this trading hours for the benefit of people who cannot actively trade during this time.

On Every working day between 9.00 am and 9.08 am Nifty and Sensex will have pre-open session as the volatility would be higher and the index will Cool down during this time period considering all after market hours order.

Similarly between 3.40 pm and 4.00 pm, the trades are considered as extended hours. Earlier, big institutional investors do the trades in extended hours considering any big news flows after market hours. Now anyone can participate in this extended hours transaction based on their broker.

AMO application availability can be availed by speaking to the brokers we choose. There is no confirmation that any order placed during the AMO will be executed for sure, only when the price matches your bit, it will be executed.

It is always wise to do the trading in the active trading hours.

AMO - After Market Orders

Best Regards,
B G Nareshkumar.

Upper & Lower Circuit for Nifty - Market Halting Process

Nifty has certain Halting Rules to the stock market timing to help traders and investors, when markets behave very violently, this does not happen frequently but rarely.

we are in the generation where Upper Circuit and Lower Circuit has been achieved in the month of March 2020 because of Corona Virus hits global markets and more deaths reported. Upper and Lower circuit is commonly referred to go up or down by 10%.

Let's consider Upper Limit:

1. Between 9.15 am till 1.00 pm, if the market went up by 10%, then the market will be halted by 45 minutes and after the market opens, 15 mins pre-open session will be held and then the market continues

2. After 1.00 pm, if the market went up by 10%, then the market will be halted by 15 minutes and after the market opens, 15 mins pre-open session will be held and then the market continues

3. At or After 2.30 pm, if the market went up by 10%, No Halt and the market continues

4. Let's take the situation. Before 1 pm, market hits 10%, halted and continues. Again after this, market continues to go up and hit 15%, then market will be halted again by 1 hour and 45 minutes and then 15 mins pre-open session will be held and then the market continues as usual

5. After 10% halting process, If the market hits 15% between 1.00 pm and 2.00 pm, then market will be halted by 45 minutes and then 15 mins pre-open session will be held and then the market continues as usual

6. After 10% halting process, If market hits 15% after 2.00 pm, No Halting, market will have its own riding unless it goes beyond 20%

7. If the market hits 20% at any time of the market hours, that day will be closed for markets

The same above process will be carried out for Lower Limit, when the market falls.

Till now, i have seen only 10% lower limit and upper limit, where market halted for 45 minutes followed by 15 minutes pre-open session and market continued.

Best Regards,
B G Nareshkumar.