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What are Stocks and Stock options? How Stock options work?

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What are stocks?

A stock is a type of tradable asset that represents ownership in a company. Basically, when you buy stocks or shares in a company, you are buying the future earnings of that company: if the company does well, you make money, but if the company does badly, you lose money.

There are usually two types of shares: common shares and preferred shares. With certain shares, it is also possible to gain voting rights in the management of the company. Stocks are usually bought and sold through exchanges or markets such as the NSE (National Stock Exchange of India) & BSE (Bombay Stock Exchange of India).

Why are you buying an option?

1. You want to protect yourself from your risk. Let’s say you own a lot of Apple stock and you’re worried about the price going down. The right choices can limit losses if this prediction comes true.

2. You want to get exposure without spending a lot of money. Buying call options can be much cheaper than buying the same stock outright, and leverage offers much greater potential.

3. You have researched the market and want to play your intuitions. Instead of choosing whether a stock will go up or down, options can benefit from predictions about how much and when a stock will move.

What’s an option grant?

Option grants are a way for your company to grant option rights. This document usually contains information about:

Types of stock options received (ISO or NSO)
● Number of shares you can buy
● Your lottery prices
● Your stock schedules

What are the options used for?

Shares generally have many uses:
● For companies, a public offering of shares can help the company raise capital.
● For individuals, buying stocks can help them see future returns on their investments.

What are the risks of the options?

This is important because the risks are high: if the underlying stock of your option doesn’t reach its strike price and you can’t convince someone to take it off your hands before it expires, you’ve lost what you paid for. This is a 100% loss which is incredibly rare if you trade a typical stock. Therefore, options trading is riskier than stock trading.

How do stock options work?

Stock options are part of the underlying stock. As such, their price is linked to the movement of the underlying stock. If the price of the stock goes up or down, the stock options will follow.

One of the differences between stocks and stock options is that stock options cover 100 shares of the underlying stock. The option premium is affected by both the buyer’s and the seller’s price. The intrinsic value is the difference between the exercise price of the option and the market price of the underlying stock.

The premium is also affected by the time the option expires and any changes in the prices of the underlying stock during the option’s holding period.

There are two other common terms you will hear when talking about stock options and they are “in the money” and “out of the money“. If the strike price is higher than the market price, the stock is called “in the money”. If the strike price is higher than the stock price, the stock is called “out of the money”.

Exercise Stock Options

When you are ready to exercise your options, you generally have several options:

1. Cash: You can find the cash to exercise your options at the exercise price.

2. Cashless Exercise: Some employers allow you to exercise your options by selling only enough to cover the cost of exercising others.

3. Cashless Exercise/Sell: Some employers allow you to exercise and sell your options immediately at the current market price, which means you are not constantly exposed to stock prices and do not have to raise money before exercise.

Understanding and using stock options is important to many financial professions such as investment banking. Some other skills that investment professionals need are:

● Understanding of debt capital markets
● Understanding of company value
● analytical skills
● Ability to read stock charts

Ending thoughts

As with all stock options employed, it is important to have a comprehensive understanding of what your stock options are worth and how they fit into your diversified portfolio. You put yourself in a somewhat speculative position with stock options, so we generally recommend that clients work closely with their financial advisors when evaluating stock options.

For buying stock options, please open an account.

Please fill out your KYC details here.

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Table of Contents

• Beware of fixed/guaranteed/regular returns/ capital protection schemes. Brokers or their authorized persons or any of their associates are not authorized to offer fixed/guaranteed/regular returns/ capital protection on your investment or authorized to enter into any loan agreement with you to pay interest on the funds offered by you. Please note that in case of default of a member claim for funds or securities given to the broker under any arrangement/ agreement of indicative return will not be accepted by the relevant Committee of the Exchange as per the approved norms.
• Ensure that pay-out of funds/securities is received in your account within 1 working day from the date of pay-out.
• Be careful while executing the PoA (Power of Attorney) – specify all the rights that the stock broker can exercise and timeframe for which PoA is valid. It may be noted that PoA is not a mandatory requirement as per SEBI / Exchanges.
• Register for online applications viz Speed-e and Easiest provided by Depositories for online delivery of securities as an alternative to PoA.

• Do not keep funds idle with the Stock Broker. Please note that your stock broker has to return the credit balance lying with them, within three working days in case you have not done any transaction within last 30 calendar days. Please note that in case of default of a Member, claim for funds and securities, without any transaction on the exchange will not be accepted by the relevant Committee of the Exchange as per the approved norms.

• Check the frequency of accounts settlement opted for. If you have opted for running account, please ensure that your broker settles your account and, in any case, not later than once in 90 days (or 30 days if you have opted for 30 days settlement). In case of declaration of trading member as defaulter, the claims of clients against such defaulter member would be subject to norms for eligibility of claims for compensation from IPF to the clients of the defaulter member. These norms are available on Exchange website at following link: NSE, MCX

• Brokers are not permitted to accept transfer of securities as margin. Securities offered as margin/ collateral MUST remain in the account of the client and can be pledged to the broker only by way of ‘margin pledge’, created in the Depository system. Clients are not permitted to place any securities with the broker or associate of the broker or authorized person of the broker for any reason. Broker can take securities belonging to clients only for settlement of securities sold by the client.

• Always keep your contact details viz. Mobile number/Email ID updated with the stock broker. Email and mobile number is mandatory and you must provide the same to your broker for updation in Exchange records. You must immediately take up the matter with Stock Broker/Exchange if you are not receiving the messages from Exchange/Depositories regularly.

• Don’t ignore any emails/SMSs received from the Exchange for trades done by you. Verify the same with the Contract notes/Statement of accounts received from your broker and report discrepancy, if any, to your broker in writing immediately and if the Stock Broker does not respond, please take this up with the Exchange/Depositories forthwith.

• Check messages sent by Exchanges on a weekly basis regarding funds and securities balances reported by the trading member, compare it with the weekly statement of account sent by broker and immediately raise a concern to the exchange if you notice a discrepancy.

• Please do not transfer funds, for the purposes of trading to anyone, including an authorized person or an associate of the broker, other than a SEBI registered Stock broker.

• Do not deal with unregistered intermediaries (who are not registered with SEBI/Exchanges).

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