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  • Algo Trading Strategy planner to nail trading & its actionable pathway

    Algo Trading Strategy planner to nail trading & its actionable pathway

    Building your first algo trading strategy can be an exciting venture, but it’s important to approach it with a systematic and well-thought-out process. Below is a step-by-step tutorial to help you get started:

    Step 1: Define Your Objectives

    Before you start coding, it’s crucial to have a clear understanding of your trading objectives. What are you trying to achieve with your algo trading strategy? Are you looking for long-term investments or short-term gains? Are you interested in specific asset classes like stocks, forex, or cryptocurrencies? Define your goals and risk tolerance.

    Step 2: Gather Data

    Data is the foundation of any algorithmic trading strategy. You need historical price data for the assets you want to trade. You can view Nifty 50 historical data, historical Sensex data, Bank Nifty historical data, and more here. Just select the historical gainers or historical losers, choose NSE or BSE, select the time period, and then indices. You will see all the historical data of NSE or BSE.

    Step 3: Choose a Trading Platform

    Select a programming language and trading platform that suits your needs. Python is a popular choice due to its extensive libraries for data analysis and trading, but other languages like R or Java can also be used. Platforms like MetaTrader, QuantConnect, or Findoc APIs are commonly used for algo trading.

    Step 4: Develop Your Strategy

    This is where the coding begins. Your trading strategy should be well-defined and based on a set of rules. It could be a simple moving average crossover strategy, a mean-reversion strategy, or a more complex machine learning model. Ensure your strategy includes risk management rules to protect your capital. Also Read: Top five algorithmic trading strategies of 2024.

    Step 5: Backtesting

    Before risking real money, it’s essential to backtest your strategy using historical data. This involves applying your strategy to past market conditions to see how it would have performed. This step helps you identify any flaws or weaknesses in your strategy. Check out our helpful guide on algo trading backtesting techniques.

    Step 6: Paper Trading

    After successful backtesting, paper trading is the next step. This involves executing your strategy in a simulated trading environment with fake money. It allows you to see how your strategy performs in real-time without risking capital.

    Step 7: Implement Risk Management

    Integrate risk management rules into your strategy. This includes setting stop-loss orders, position sizing, and diversification to limit potential losses.

    Step 8: Monitor and Optimize

    Even after deploying your strategy in a live environment, you should continuously monitor its performance. Make necessary adjustments based on market conditions and feedback from your system. This may involve fine-tuning parameters or even redesigning the strategy if it’s underperforming.

    Step 9: Deploy and Trade Live

    Once you are satisfied with your strategy’s performance during paper trading, you can start trading with real money. Start with a small amount to minimize risk initially and gradually scale up as you gain confidence.

    Step 10: Stay Informed and Adapt

    The financial markets are dynamic, and conditions can change rapidly. Stay informed about Indian financial news, economic events, and market sentiment that can impact your assets. Be prepared to adapt and refine your strategy accordingly.

    Step 11: Keep Records

    Maintain detailed records of your trades, including entry and exit points, profits, losses, and the reasoning behind each trade. This information will be valuable for evaluating your strategy’s long-term performance and making improvements.

    Remember that algorithmic trading involves risk, and there are no guarantees of profit. It’s essential to continuously educate yourself, stay disciplined, and be prepared to adjust your strategy as needed. Additionally, consider seeking advice from certified financial manager or mentors experienced in algo trading before diving into this complex field.

  • The Game of Compounding & Timing for Mutual Funds

    The Game of Compounding & Timing for Mutual Funds

    “Forget about timing the market, it doesn’t work. You will lose money. Invest for the long haul and then sit back and wait — the market always goes up in the long run.” – Paul Farrell

    Often we hear investment experts say that it is better to invest time in the market instead of timing the market. While this holds for traders who trade on a daily basis, and their profits are generated from different prices at different times in the market, for an investor, it is better to invest more time in the market, to understand how it is working, and then invest, and in such cases, chances of earning positive returns increases.

    That said when investing in the equity market for a shorter period, entering and exiting the market at the right time can be crucial. However, predicting the future of any stock or even the overall market accurately every time is something beyond the capabilities of a human brain or even AI cannot do so.

    However, does this concept hold for mutual funds as well? Often you will see people asking if is it a good time to invest in mutual funds or not, which is a valid question but the answer needs a little explanation.

    Is There Any Right Time to Invest in Mutual Funds?

    While there is no thumb rule related to the timing of investing in mutual funds, the timing of investing should change according to the type of funds you are investing in or the duration for which you want to stay invested and most importantly the mode of investment – SIP or Lumpsum.

    Since, mutual funds also invest in the same asset classes like equities, debt, alternative investments, and others, thus, while investing a lump sum in a mutual fund, you need to think about the timing a bit. This especially holds for equity mutual funds and if you are investing in them for a shorter duration.

    When the equity market goes up, the NAV of the equity mutual funds or funds having major portions of equity and equity-related instruments also tends to increase. This makes the units of the fund expensive and thus, if you are thinking about lump sum investment during market highs, you may end up with a lesser number of fund units.

    Especially if you are looking for mutual fund investment plans for short term then you should avoid investing in higher NAV funds as markets are volatile and you may never know, when the time of redemption comes, the market may decrease leaving you with losses.

    Thus, if you are investing a lump sum amount in a mutual fund and for the short-term then always try to invest in funds with lower NAV or during the market lows for the asset class in which the fund invests.

    Is There Any Other Way to Invest in Mutual Funds without Worrying About Timing?

    To keep all the hassles of timing the market and your mutual fund investments at bay, you can consider investing in SIPs.

    SIPs are Systematic Investment Plans, which do not depend on market timing. Rather, the more time you stay invested, the potential for higher returns increases.

    Investing in mutual funds via the SIP route has increased drastically in the last few years, especially during the Covid-19 pandemic, since the SIP route helps investors invest in the funds on a regular basis without worrying about whether the markets are at a high or low.

    To help you plan your mutual funds investments better, you can use our SIP plan calculator to estimate potential returns and create a tailored investment strategy.

    How Do Sip Help in Achieving Investment Goals without Timing the Market?

    SIPs lets you invest every month and you can invest small amounts starting from even Rs. 100 or Rs. 500 depending on the fund. If you are wondering how these small investments can help you achieve your investment goals, then you need to know about Rupee cost averaging.

    Rupee Cost averaging helps in mitigating the timing factor involved in mutual fund investments. Here you invest a fixed amount at regular intervals irrespective of market ups and downs and the averaging out of the prices at which the mutual fund units are bought helps in generating better returns for the investors rather than a one-time investment or timing the market.

    Let us understand this with an example.

    Suppose you started an SIP of Rs. 10000 for an equity mutual fund. The NAV of the fund at the start of the investment is Rs. 60 and the most popular equity market index, Nifty is at the 21000 level. Let’s see how it will work –

    Month SIP Amount (Rs.) Nifty Equity Fund NAV (Rs.) Fund Units
    January 10000.00 21000.00 60.00 166.67
    February 10000.00 20200.00 52.00 192.31
    March 10000.00 20400.00 54.00 185.19
    April 10000.00 20200.00 52.00 192.31
    May 10000.00 19800.00 48.00 208.33
    June 10000.00 19600.00 46.00 217.39
    July 10000.00 19400.00 44.00 227.27
    August 10000.00 19800.00 48.00 208.33
    September 10000.00 20200.00 52.00 192.31
    October 10000.00 20400.00 54.00 185.19
    November 10000.00 20600.00 56.00 178.57
    December 10000.00 20800.00 58.00 172.41
    Total Investment 120000.00 Average NAV 52.00 2326.28

    The above table showcases how Rupee cost averaging would work. Now, if you wanted to time the market, and invest the entire amount in the month of January when the market was high compared to the next few months of the year, then at the NAV of Rs. 60, if you had invested the entire Rs. 120000, then you would have bought only 2000 units of the fund. With the help of rupee cost averaging in the SIP route, you get 2326.28 units of the funds for the same amount invested.

    Now you may say, if you had invested when the market dropped in July Nifty touched 19400 and the NAV of the fund became Rs. 44, then you would have got 2727.3 units of the fund. However, can you be certain of when the market will drop and rise? Even Warren Buffet or our very own Rakesh Jhunjhunwala could not.

    This is why investing in mutual funds via SIPs using the rupee cost averaging effect helps retail investors as well as HNIs generate better returns over the long term.

    If you want to invest for the short-term, then you can invest in debt mutual funds, and avoid equity mutual funds as the equity funds are more volatile than debt funds or invest when the market is at a low, but then again you cannot be sure.

    Final Thoughts

    Therefore, instead of looking for the right time to invest in mutual funds, you should start today, and go for long-term investments, as markets rise in the long-term especially when it comes to equity markets. Moreover, you do not have to worry all the time and keep track of the market to invest in your favourite funds. All you need to do is chalk out a plan of investment and invest regularly to achieve the maximum returns without taking higher risks.

  • Everything you need to know before investing in Foreign Exchange

    Everything you need to know before investing in Foreign Exchange

    Do you know which asset is traded the most or the liquid one? If you are thinking about stocks, then wait, stocks or any other stock market instruments cannot match the volume and liquidity quotient of forex trading or to be specific currency trading.

    In this article, we will talk about currency trading in India, how it takes place, the most traded currencies, things you need to know about currency trading, and a lot more.

    What is Forex Trading?

    To begin with, let’s understand what forex actually is. Forex is a word derived from two words, which are Foreign and Exchange. When currencies are exchanged for one another, it is termed as Forex. For instance, the US Dollar is exchanged for Indian Rupees.

    The trading process that is buying and selling different currencies for profit-making can be described as Forex trading or currency trading.

    From investors to multinational companies all take part in currency trading across the world. It is the largest market with average daily transactions of US$4 trillion.

    In India and across the globe, currency trading takes place around the clock. So, there is no restriction on timing for trading.

    However, the most interesting fact about forex trading is that these currencies are traded over the counter (OTC). Thus, the forex market is decentralised and anyone can trade forex irrespective of any centralised exchange unlike the stock market or commodity market.

    Features of the Foreign Exchange Market in India

    Now let’s come to the features of the Foreign Exchange Market in India:

    • Inexpensive: Currencies are traded across the globe and especially in the country for very low costs or expenses. Unlike other investment options, where there are a lot of fees and taxes to be paid, currency trading in India has lower fees. This is due to the fact that the commission, which the intermediaries charge is restricted to the spread that is the price gap between the buying and selling prices of the pair of the currencies, traded.
    • Highly Transparent: Transparency is another crucial factor that comes into play when trading forex. The forex market in India is highly transparent where all the traders get full access to the information and data about all the market deals and orders related to currency trading. Moreover, due to the international aspect of currency trading, transparency is maintained throughout the market. This helps the investors make wiser choices about which currencies to trade and at what prices.
    • Higher Leverage: For trading currencies, brokers in the country most often offer higher exposure limits to the traders. Thus, you can take more positions and increase your chances of making higher profits.
    • Ease of Trading and Convenience: Due to the decentralisation of the forex market, there is no limitation on trading from certain devices or through any particular exchange. This makes it easier for the traders to trade the currency pairs anytime and from anywhere they want if they just have a stable internet connection. You can also set your timings according to the country of the currencies you are dealing in.

    Different Forex Market

    Forex market can be segregated into three sub-markets, which are –

    1. Spot Market: This is a market where trading is done at the ‘SPOT rate’, which means the present rate of the currency pairs. The trader has to be swift in placing orders and making transactions as prices change within the blink of an eye.
    2. Futures Market: Like any other futures market work where orders are placed for trading the asset at a future date or a pre-agreed price, the currency market is no different. Here traders get into standardized agreement and make transactions according to their assumptions of the price movement of the currency pairs.
    3. Forward Market: This is similar to the futures market however, while in the futures market, the agreements are standardized, in the forward market the agreements are custom-made. The rest of the things like the pre-determined price of the currency pairs, and maturity factor remain the same.

    Things You Need to Know Before Starting Currency Trading in India

    By now, you must have got an idea of what is currency trading, so let’s understand the factors you need to keep in mind while trading currencies or forex in India.

    • Commissions: Though commissions are lower for forex trading, you need to understand this as commissions are determined on the basis of the spread. The commission in the forex market is paid to the market makers.
    • Trading Style: Each currency is different and the risk and return quotient of each currency pair varies. So, you need to align your risk appetite and return expectations with the currency pair in order to set a trading approach or style.
    • Brokerage House: Though brokers are not the intermediaries in the forex market, you need to have a trading account and thus, you need a brokerage house, which is highly reputable and offers the best platforms as currency trading requires advanced trading platforms for smoother and swifter transactions.
    • Keep Emotions Away: Forex trading can take a toll on you and your finances if you do not keep your emotions away from the market. As these trades are comparatively inexpensive, often traders take higher risks, which leads them to losses.

    Terms to Know when Trading Forex

    To understand how to trade currency you first need to be aware of these terminologies, which are heavily used in the forex market.

    • Spread: Often called Bid-ask spread, it is the difference between the maximum amount that buyers of a currency pair are willing to pay with the minimum amount that sellers are willing to take. Suppose, the highest bid for USD/INR is Rs. 75 per USD while the minimum ‘ask’ price is Rs. 75.50. Therefore, here the spread is Rs. 0.50.
    • Pip: This is described as the percentage change in a currency pair’s price. The changes in prices in the forex market are quoted in decimals and up to four decimal points.
    • Currency Pair: All currencies are traded in pairs. In simple terms, you trade one currency for another. For instance, in the above USD/ INR example, you are trading INR for USD.
    • Lot: In the forex market in India, currency derivatives are mainly traded. Either currency futures or currency options and thus they are traded in ‘lots’ which consist of a certain number of units of currencies. For instance, a 1000 lot size means, you will be trading 1000 INR units for 1000 USDs.

    How Does Currency Trading Take Place?

    Currencies are traded in different ways. Let’s understand them individually –

    • Direct Trading: This is like trading stocks where you will a currency pair for say X price and if the price moves above X, then you will gain and if it moves below X, you lose.
    • Trading Currency Derivatives: In India, and also across the globe, currencies are mainly traded as derivatives. Currency futures or currency options are traded like equity futures and equity options. If you are trading currency futures, then you are buying future contracts where you agree to pay a certain price for buying or selling the currency pair at a future date.

      With currency option, you do not have the obligation but have the right to buy or sell currency pair at a pre-determined price at the time of expiry of the option contract.

    How Can You Start Foreign Exchange Trading?

    To start currency trading in India you need to –

    • Open a trading account with a brokerage house
    • Complete KYC and get access to your trading account
    • Deposit the amount into your trading account for trading and availing margin or exposure benefits
    • Explore the currency market and choose the pairs of currencies you want to trade
    • Do your research and then start trading.

    Which Are the Top Currencies to Be Traded in India?

    While USD is the currency, that is mainly used for international trade, there are other currencies as well that are popular. Some of the most traded currency in the world includes

    • US Dollars (USD) – It is highly liquid because it is the most popular currency across the world and is accepted as well
    • Euro (EUR) – In second place, is Euro, which is the most traded currency across the globe.
    • Japanese Yen (JPY) – It is the most traded currency in Asia
    • Pound Sterling (GBP) – This is the fourth most popular and traded currency across the world. It has close competition with USD, as, after USD, GBP is one of the most accepted currencies for international trade.
    • Canadian Dollar (CAD) – Due to its relationship with crude oil, CAD has high popularity and a close connection with USD which is obvious. It is regarded as the most important commodity currency in the world.

    While the most traded currencies are the above-mentioned ones, the best currency pairs to trade depend on your trading goals, approach, and research work.

    Pros and Cons of Currency Trading

    Pros Cons
    Highly liquid market Highly volatile
    Accessible round the clock Requires in-depth understanding of currencies, economic fundamentals, and technical analysis
    Lower fees and commission Not regulated unlike other markets
    Decentralised market –
    Margin trading available –

    Why Forex Market Is Booming in India?

    In India, forex trading has boomed in recent years due to multiple factors which include –

    • Increased use of future derivatives for trading currencies in the Indian currency market
    • Retail investors can now invest in currencies, which were early restricted to HNIs, banks and institutional traders
    • Increasing financial literacy rate and people becoming aware of the currency market
    • Globalisation and liberalisation

    Conclusion

    Thus, we can conclude by saying, that with the right knowledge about the currency market, and trading platforms, tools and resources for trading currencies, traders nowadays can easily explore this market. However, before getting into trading currencies, one needs to learn about the fundamentals of how the forex market works.

  • Common Mistakes to avoid when opening a Demat account online

    Common Mistakes to avoid when opening a Demat account online

    In 1996, SEBI eased the hassle of trading and introduced an online demat account, allowing individual retail investors to trade directly with the help of a mediator, but online. The awareness of investing money is growing rapidly. Call It global influence or influencers’ impact, more and more people are drawn towards investing in financial products. In alone FY23, nearly 5 crores (24.8 million) of Demat accounts were opened. That is around a 25% increase from the last FY.

    A Demat account is required to hold and manage securities online. It is generally accompanied by a trading account required to invest in the stock market, bonds, IPOs and other financial products. In today’s digital age, opening a Demat account online has also become a streamlined and convenient process. Investors are required to complete the EKyc and verify the account.

    The process is thorough but quick at the same time. Often the account is verified with a one-time password and does not take several days to activate. However, as easy as the process seems, there are a few common yet avoidable mistakes investors make before going through with the process.

    In this article, we’ll understand the most common mistakes people can avoid before choosing a demat account. Let’s dive in.

    Understanding how Demat Account Works

    A Demat account is held with a depository participant (DP). In India, there are two depositories; NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited). However, investors need not be concerned about these. Which depositories you’d signed up with would depend upon the brokerage firm the demat account is associated with. A broker and DP are often from the same company.

    There are two types of brokerage firms; discount and service brokers. The difference between the two lies in the range of products an investor can trade into. A service broker provides investing options to the stock market, IPOs, mutual funds and insurance; whereas a discount broker carries out the investing instructions and offers equity and derivative trading.

    Now, let’s understand the process. When a stock/security is purchased, it is credited to the demat account electronically. You can easily track your holdings and also sell securities hassle-free from your demat account. When an account is opened, investors are required to add money to the account manually. This is how demat account works.

    Mistakes to Avoid Before Opening the Demat Account

    Not Reading the Account Opening Form Thoroughly – Not reading the fine print is something everyone is guilty of. However, reading the instructions, clauses, restrictions and process is crucial when you are going to open a demat account online. It is important to carefully read all details filled in the account opening form. All the Ifs and buts, terms and conditions are explained in the form of disclosure.

    Ensure your personal details like name, contact information, PAN, etc. are correctly entered. Cross-check nominee details and make sure the form is duly signed by all account holders in case of joint accounts. If any information is entered incorrectly, it can lead to problems later during transactions. Verify that the chosen DP, account type, mode of holding and other fields is accurately filled as per your requirements. 

    Not Paying Attention to Auto Debit and POA clauses – Auto concerned or auto debit instructions is a facility in a Demat account to allow investors to invest automatically based on preset instructions. It acts just like a SIP. After the proper set-up, a certain amount of money will be debited from the demat account every month/quarter and invested in the desired shares regularly. It is a convenient facility to meet investing goals, however, not understanding the terms and conditions is important. Be sure to opt for or reject this based on requirements to avoid unnecessary charges.

    POA authorizes a broker to invest on behalf of the account holder without seeking further approval for each transaction. This facility is useful if you are overly occupied or become incapacitated. However, any decision not taken by the account holder directly might concern a few people. Choices and frequency of investment can end up causing one to lose money at times. It’s a serious document. Be judicious in enabling these options – understand the risks before signing up.

    Not Opting for Multilateral Trading Facility – What is a multilateral trading facility (MTF)? It is a trading system that enables account holders to trade between multiple parties. It’s an alternative to traditional exchanges. MTFs have fewer restrictions surrounding the admittance of financial instruments for trading, allowing participants to exchange more exotic assets and over-the-counter (OTC) products. Not all brokerage firms offer this facility. Checking before opening an account would reduce unnecessary hassle.

    Not opting for Margin Trading facility – Margin trading facility allows investors to make bigger orders by paying only a fraction of the total price. This facility needs to be specifically opted for in the account opening form, or else it won’t get activated by default. Some brokerage firms facilitate investors to purchase shares worth ten times their investments. The remaining amount is borrowed by the broker. This way, investors can magnify profits. This facility is suitable for investors in the beginning with less money or if the plan is to trade in derivatives like futures & options, which require margin funding. Ensuring to have enabled MTF in the form would prevent issues later. A Demat account should also be linked with a trading account.

    Lack of Attention to Regulatory Charges and Transaction Fees – A Demat account has different kind of charges, such as account opening fees, annual maintenance charges, settlement fees for purchase/sale of securities, custody fees, and so on. There are different transactional charges for different opted facilities or trading in different products and securities. A lack of awareness about the costs deducted from the account subsequently would discourage investing frequency, and could also result in less anticipated profit. Keep an eye out for any hidden costs not clearly specified upfront as well.

    Inadequate Knowledge of Account Limitations – Understanding any limitations or restrictions applicable to your demat account is the first step in deciding to go to a brokerage firm. Certain types of accounts prohibit trading in speculative securities or have limits on the number of transactions per month. Not being aware of such restrictions can pose problems later when you try to transact beyond permissible limits. Read all provided documentation carefully.

    A Demat account opens a wide array of investing worlds for investors, however, as everything else comes with challenges. Avoiding common mistakes when opening your demat account and having complete clarity on how it works goes a long way in ensuring a smooth investing and trading experience. Ensure the investing patterns and needs beforehand. This will help investors finalize the type of demat account and the facilities required to meet those goals. Researching thoroughly about brokerage firms, types of needed demat accounts and restrictions and facilities that entail these would help in the longer run.

    Frequently Asked Questions

    1. How demat account works?

    A Demat account works by electronically storing and managing your securities, such as stocks, bonds, and mutual funds, in a digital format. It facilitates easy buying, selling, and transferring of these financial instruments.

    2. Are demat accounts different from trading accounts?

    A Demat account is where you manage and hold the bought securities. A trading account is needed to place trades in the market. Most providers offer a demat cum trading account to facilitate both features.

    3. Can I open multiple Demat accounts with different providers?

    Yes, you can open multiple Demat accounts with different providers.

    4. What documents are typically required to open a Demat account?

    The documents required to open a Demat account usually include proof of identity, proof of address, a Pan card and a passport-sized photograph. Acceptable documents may vary as per providers.

    5. Are there any charges associated with transferring securities between Demat accounts?

    Yes, there are charges associated with transferring securities between Demat accounts. These charges are known as transfer fees or depository participant charges. There are also custody fees and annual maintenance charges.

    6. Is it safe to opt for a Margin trading facility in my Demat account?

    Margin trading facility comes with associated risks. Investors are actively advised to use this facility to trade in the securities they are familiar with and strongly believe that it has good future growth prospects.

    7. Can NRIs open a demat account in India?

    Yes. NRIs can open two types of Demat accounts, i.e. Repatriable and Non-repatriable demat accounts. Both accounts have a set of regulations and guidelines they need to adhere to, and would require a set of documents such as a passport, proof of identity, proof of income, etc.

    8. Where can I open a demat account as an NRI?

    Some of the popular names are ICICI Securities, HDFC Securities, Kotak Securities, and Zerodha.

    9. Do I need a demat account to invest in mutual funds and gold bonds?

    No, you do not need a demat account to invest in mutual funds and gold bonds.

    10. Can I take a loan against my Demat account?

    Yes, you can take a loan against a demat account. It is known as Loan against securities, but a lender should be offering this facility. The process would require you to pledge the securities you wish to use as collateral. In the case of default, the lender can sell your securities to recover the amount owed.

  • What is Beneficial Owner Identification Number (BO ID)?

    What is Beneficial Owner Identification Number (BO ID)?

    Your Demat account is like a safety vault where you keep all your investments in different securities, in electronic format. Now like for a physical vault, there is a code to open it, isn’t it? Similarly, for the Demat account, there is BO ID, which stands for Beneficial Owner Identification ID.

    In this article, we will discuss this BO ID in detail, how it works, why it is important, how you can get the same and a lot more. This is crucial for every investor with a Demat account.

    What is BOID?

    BO ID can be defined as a unique identification code, which is given to every Demat account holder whether he or she is registered with CDSL or NSDL. The Depository participant, or in simple terms the brokerage house, with which the investor/ trader has opened the Demat account assigns the BO ID.

    For CDSL Demat account holders, the BO ID is a 16-digit code, which is a mix of alphabets and numbers. The first eight characters represent the ID of the DP and the last eight represent the Client ID.

    For NSDL Demat accounts, the BO ID is a 16-digit code only but it always starts with IN and then the remaining 14 characters are numbers. For instance, an NSDL BO ID can be IN12345678910112 while a CDSL BO ID can look like 94982280ABZ012534.

    BO ID is crucial for every Demat account holder as it keeps track of all the transactions happening in the account and the movement of the assets in your account as well. This ID irrespective of the device from which you are logged in, or irrespective of what kind of securities you are trading, keep track of transactions and movement in the Demat account.

    How Does BOID Work?

    The BO ID is required at different phases of trading and investments. When a Demat account holder places an order, the brokerage house with which it is trading/ investment (DP) verifies the order using the BO ID of the account holder. Then the broker places the trade on the respective stock or other exchanges for further processing.

    Then BO ID is also required while transferring securities from one account to another. It is recorded at both the end of the transactions, making sure the securities go into the right account.

    Companies issuing dividends, bonus shares and other benefits to the investors use the BO ID of the Demat amount holder to transfer the benefits. So, this ID is essential at every step involved in investments and trading.

    Key Features of BO ID

    • Unique 16-digit Number: A BO ID is a fixed 16-digit code that identifies each Demat account holder in CDSL.
    • Combination of Two IDs: It is formed by combining the Depository Participant (DP) ID (first 8 digits given to the broker or bank) and the Client ID (last 8 digits unique to the investor).
    • Ownership Tracking: It keeps a clear record of who owns which shares, bonds, or mutual funds.
    • Transaction Security: Every buy, sell, or transfer of securities is directly connected with this ID.
    • Digital Record Keeping: Investors no longer need paper share certificates, as all data is stored safely online.
    • Regulatory Compliance: BO ID helps maintain transparency and follows the rules laid by market regulators.

    How to Create a BOID?

    For creating your BO ID, you have to follow the following steps –

    • Pick your DP: The BO ID is generated when you open a Demat amount with a depository participant (DP), or broker in a common language. Therefore, you need to pick the right brokerage house as your DP to create your BO ID. Findoc here can help you as it offers a wide range of brokerage services, which you can use for creating BO ID.
    • Demat Account opening: Once you pick your DP, for instance, you picked Findoc, you have to then open the Demat account. You need to share your details such as name, address, occupation, income, and other details for applying for the Demat account.
    • KYC: The next step is to upload all your documents that are required for opening and KYC verification. The documents you need to upload will include PAN, AADHAAR, Bank Statements, Photos, and other details.
    • Agreement: Once the KYC is done, you will be shared an agreement, which you need to sign and which is to ensure that you are obliging with the terms and conditions of the DP for opening the Demat and trading account.
    • Make payment: If there is any account opening charge, you need to pay the same to finalise the account opening procedure. With Findoc, you can open Demat account online free of cost and maintain it with just a one-time maintenance fee, isn’t that great?
    • Get your BO ID: Once all the above steps are completed, your Demat account will be live and your BO ID will be shared with you on your registered email id.

    How to Find BOID?

    Often people find it difficult to check their BOID. However, it is quite simple and doesn’t include many steps.

    All you need to do is to –

    • Open your Demat account, and log in using your username and password
    • Then go to the ‘My Profile section or ‘ Account information tab in the Demat account
    • Here you will find the BO ID under the account information or your profile. It is a 16-digit alphanumeric code.
    • You can note down the BO ID to use it without hassle in the future.

    Why BOID is So Important?

    The BO ID of a Demat account holder is important for so many aspects. Let’s understand each one of them –

    • Firstly, with the BO ID, the Demat account holder can have track of all his investments online as well as offline mode. He or she can track not just the portfolio valuation, but also each of the transactions that take place in the account.
    • This brings us to the safety quotient of the portfolio and the account holder. With the rise in cybercrimes, Demat accounts are not spared even. However, with the help of BO ID, you can keep track of each and every transaction done in the account, so, the risk of online theft comes down significantly.
    • Thirdly, with the help of BO ID, you can keep all the records of your transactions online. You do not have to maintain any physical document or journal. This makes the entire process easy and quick.

    While BO ID is highly useful for every investor and trader, they also need to keep in mind that this id has certain limitations as well.

    • For instance, the BO ID for a Demat account opened on CDSL will be different from a Demat account opened with NSDL.
    • Then this id cannot help in tracking any physical trading or investments done, without using the Demat account.
    • Another major concern is BO ID is entirely dependent on the DP, so choosing the right brokerage house with whom you open a Demat account is essential.

    Key Benefits of BO (Beneficial Owner) ID

    • Clear Identification: Ensures that every account holder has a separate code, reducing confusion between investors.

    • Simple Transactions: It allows smooth buying, selling, and transferring of securities without delays.

    • High Security: As every transaction is tied to a single BO ID, it reduces errors and the chance of fraud.

    • Accurate Records: Helps in maintaining precise statements of all investments and activities in the account.

    • Direct Corporate Benefits: Companies use BO ID details to credit dividends, rights issues, or bonus shares directly to investors’ Demat accounts.

    • Easy Account Access: Investors can check holdings, monitor past transactions, and download statements anytime.

    • Market Compliance: It plays a key role in making trading more transparent for regulators and depositories.

    • Boosts Investor Confidence: By offering a secure and organised system, it gives confidence to investors that their investments are well-protected and tracked.

    BO ID Limitations

    • Accuracy Required: The BO ID is linked with the account details given during registration. If those details are wrong, it may cause issues later in transactions.

    • Difficult for Multiple Accounts: Investors who hold more than one Demat account must remember and manage several BO IDs, which can sometimes be confusing.

    • Privacy Concerns: Since the BO ID is linked to personal and financial data, there is a risk if the information is not protected by the broker or depository.

    • Dependence on System and Rules: Any change in regulations or operational processes can impact how BO IDs work.

    • Processing Errors: Mistakes from the DP while linking BO IDs may cause delays in transfers or settlement.

    • Challenging for Beginners: New investors may take time to fully understand the role of BO ID in trading and investments.

    What is a Depository Participant (DP)?

    A Depository Participant (DP) is an agent or middleman that connects investors with the depository. A depository is an organisation that stores securities like shares, bonds, and mutual funds in electronic form. To open a Demat account, an investor must register with a DP. DPs can be banks, brokers, or financial companies that are authorised by SEBI. They handle essential services such as opening Demat accounts, updating records, settling trades, and helping investors with transfers. Each DP has a special code known as a DP ID, which is part of your 16-digit BO ID. Simply put, a DP sees to it that all securities are securely stored and transactions are executed in the right manner on behalf of the investor.

    How does a Demat Account differ from a DP ID?

    A Demat Account is a repository account where your shares, bonds, and securities are held in a digital format. It has a 16-digit Demat number that is allotted to each investor. This number is divided into two segments. The initial 8 digits are the DP ID, representing the opening bank, broker, or financial institution. The last 8 digits are the Client ID, that is, your account holder identity. Together, they form the entire BO ID. The DP ID by itself is the broker or bank’s and is the same for all clients of the same DP. The complete Demat account number (DP ID + Client ID), however, is yours as an investor.

    Conclusion

    Thus, the next time you open your Demat account; do not forget to look for your BO ID. Keep a note of the code for your future reference and ease of use. This ID is essential for every investment you make using your Demat account.

    Frequently Asked Questions

    If you forget your BO ID, you can refer to it in your Demat account statement, the trading app of your broker, or communicate with your Depository Participant. They will give you your 16-digit BO ID after authentication.

    A BO ID is always 16 digits long. The first 8 digits are the Depository Participant (DP) ID, and the remaining 8 digits are the distinctive Client ID provided for every Demat account holder.

    You can log in to your broker’s trading platform or check your Demat account statement. If your transactions and holdings show correctly under the BO ID, it means your account is active and valid.

    A BO ID acts like the account number for your Demat account. It ensures secure ownership tracking, smooth transactions, and correct credit of benefits such as dividends, rights issues, and bonus shares to your account.

    A DP ID is an identification number given to the broker or bank that opened your Demat account. It is important because it shows which Depository Participant manages your account and forms part of your BO ID.

    Yes, every Demat account must be opened through a Depository Participant (DP). The DP acts as a middleman between you and the depository, helping with account opening, trade settlements, and keeping your securities safe in electronic form.

  • Top Five Commodity Markets in India: Opportunities and Challenges for Traders

    Top Five Commodity Markets in India: Opportunities and Challenges for Traders

    India is one of the largest and most diverse commodity markets in the world, with a rich history of commodity trading those dates back to ancient times. India has four major commodity exchanges that facilitate online trading of commodities: Multi Commodity Exchange of India (MCX), National Commodity and Derivatives Exchange (NCDEX), Indian Commodity Exchange (ICEX), and National Multi Commodity Exchange of India (NMCE). These exchanges offer trading in various commodities across different segments, such as bullion, energy, agricultural products, metals, spices, guar complex, and others.

    What is Commodity Trading?

    Commodity trading is the buying and selling of raw materials or primary products that are used in various industries, such as agriculture, energy, metals, and softs. Commodity trading can be done in two ways: spot market and futures market. In the spot market, the commodity trade happens immediately, in exchange for cash or other commodities. In the futures market, the commodity trade is based on contracts that specify the quantity, quality, price, and delivery date of the commodity in the future. However, commodity trading is majorly done through futures contracts.

    In this article, we will discuss the top five commodity markets in India and the opportunities and challenges for traders in each market.

    1. Bullion Market

    The bullion market refers to the trading of precious metals, such as gold and silver. The bullion market is one of the most popular and liquid commodity markets in India, as it attracts a large number of investors, traders, hedgers, speculators, and arbitrageurs. The bullion market is mainly traded on MCX, which offers futures contracts on gold, silver, and platinum. The market offers a hedge against inflation and currency devaluation and a wide range of products and strategies for traders. However, it still has many challenges as well.

    Challenges:

    • The bullion market is highly volatile and unpredictable, as it is affected by various global and domestic factors that are beyond the control of traders. Price volatility in the international markets, import duties, and changing consumer preferences pose challenges that traders need to navigate skilfully.
    • The prices of bullion are influenced by various factors, such as global demand and supply, geopolitical events, currency fluctuations, inflation, interest rates, and market sentiments.

    2. Energy Market

    The energy market refers to the trading of energy products, such as crude oil, natural gas, gasoline, heating oil, etc. The energy market is one of the most dynamic and influential commodity markets in India, as it affects the economy and various sectors that depend on energy consumption, and has also been underway reform for the past few years. It offers a high growth potential for traders who want to capitalize on the increasing demand for energy products in India and globally. The energy market is mainly traded on MCX, which offers futures contracts on crude oil, natural gas, gasoline (petrol), heating oil (diesel), etc.

    Challenges:

    • Both Metal and energy markets are highly affected by international affairs and geopolitical situations.
    • The prices of energy products are influenced by various factors, such as global demand and supply, production levels, inventory levels, geopolitical events, environmental issues, technology innovations, and market sentiments.
    • Fluctuations in oil prices and shifts toward renewable energy sources can introduce volatility and require adaptive trading approaches.

    3. Agricultural Market

    The agricultural market refers to the trading of agricultural products, such as grains, pulses, oilseeds, spices, fibres, etc. The agricultural market is one of the most diverse and important commodity markets in India, as it affects the livelihood of millions of farmers and consumers. The agricultural market is mainly traded on NCDEX, which offers futures contracts on various agricultural products, such as wheat, rice, maize, soybean, mustard seed, cotton, castor seed, etc. This market has high growth potential for traders and also offers a wide range of products and strategies for traders to suit their risk-reward preferences, such as options, spreads, calendar spreads, etc.

    Challenges:

    • The agricultural market is highly volatile and unpredictable, as it is affected by various natural and human factors that are beyond the control of traders.
    • Factors such as erratic weather conditions, pest outbreaks, and infrastructural limitations can impact agricultural yields and influence trading outcomes.

    4. Metals Market

    The metals market refers to the trading of metals, such as copper, zinc, lead, nickel, aluminium, etc. The metals market is one of the most active and liquid commodity markets in India, as it attracts a large number of industrial users and investors. The metals market is mainly traded on MCX, which offers futures contracts on various metals. The market offers a high-leverage opportunity for traders who want to take advantage of price movements with a small margin requirement.

    Challenges:

    • Economic downturns, supply disruptions, and market speculations can contribute to base metal price fluctuations, demanding vigilant risk management.
    • The prices of metals are influenced by various factors, such as global demand and supply, industrial production, inventory levels, geopolitical events, currency fluctuations, interest rates, and market sentiments.

    5. Spices Market

    The spices market refers to the trading of spices, such as pepper, cardamom, chilli, ginger, turmeric, etc. The spices market is one of the unique and niche commodity markets in India, as it reflects the rich cultural and culinary diversity of the country. The market offers a social benefit for traders who want to contribute to the development and welfare of the spice growers and exporters. The spices market is mainly traded on NCDEX and ICEX, which offer futures contracts on various spices.

    Challenges:

    • The spices market is highly volatile and unpredictable, as it is affected by various natural and human factors that are beyond the control of traders.
    • Unfavourable international trading situations can potentially affect the Spice market.

    Commodity trading in India is well-regulated and closely monitored by SEBI. Markets also have their own governing bodies and exchange boards. Each participant must abide by the rules and regulations of fair trade. Trade in commodities offers a diversification benefit for portfolio management. However, the complex tax rules might disinterest some investors.

    Frequently Asked Questions

    1. How does the rapid reshaping of global trading patterns affect the market?

    Rapid reshaping of global trading patterns highly affects the market; hence, traders should be well-informed before investing. Global and domestic factors are beyond the trader’s control hence a highly volatile and unpredictable market.

    2. How do regulatory changes and interventions affect commodity markets?

    Commodity markets are subject to regulatory changes and interventions by the government and central banks that can impact the price movements and liquidity of the market.

    3. What are some risks associated with commodity markets?

    All commodity markets are exposed to counterparty risk and delivery risk, as there may be instances of default or delay by the buyers or sellers of the contracts, also are subject to transaction costs and taxes that can reduce the profitability of the trades.

    4. What factors affect Agriculture and Spice markets in commodity trading?

    Both Agriculture and Spice markets are affected by various natural and human factors. Natural calamities such as drought, and flood can make a real-time sudden surge in the price of the available product. For example- the price hike of tomatoes this year could be traced back to the sudden rise in temperature in March-April and the leaf curl virus.

    5. What factors affect Metal and energy markets in commodity trading?

    Both Metal and energy markets are highly affected by international affairs and geopolitical situations. The global economy, supplies and policies make a huge impact on the commodity market. For example- changes in global trade policies or conflicts between nations can impact the availability and price of metals and energy commodities.

  • Algo Trading Backtesting Techniques: Ensuring Strategy Robustness

    Algo Trading Backtesting Techniques: Ensuring Strategy Robustness

    Algorithmic trading, or Algo trading, is a process for traders to make data-driven decisions. It comprises the use of a few computer programs to make decisions based on the market movement. Automated trading offers benefits like speed, accuracy, consistency, and less human errors. However, like any program, there are a few challenges and risks involved, such as technical errors, market changes, regulations, and strategy failures. And this is where algo backtesting comes to rescue.

    Algo backtesting allows traders to test their theories and algorithmic trading strategies before going live on the market. It is the process to simulate the performance of a trading strategy using historical data. Algo Backtesting can help the traders,whether a scalper trader or long-term investor, evaluate the profitability, risk, and robustness of their strategies under different market conditions before even deploying the strategies into the live market.

    However, algo backtesting is not a foolproof method to guarantee success in algo trading. In this article, we will discuss some of the common algo backtesting techniques and methods that algo traders can use to validate and improve their strategies.

    Also Read: What is Algo Trading

    Why Backtest Your Strategy?

    Backtesting is an important stage of creating a profitable trading strategy. It helps you test your approach with old market data before actually implementing it in real-time. Through this process, you can analyse your strategy and see how it would have performed under various market conditions. This can help you know the strengths, weaknesses, and possible risks involved. Backtesting also gives feedback regarding major performance factors like profitability, win rate, drawdowns, and risk-reward ratios. This assists in fine-tuning and optimising the strategy for improved performance.

    Without backtesting, traders risk entering the market blindly, which may lead to losses. A well-tested strategy boosts confidence, cuts down on emotional trading, and makes sure that your trades are not made on guesswork but out of data-driven knowledge. In a nutshell, backtesting closes the gap between theory and reality so that you can trade with discipline and increased opportunities for long-term success.

    Types of Algo Backtesting Techniques

    There are various types of algo backtesting techniques that traders can use to test their strategies. Some of the common types are:

    1. Walk Forward Backtesting

    This is a type of algo backtesting that involves testing a strategy on multiple sets of historical data that are also divided into in-sample and out-of-sample periods. In walk-forward backtesting, the strategy is optimized in the in-sample period and then tested in the out-of-sample period.

    This process is repeated for different combinations of in-sample and out-of-sample periods. Walk-forward backtesting can provide a more realistic and robust way to evaluate a strategy’s performance in different time periods. However, walk-forward backtesting can also be time-consuming and complex to implement and analyse.

    2. Out of Sample Testing

    This is a type of algo backtesting that involves testing a strategy on a set of historical data that is not used for optimization or calibration. Out-of-sample testing can provide a way to validate a strategy’s performance on unseen data that is independent of the optimization process. Out-of-sample testing can help to avoid over-fitting and data snooping bias. However, out-of-sample testing can also be insufficient and inaccurate if the out-of-sample data is not large enough or diverse enough to capture future market conditions.

    3. Sensitivity Analysis

    This is a type of algo backtesting that involves testing a strategy’s performance under different values of its parameters and settings. Sensitivity analysis can provide a way to measure a strategy’s robustness and stability under different market scenarios. Sensitivity analysis can help to identify the optimal and robust values of the strategy’s parameters and settings. However, sensitivity analysis can also be tedious and challenging to perform and interpret.

    4. Monte Carlo Simulation

    This is a type of algo backtesting that involves testing a strategy’s performance under different random scenarios that are generated by a statistical model. Monte Carlo simulation can provide a way to measure a strategy’s performance under various possible outcomes that are not captured by historical data. Monte Carlo simulation can help to estimate the probability and magnitude of the strategy’s returns, risks, and drawdowns. However, Monte Carlo simulation can also be computationally intense and dependent on the quality and validity of the statistical model.

    Key factors to consider

    Before starting backtesting, it’s important to set the right foundation. Rushing into it without preparation can give misleading results. Here are some factors to keep in mind:

    • Consider Market Conditions: Market behaviour changes over time. A strategy that worked in a bullish (rising) market may fail during a bearish (falling) trend. Traders must backtest across different conditions to see if the strategy is flexible.

    • Account for Trading Costs: Brokerage fees, taxes, and slippage (the small difference between expected and actual trade price) can affect profits. Ignoring these can make the strategy look more successful than it truly is.

    • Set Risk Management Rules: Backtesting is not just about profits. It’s also about how much you could lose. Adding stop-loss levels or risk per trade guarantees that the results are realistic based on trading discipline.

    Additionally, traders should also focus on account setup. If you are new to trading, the first step is to open a Demat Account that allows you to execute trades securely. Platforms like Findoc provide the option to open free demat account online in just a few steps, making it easy to start algo trading confidently.

     

    Also Read: What is a Demat Account?

    Steps to Backtest a Trading Strategy

    To simplify backtesting, let’s divide it into a step-by-step guide:

    1. Define Your Trading Strategy

    A trading strategy includes rules for entering and exiting trades. For instance, a strategy can indicate “buy when the stock crosses above its 50-day average and sell when it falls below.” Without having a specific set of rules, backtesting cannot provide accurate insight.

    2. Choose Historical Data

    Select a stock or index and decide the time period you want to test. If you’re testing short-term strategies, a few months of minute-by-minute data may be required. For long-term strategies, several years of daily data may be enough.

    3. Run the Backtest

    Using either software or manual spreadsheets, apply your strategy to the past data. Record each trade, including buy price, sell price, and profit or loss.

    4. Analyse the results

    If the results are not promising, tweak the rules slightly and test again. For instance, you may change the stop-loss from 5% to 3% or adjust your entry signal.

    By following these steps, traders can simulate how their strategy might perform without risking money in the live market.

    Challenges in Algo Backtesting

    Algo backtesting offers numerous benefits but also involves various challenges and limitations for algo traders, such as:

    i. Overfitting and data snooping bias

    Excessive optimization, inadequate data, or improper testing methods can result in overfitting and data snooping bias. Creating a strategy that fits the historical data more than it should might fail to produce results in the future. The same historical data for multiple tests and optimizations can lead to false discoveries and spurious results.

    ii. Ignoring transaction costs

    Transaction costs are the costs associated with executing a trade, such as commissions, fees, slippage, etc. Transaction costs can have a significant impact on the profitability of a strategy, especially for high-frequency or low-margin strategies. Ignoring transaction costs in algo backtesting can lead to unrealistic and inflated results that do not reflect the actual performance of a strategy in the live market. Your trade might be profitable, but the end result might result in a negative balance.

    iii. Market assumptions and limitations

    Market assumptions are the simplifications or approximations that are used to model the market behaviour and dynamics in algo backtesting. Market assumptions and limitations can affect the accuracy and reliability of the algo backtesting results, as they may not capture the complexity and uncertainty of the real market.

    Ensuring Strategy Robustness

    Stock market is always volatile and ensuring that a strategy will always work based on such dynamic data would require a set of strategies, not just one. However, here are some set-up parameters to keep in mind:

    • Define clear and conscious rules specifying entry, position sizing, target and stop-loss levers. Clarity in parameters ensures consistency and reproducibility during testing.
    • The choice of market, whether stocks, forex, or commodities, and the timeframe, such as daily, hourly, or minute charts, significantly influences the strategy’s performance and suitability. Create a unique strategy for each market/trade.
    • The shifts or transitions in the market behaviour and dynamics that occur over time can affect the performance of a strategy, as it may not adapt or adjust to the new market conditions.
    • With parameters set, historical data is utilized to identify potential trades. The historical period chosen should align with the intended trading horizon. Trades are then marked based on entry and exit signals generated by the strategy.
    • Algo traders should always include realistic and updated slippage and latency estimates in their algo backtesting process and analysis.
    • Always keep the transaction cost in mind, especially for high-frequency or low-margin strategies. To evaluate profitability, calculate the gross return by tallying all trades, considering both wins and losses. Net return, a more realistic measure, is obtained by deducting commissions and trading costs from the gross returns.

    Interpreting Backtesting Results

    Running the test is just the first step. The real value comes from analysing the results carefully. Here’s what to focus on:

    • Profitability: How much profit did the strategy generate? While high profits look attractive, they must be consistent across different timeframes.

    • Risk and Drawdowns: A strategy that doubles money but faces frequent heavy losses may not be suitable for beginners. Check how deep the losses went and how long it took to recover.

    • Consistency: Did the strategy work only in one type of market (bullish, bearish, or sideways)? Consistency across conditions is key for long-term success.

    • Trade Frequency: Some strategies may show profits but require hundreds of trades, leading to high costs. Analysing trade frequency helps to check if the method is practical.

    • Comparison with Benchmark: Compare the performance against a benchmark index like Nifty 50 or Sensex. If your strategy underperforms the benchmark, it may need adjustments.

    In short, analysing results is about balancing risk and reward while checking if the strategy is realistic for live trading.

    How Backtesting Differs from Scenario Testing

    Backtesting and scenario testing are both techniques for analysing trading strategies, but they are used for distinct purposes. Backtesting uses historical market data to check how a strategy would have performed in the past. It focuses on real, recorded market movements. In contrast, scenario testing examines how a strategy might react to hypothetical or extreme market conditions, such as crashes or sudden volatility. Though backtesting indicates previous success, scenario testing gets traders ready for the unforeseen future events.

    Backtesting vs Paper Trading

    Backtesting and paper trading are both complementary tools for traders, but differ in approach. Backtesting evaluates a strategy based on historical market data to check how it would have performed in the past. It is fact-based and allows for strategies to be refined quickly. However, paper trading tests strategies on real-time market conditions without using actual money. It focuses on implementation, timing, and emotional control. In simple terms, backtesting provides for academic insights, while paper trading gives hands-on experience prior to investing real money.

    Algo backtesting is an essential step for trading success, as it helps to test and validate the validate the best algorithmic trading strategies before deploying them in the live market. However, it is not a foolproof technique to guarantee a return. Like any other strategy, Algo backtesting also suffers from limitations, bias and inaccurate market comprehension. Updating the strategies regularly as per market dynamics would help investors with better gains.

    Frequently Asked Questions

    1. How to choose the appropriate data, frequency, and time period for algo backtesting?

    Backtesting data and strategies are created according to the market, target stock, and goals. For example, if you are planning to hold for over a month or so to achieve your target, go for a strategy designed for a long-term period. The quality and accuracy of the data play a crucial role. It is important to select high-quality data, that is, data without any errors only from trusted sources for the utmost accuracy.

    2. How to compare different algo backtesting methods and software?

    The difference lies in multiple factors such as cost, ease of use, features, and capabilities. For example, some algo backtesting software may have more advanced features or support for more asset classes than others. Investors are advised to read reviews and comparisons of different algo backtesting tools to make an informed decision.

    3. How to account for transaction costs, slippage, and market impact in algo backtesting?

    These factors would influence the end profit/loss. Incorporating these in your strategy in the algo backtesting model would fetch the accuracy. This can be done by including estimates of transaction costs such as commissions and fees in your calculations. You can also model slippage by incorporating the difference between the expected execution price and the actual execution price into your calculations.

    4. How to evaluate the performance and robustness of a strategy?

    Testing your backtesting strategy on various performance metrics would help you evaluate the end result. This is advised to use various affecting variables such as net profit, desired return, Sharpe ratio, transaction cost and maximum drawdown etc. Then compare the results to see how well the strategy performed under different market conditions and assess its consistency over time.

    5. What are the benefits and limitations of algo backtesting?

    The idea of algo backtesting is to be able to test a trading strategy without risking any actual capital. A good strategy prepares investors for different market circumstances before investing any money. However, there are also limitations to algo backtesting such as the fact that past performance is not necessarily indicative of future results. There can be multiple events in the real-time market that did not happen in the past.

  • Top Reasons to Consider Investing in the Sovereign Gold Bond Scheme

    Top Reasons to Consider Investing in the Sovereign Gold Bond Scheme

    Gold has always been considered a safe haven for all investors. If you just ask your parents or grandparents, you will realise that they have always purchased gold not only as jewelleries but also for investment purposes. However, holding physical gold is a tedious job. There are a lot of threats and risks of having gold in physical form at your residence or even in the bank locker. Here, the sovereign gold bond comes in.

    What is a Sovereign Gold Bond?

    Sovereign Gold Bonds (SGBs) can be defined as securities offered by the government, which are denominated in units of gold. In simple words, these bonds are substitutes for physical gold and serve the same purpose of investment. These bonds are purchased with cash and when they are redeemed that the investors get back the maturity amount in cash as well.

    Reserve Bank of India issues these bonds on behalf of the government and the last issue was in June, 2023. The subscription was open for the last tranche of SGBs from 19th June, to 23rd June 2023, and the issue price was Rs. 5926 per gram of gold. However, the investors who applied online for this issue were offered a discount of Rs. 50 per gram.

    As sovereign gold bonds are debt instruments, the primary return on investing in these bonds is from the interest received. As these are government bonds, so you can be assured about the interest income on a regular basis along with timely redemption and refund of the amount invested.

    Reasons to Invest in Sovereign Gold Bond

    There are eight most important reasons to invest in sovereign gold bonds. Here they are –

    1. Regular interest income: Under the sovereign gold bond scheme, the best part of investing in SGBs is that you earn a regular interest from these bonds, which is currently fixed by the RBI at 2.5% p.a. and this is calculated on the nominal values of the bonds. The interest is payable every six months which is semi-annually.
    2. Appreciation of Invested funds: The value of sovereign gold bonds is determined based on the market price of physical gold. So, at the time of redemption of these bonds, if the price of the gold is higher than the price at the time of purchase, you can also see an appreciation in your investment value. So, there are dual profits, one from the interest amount and then from the appreciation of the gold value.
    3. No hassle of holding physical gold: In earlier times, when our parents used to invest in gold, they had to buy bank lockers for keeping the gold jewellery, or gold bars safe, or lockers at home for the same purpose. Keeping physical gold at home or even in bank lockers is never safe, as there are high chances of theft, burglary, misplacement, and other issues. With SBGs, while you get the exact benefit of having physical gold in terms of value and also interest income, you do not have to think about its safety.
    4. Exempted from capital gain taxes: The capital gains arising from the redemption of SGBs are exempted from capital gain taxes. Moreover, there is an indexation benefit for long-term investments in these bonds.
    5. Nomination facility: You can nominate your loved ones or anyone you trust for SGB investments you have.
    6. Collateral security: In India, gold loan is quite popular and even with SGBs, you can avail of a gold loan. Yes, SGBs can be used as collateral for availing of a loan like any other collateral security or gold in the gold loan. RBI decides the loan-to-value again, and it changes from time to time.
    7. No Hefty Making Charges: Hardly people keep gold in bar form, most of us buy jewelleries, which we can use as ornaments as well as investments in times of crisis. However, making charges for gold jewellery is pretty high, which increases your outlay of funds, and reduces the return. With sovereign gold bonds, you do not have to pay those hefty making charges; instead, you can buy more of the bonds and increase your investment value.
    8. No GST: Similarly, there is no GST applicable on sovereign gold bonds, unlike its physical counterpart. Whether you purchase gold jewellery, bars or coins, you have to pay high GST. With Digital gold, the GST is 3% but it is there. Only with SGBs, there is no GST on gold purchases.
    9. Liquidity: Finally, SGBs are quite liquid investments, they are listed on the stock exchanges and thus can be traded as well.

    Things to Keep in Mind While Investing in Sovereign Gold Bond

    While sovereign gold bonds are great as investments, especially during a crisis, there are certain things you need to keep in mind before you invest in these bonds –

    • While capital gains are exempted from capital gain taxes, you have to hold them for at least eight years to be eligible for the exemption. If you redeem the SGBs before eight years, the capital gains (if any) will be taxable.
    • The interest received on these bonds is not exempted. You have to pay tax as per your income tax slab on the interest income from SGBs.
    • Though SGBs are listed and traded on stock exchanges like NSE and BSE, the trading volumes are very low leaving no room for liquidity.
    • You cannot redeem the SGBs as and when you want. You have to wait for the maturity date and then the government will open the repurchase window every five years.

    Final Thoughts

    As the world is predicting a recession or a slowdown to hit in the coming years, it can be beneficial to invest in sovereign gold bonds as they can help you as a cushion from financial shock, not only during a slowdown but also for other reasons, if you enter into a financial crisis.

  • Understanding the Benefits of Investing in Sovereign Gold Bonds

    Understanding the Benefits of Investing in Sovereign Gold Bonds

    Gold is one of the most popular and valuable assets in the World. It is considered as a safe-haven, a hedge against inflation, and a store of wealth. However, investing in physical gold comes with some challenges and risks, such as storage, security, purity, making charges, and taxation. Even if you buy a coin and avoid a few, storage and security still remain in the picture. So, is there a better way to invest in gold without these hassles? The answer is yes.

    There are a few popular substitutes for holding a physical gold. One of them is Sovereign Gold Bond. The Government of India, in consultation with the Reserve Bank of India (RBI), launched the Sovereign Gold Bond (SGB) scheme in 2015. This scheme allows investors to buy government securities denominated in grams of gold. It is considered one of the best substitutes for holding physical gold because of several advantages. Let’s discuss those first.

    Benefits of Investing in SGB:

    1. Capital Appreciation

    The quantity of gold for which the investor pays is protected, since he receives the ongoing market price at the time of redemption or premature redemption. The investor does not lose in terms of the units of gold which he has paid for.

    2. Interest Income

    The investor also earns a fixed interest of 2.5% per annum on the amount of initial investment. This interest is paid semi-annually to the investor’s bank account.

    3. Tax Benefits at Maturity

    There is no tax deducted at the source (TDS) on the interest payments. Moreover, there is no capital gains tax on the redemption of SGBs if they are held till maturity. The capital gains arising from transfer of SGBs before maturity are also eligible for indexation benefits.

    4. Convenience and Safety

    An investor does not have to worry about the storage, security, purity, or making charges of physical gold. The SGBs are held in the books of the RBI or in demat form, eliminating the risk of loss or theft. The investor also gets a holding a certificate as a proof of investment.

    5. Liquidity and Tradability

    The SGBs have a tenure of eight years, with an option to exit from the fifth year onwards on the interest payment dates. The investor can also sell or transfer the SGBs in the secondary market through stock exchanges. The price and liquidity of SGBs depend on the prevailing market conditions and demand and supply factors.

    6. Collateral Value

    The SGBs can be used as collateral for availing loans from banks and other financial institutions. The loan-to-value ratio will be as per the RBI guidelines.

    How to Invest in SGB?

    The SGBs are issued by the RBI on behalf of the Government of India in tranches throughout the year. The RBI notifies the terms and conditions for each tranche, such as the issue price, subscription period, date of issuance, etc. The investors can apply for sovereign gold bond online through investment platforms or stock exchanges. One can also apply for SGBs at designated banks and post offices.

    The minimum investment in SGBs is one gram of gold and the maximum limit is 4 kg for individuals and Hindu Undivided Families (HUFs) and 20 kg for trusts and similar entities per fiscal year (April-March). The bonds are issued in multiples of one gram of gold.

    The issue price of SGBs is based on the simple average closing price of gold (999 purity) published by India Bullion and Jewellers Association Limited (IBJA) for three working days preceding the subscription period.

    The investors can pay for SGBs through cash (up to Rs 20,000), cheque, demand draft, electronic fund transfer, or online mode.

    An investor can choose to hold SGBs either in physical form or in demat form. If they opt for demat form, they have to provide their demat account details at the time of application.

    Here are a few examples to look for –

    Series Name Face Value NSE Code Interest Rate Market Price
    2022-23 Series IV Rs 5,611 SGBMAR31IV 2.50% Rs 5,100
    2022-23 Series III Rs 5,409 SGBDE30III 2.50% Rs 4,900

    **The market price of SGBs may vary depending on the demand and supply factors and the prevailing gold price. The investors should do their own research and analysis before investing in SGBs.

    Frequently Asked Questions

    1. Are minors eligible to invest in SGBs?

    Yes, minors can invest in SGBs. The application on behalf of the minor has to be made by his/her guardian.

    2. How to pay for SGBs?

    The investors can pay for SGBs through cash (up to Rs 20,000), cheque, demand draft, electronic fund transfer, or online mode.

    3. Can SGBs be transferred or sold once purchased?

    Yes, SGBs can be transferred or sold in the secondary market through stock exchanges. The price and liquidity of SGBs depend on the prevailing market conditions and demand and supply factors.

    4. Can NRIs (Non-Resident Indians) Invest in Sovereign Gold Bonds?

    No. NRIs can’t invest in Sovereign Gold Bonds.

    5. Can I Use Sovereign Gold Bonds as Collateral for Loans?

    You can use these as collateral just like a physical gold. The amount of money you can borrow will depend on the value of the gold, which is set by the Reserve Bank from time to time.

    6. Is nomination possible in SGBs?

    Yes, nomination is possible in SGBs. The nomination form can be obtained from the issuing banks or post offices or downloaded from the RBI website.

    7. Is there any tax deducted at the source (TDS) for SGBs?

    No, there is no TDS applicable on the interest payments or the redemption amount of SGBs (conditions apply).

  • Introduction to Options Trading: A Beginners Guide

    Introduction to Options Trading: A Beginners Guide

    Everyone like to have options so that they can choose as per their wish. This is what options trading gives you, the option to choose. In the stock market, or to be specific derivatives market, options are like the ruler, with all the power and no obligations.

    However, for beginners, option trading may seem a bit complex, as there are a lot of things to keep in mind while trading options. That said, options are also one of the best ways to trade in the market without putting in a lot of money, however, that doesn’t restrict your profit potential. Let us find out how and to do that, we need to dig deeper.

    What are the Options and Option Trading?

    Options are derivative contracts, which are used to speculate the price of the underlying asset and trade accordingly. These derivative contracts offer the buyer the right to buy or sell the underlying asset at a specified date for a pre-determined price. While you get the right to buy or sell the underlying asset, there is no obligation to do it. This is the feature that makes options most sought after.

    So, Options trading can be defined as the trading process of buying and selling these option contracts.

    Types of Options

    Call option: Call option offers the ‘right to buy’ the underlying asset at a predetermined price on a specified date, without any obligation. Traders purchase the call option when they think the price of the underlying asset may go up in the future. So, in order to make a profit, they buy call options by paying a premium, which gives them the right to buy the underlying asset at a future date for a pre-determined price.

    Suppose, you think the price of stock A will go up next month as the company is coming up with new products, which have huge demand in the market. Let’s say, the current price of stock A is Rs. 1000. You are anticipating the price of the stock to go up to Rs. 1200 next month. Therefore, you buy the call option at a strike price of Rs. 1050. You bought five lots, and each lot has 100 stocks, and the premium you paid is Rs. 2000 each, which means a total of Rs. 10000, paid as a premium.

    Now there can be two scenario:

    Scenario 1: Price of stock A goes up to Rs. 1250 next month

    If this happens, then you can execute your call options, and buy 500 units of stock A at a price of Rs. 1050.

    Buying price = Rs. 1050*500 = Rs. 525000

    Premium paid earlier = Rs. 10000

    Total investment = Rs. 535000

    You can sell the shares at a price of Rs. 1250 each.

    Selling price = Rs. 1250*500 = Rs. 625000

    Net profit = Total Investment – selling price

    = Rs. 625000 -535000

    = Rs. 90000

    Scenario 2: Price of stock A decreases to Rs. 950 next month

    Now, since, the price drops against the expectation, you choose not to execute the contract. As there is no obligation to execute the contract on the contract buyer.

    Thus, your total loss would be the amount of premium paid in this case which is Rs. 10000.

    However, if you had invested in the stock instead of buying the call option, then

    • First, you had to invest Rs. 525000 at one go for buying 500 shares at Rs. 1050 each.
    • Secondly, if the price drops to Rs. 950 each, then your loss would have been Rs. 100 per share. Therefore the total loss would have been Rs. 100*500 = Rs. 50000.

    So, instead of losing Rs. 50000, you lost Rs. 10000, which is much better, isn’t it?

    Put Option: When you believe or anticipate the price of an asset to go down, you can buy a put option as this derivative contract gives you the right to sell an underlying asset at a predetermined price on a specified date, without any obligations of executing the contract.

    Again let’s understand this with an example;

    Suppose, you think the price of stock B will decrease in September 2023, as the company is not performing well in this quarter. So, purchase five Put options, by paying a premium of Rs. 2000 each, which makes it Rs. 10000 in total. The lot size of each put option is 100 shares. Thus, you can sell 500 shares at the end of the contract. Now, the current market price of stock B is Rs. 1000, and you think it will come down below Rs. 900 each by September. Therefore, the put options you bought have a strike price of Rs. 1000 for each share.

    Here, like above, can be two scenarios;

    Scenario 1: The price of stock B goes down to Rs. 850

    Since the price of the stock has come down as per your anticipation, you will execute your contract.

    To buy 500 shares, your investments would be Rs. 850*500 = Rs. 425000

    Selling price = Rs. 1000*500 = Rs. 500000

    Gross profit = Rs. 500000 -425000 = Rs. 75000

    Premium paid = Rs. 10000

    Net profit = Rs. 65000

    Scenario 2: Price of stock B goes up to Rs. 1100

    In this case, you can choose not to execute the contract and your loss would be limited to Rs. 10000 which is the premium amount paid by you.

    Suppose, you had short-sell 500 units of stock B at Rs. 1000, you had made Rs. 500000 then. However, if the price went up to Rs. 1100, for squaring off your position, you had to buy stock B at Rs. 1100 each, which means, an outlay of Rs. 550000. Therefore, in this case, your loss would have been Rs. 50000.

    The Extent of Profit and Loss

    • In the case of a call option, the maximum profit can be infinite for the call option buyer. This is because the price of the underlying asset can go up to any extent, and thus, there is no upper limit on the profit.
    • In the case of a put option, the maximum profit for the option buyer is the difference between the strike price of the contract and Rs. 0 as the price of the underlying asset cannot go below that.
    • The losses in both cases can be up to the amount of premium paid.

    Important Concepts of Option Trading

    In option trading, there are certain terminologies and concepts which you need to keep in mind. These include –

    • Strike Price: This is the price, which is determined at the time of drawing the option contract at which the buyer of the option contract will be able to buy or sell the underlying asset. As per the example for a put option, the strike price is Rs. 1000 which means the put option buyer, can sell the underlying asset which is stock B in that example at a price of Rs. 1000 when the market price has dropped to Rs. 850.
    • Expiration date: The contract will become executable on this date. It is also the expiration date and this is specified at the time of making the contract. Suppose, in the above example, the expiration date is 9th September, then on 9th September, if the price is below the strike price, and the option buyer is willing to execute the contract, he or she can. However, if not, then it will expire.
    • Premium: The premium is the amount you pay in order to purchase the option. In the above example, Rs. 5000 is the total premium paid for buying the five lots of put option. The premium is determined on the basis of the price of the underlying asset and values.
    • Intrinsic Value: in options trading, intrinsic value means the gap between the strike price of the option contract and the present market price of the underlying security. So, in the above example of a call option, the gap between the strike price and the current market price is Rs. 50 which is the intrinsic value.
    • Extrinsic value: This value is a qualitative measure of representing factors like is the premium amount for the contract is justifiable or not, how long the option will be good, and other such factors, which are not considered by the intrinsic value.
    • In-the-money option: If an option contract is profitable depending on the price of the underlying security and the time until expiration, then it is known as an in-the-money option. In the above, example, the time of expiration is in September. The strike price is Rs. 1000 and the underlying security’s price was Rs. 1000 at the beginning of the contract. So, the option will be in-the-money until the market price of the underlying security doesn’t go above the Rs. 1000 mark. Since, it is a put option, where you will make a profit when and if the price of the underlying security goes down. Therefore, it will be in-the-money until the price of the underlying security doesn’t go above the strike price.
    • Out-of-the-money Option: This is when the option contract becomes unprofitable. Going by the above put option example again, if the price of the underlying security goes above the strike price of Rs. 1000, then it will become an out-of-the-money option, as the price went up against your anticipation of price going down.

    How to Start Options Trading?

    If you are starting with options trading, then here are the steps you need to follow.

    • Firstly, you need to have an online trading account, which you can easily open with our quick and easy, paperless account opening process.
    • Now the next step is crucial, where you start finding those securities, which have the potential upside and downside. Once you find the same, you need to anticipate whether the price will go up or down in the future. If you think it will go up, you have to buy the call option and if you think it will go down you will have to purchase put options.
    • Then you need to determine the strike price of the option contract and also analyse if the premium that you have to pay is reasonable or not.
    • Next, you need to determine the period for the potential rise or decrease in the price. This is required for deciding the expiration date of the contract.
    • Once all these are sorted, you pay the premium and buy the options.
    • Now, upon expiration, if the options are in-the-money, then you can execute them and make a profit, while if they become out-of-the-money, then you can choose not to execute them.

    So, this is how you start options trading in the beginning and once you grow, you can learn new option trading strategies to generate better results.

    Option Trading Strategies for Beginners

    As a beginner in the option-trading arena, you can use the following three option-trading strategies to your benefit.

    Long call: This is one of the basic options trading strategies that beginners can use while trading options. Here you have to buy call options when you think the price of the underlying security will increase in the near term. Since you have to buy the call option, it is known as the ‘going long’ on-call option and thus, long call. In this strategy, there is no cap on the profit, while the loss is limited to the amount of premium paid.

    Long Put: When you expect the price of the underlying security to do down in the near future, you can buy put options, which is known as long put as you are ‘going long’ on the put option.

    Covered call: This options trading strategy is a little advanced where you have to sell a call option which means you are ‘going short’ as you expect the price of the underlying security to reduce but to protect yourself from the losses, you also buy underlying security equivalent to the number of units in the call option sold by you. You receive the call option premium as you sell the option in this strategy.

    Now if the price of the underlying security decreases below the strike price, as expected by you, then the call option buyer will not execute the contract, so, you do not have to sell the underlying securities and your profit is the premium you have received. On the contrary, if the price of the underlying security goes up against your expectation, then you sell the securities you have bought to the call option buyer at the strike price and the premium is retained by you, which is your profit.

    Why You Should Consider Options Trading?

    • Infinite returns: The maximum profit that one can make with options, especially the call option has no upper limit. It can go up to any extent as the price of the underlying security can increase in that way. Even in the put option, one can make a profit to the extent of the price of the underlying touching the floor.
    • Low Cost High Return: While the return potential is superb with options trading, the cost of trading these instruments is limited to the premium amount. This helps traders to generate higher returns without investing a lot of money.
    • Lower Risk Potential: The risk potential of the options is limited to the amount of premium paid.
    • Multiple strategies: There is a wide range of option trading strategies, which the traders can pick to enhance their trading and generate positive returns.

    Conclusion

    While buying or selling securities directly can help you make good returns, the downside is too risky as well and thus, trading options become more sensible to mitigate the risk to quite an extent while increasing the profit potential. However, you need to be cautious and evaluate everything before you start trading options.