FAQ

Know Trading - FAQ

Know Trading - Frequently Asked Questions

Arbitrage
The business of taking advantage of difference in price of a security traded on two or more stock exchanges, by buying in one and selling in the other (or vice versa). Quite simply it means you try to buy something cheap in one place, to make a profit selling it somewhere else. Given the speed at which the financial markets now operate, in practice the simultaneous purchase of foreign exchange, securities, commodities or any other financial instrument in one market and the sale in another at a higher price.

Averaging
The process of gradually buying more and more securities in a declining market (or selling in a rising market) in order to level out the purchase (or sale) price price.

Bears
These stock market animals are pessimists, they expect share prices or any other type of investment to fall. In a 'bear market' the general sentiment is that prices are going to go lower and majority of dealers will sell as quickly as possible for fear of holding shares which diminish in value. Bears, like 'bulls' drive the market.

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

Badla
Carrying forward of transaction form one settlement period to the next without effecting delivery or payment. Badla involves carrying forward of a transaction from one settlement period to the next. The carry-forward is done at the making up price, which is usually the closing price of the last day of settlement. A badla transaction attracts the following payments / charges : (a) 'margin money' specified by the stock exchange board; and (b) contango or badla charges (interest charges) determined on the basis of demand and supply forces.

Blue Chips
Blue Chips are shares of large, well established and financially sound companies with an impressive records of earnings and dividends. Generally, Blue Chip shares provide low to moderate current yield and moderate to high capital gains yield. The price volatility of such shares is moderate.

Bull
A bull is one who expects a rise in price so that he can later sell at a higher price.

Bull Market
A rising market with abundance of buyers and few sellers.

Buyer
The trading member who has placed the order for the purchase of the securities

Bid and offer
Bid is the price at which the market maker buys from the investor and offer is the price at which he offers to sell the stock to the investor. The offer is higher than the bid.

Basket Trading
Basket trading is a facility by which investors are in a position to buy/sell all 30 scrips of Sensex in the proportion of current weights in the Sensex, in one go.

Bid
This is the highest price at which an investor is willing to buy a stock . Practically speaking, this is the available price at which an investor can sell shares.

Buy Limit Order
An order of buying a security with a condition that order will not be executed above the specific mentioned price.

Call Option
This is the right, but not the obligation, to purchase shares at a specified price at a specified date in the future. See Options.For this privilege, the buyer pays a premium which would be a fraction of the price of the underlying security. You are gambling that the share price will rise above the option price. If this happens you can buy the shares and sell them immediately for a profit.If the share price does not rise above your option price, you do not exercise the option and it expires - all you have lost is the initial payment made to purchase the option.

Call
The demand by a company or any other issuer of shares for payment. It may be the demand for full payment on the due date, such as, for example, with a rights issue. It may, alternatively, be the demand for a further payment when the total amount is payable by instalments.The calls are usually made several months apart by call letter and the shares are said to be paid-up when the final call has been paid. A call by a company should not be confused with a call option.

Derivatives
Instruments derived from securities or physical markets. The most common types of derivatives that ordinary investors are likely to come across are futures , options , warrants and convertible bonds. Beyond this, the range of derivatives possible is only limited by the imagination of investment banks. In other words, new derivatives are being created all the time. It is likely nowadays that any person who has funds invested will unwittingly perhaps be indirectly exposed to derivatives.

Futures
A contract for the purchase and sale of a commodity, financial instrument or index at a fixed price at a fixed date in the future. Futures contracts were originally invented to allow those who regularly buy and sell goods to protect themselves against future changes in the price of those goods. In other words, the futures markets evolved to allow producers or consumers to hedge their risk.

Foreign Institutional Investor (FII)
An overseas institutional investor permitted under Securities and Exchange Board of India (SEBI) guidelines to trade in Indian bourses.

Hedging
Offsetting or guarding against investment risk. A perfect hedge is a no-risk-no gain precaution.A conservative strategy for reduction of risk through futures, options or some other derivative, by opening an opposite position to that already held in the underlying market. Taking positions in securities so that each offsets the other.

Long position
A position in which a person's interest in a particular series of options is as a net holder, meaning that the number of contracts bought is more than the number of contracts sold. It is similar for the futures contracts. A bull position in a security.

Margin
The amount a buyer/seller of a futures contractor an uncovered (naked) option seller (writer) is required to deposit and maintain to cover his daily position valuation and reasonably foreseeable intra day price changes.

Pay-in
Pay-in day is the designated day on which the securities or funds are paid in by the members to the clearing house of the Exchange.

Pay-out
Pay-out day is the designated day on which securities and funds are paid out to the members by the clearing house of the Exchange.

Put Option
The right to sell stock at an agreed price at or before a stated future time. Contrast this will call options.

Short Position
A position in which a person's interest in a particular series of options is as a net seller (writer) meaning that the number of contracts sold exceeds the number of contracts bought. It is similar in case of futures contracts.

Strike Price
Strike Price is also called exercise price. The price for which the underlying stock index or other asset may be purchased (in the case of a call) or sold (in the case of a put) by the option buyer (holder) upon exercise of the option contract.

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

Volume of Trading
The total number of shares which change hands in a particular company's securities. It is the sum of either purchases or sales which necessarily equal. This information is useful in explaining and interpreting fluctuations in share prices.

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