Futures and Options-19Cop27: fg7nbt5

SRI KRISHNA ARTS & SCIENCE
COLLEGE
[An Autonomous Institution]
Ranked 53rd in NIRF; MHRD: 1st in Institutional Swachhata Ranking
Coimbatore – 641 008
FUTURES AND OPTIONS- 19COP27
II M.Com A
Google Classroom Code: fg7nbt5
Unit 1 – Lecture 2
Facilitator
Svetha G
Assistant Professor
Department of Commerce
Topics covered
1.Exchange Traded Markets
2.Over- The- Counter Markets
3.Types Of Traders
4.Mechanics Of Future Markets
1.Exchange Traded Markets
 Exchange-traded Market refers to a centralized and
regulated financial market, where securities,
commodities, derivatives, etc. of listed companies are
bought and sold between stockbrokers and traders.
 The prices of securities such as shares, debentures,
notes, corporate bonds, etc. are decided by the market
demand and supply forces.
 It can be a physical trading location such as premises,
etc. or it can be an electronic platform, i.e. website.
It has an association of persons (registered or
unregistered) commonly referred to as member
brokers.
 It is established with the aim of governing the trade
of securities by the general public and companies, as a
whole.
There is a set of rules imposed by the Exchange on
the firms and brokers, which participate in the trading
of securities.
Features of an Exchange
•Trading of Securities: The first and foremost function of a stock
exchange is to provide a formal platform for trading of securities
and liquidating them whenever an investor needs to encash them,
at the prevailing market price. Moreover, it provides the flexibility
to the investor to change their portfolio whenever required.
•Ascertainment of price: An Exchange-traded market is one of the
best examples of perfect competition, because of the presence of
many buyers and sellers in the market. As the market is
transparent, all the necessary information is available and so active
bidding takes place and in this way, the price is decided.
•Raising funds: Stock exchange is commonplace for the
companies and governments to generate funds from the market
by offering securities for sale to the general public.
•Mobilization of savings: People invest their savings in the share
market, to earn good returns and make money out of their
investments. In this way, the savings of the public is mobilized and
channelized by the stock exchanges, by investing their money in
different sectors, which generate high returns.
•Trades in second-hand securities: In an exchange, only those
securities are traded which are previously issued by the
companies through a public offering in the primary market.
2. Over- The- Counter Markets
OTC or Over the counter market is a decentralized market for
unlisted securities, not having a specific physical location, rather
the firms/persons involved in trading directly negotiate over a
communication network such as telephone lines, emails, computer
terminals, etc.
 Trading Over the counter is also called off-exchange trading,
because of the absence of a formal exchange.
In general, those companies which do not fulfill the prerequisites
of the stock exchange for listing their stocks, trade them over the
counter.
The trade takes place between two companies or financial
institutions.
 Financial products such as bonds, derivatives, currencies,
etc. are mainly traded OTC.
 It is a dealer’s market, where they buy and sell the financial
products for their account and the investors can directly
contact the dealers, who are interested in selling their stocks
or bonds they have or they can talk to the brokers, who will
find out the dealers offering the stocks with the best price.
The dealers making the market for a certain securities
quote the price at which they are going to pay for the stock
called as the bid price and the rate at which they are going
to sell the stock is called ask price.
Here, the bid-ask spread implies the amount left in-
between the bid and asked prices indicating the markup of
the dealer.
Difference between OTC and Exchange
BASIS FOR OTC (OVER THE

EXCHANGE
COMPARISON COUNTER)
Meaning Over the Counter or Exchange is an
OTC is a decentralized organized and
dealer market wherein regulated market,
brokers and dealers wherein trading of
transact directly via stocks takes place
computer networks and between buyers and
phone. sellers in a safe,
transparent and
systematic manner.
BASIS FOR OTC (OVER THE
EXCHANGE
COMPARISON COUNTER)
Market maker Dealer Exchange itself
Used by Small companies Well established

companies
Physical Location No Yes
Trading hours 24×7 Exchange hours
Stocks Unlisted Stocks Listed Stocks
Transparency Low Comparatively high
Contracts Customized Standardized

3. Types Of Traders
1. The Day Trader

2. The Swing Trader
3. The Technical Trader
4. The Fundamental Trader
5. The Long Term Trader
•Types of traders include the fundamental trader, noise trader,
and market timer.
•Each type of trader appeals to investors differently and are based
on varying strategies.
•Understanding your own style of trading can help make better
investing decisions.
Fundamental Trader
Fundamental trading is a method by which a trader focuses on
company-specific events to determine which stock to buy and
when to buy it.
To put this in perspective, consider a hypothetical trip to a
shopping mall. In the mall, a fundamental analyst would go to each
store, study the product that was being sold, and then decide
whether to buy it or not.
While trading on fundamentals can be viewed from both short-
term and long-term perspectives, fundamental analysis is often
more closely associated with the buy-and-hold strategy of
investing than it is with short-term trading.
Noise Trader
Noise trading refers to a style of investing in which decisions to buy
and sell are made without the use of fundamental data specific to the
company that issued the securities that are being bought or sold.
Noise traders generally make short-term trades to profit from
various economic trends.
While technical analysis of statistics generated by market activity,
such as past prices and volume, provides some insight into patterns
that can suggest future market activity and direction, noise traders
often have poor timing and over-react to both good and bad news.
Sentiment Trader
Sentiment traders seek to identify and participate in trends.
They do not attempt to outguess the market by finding great
securities. Instead, they attempt to identify securities that are
moving with the momentum of the market.
Sentiment traders combine aspects of both fundamental and
technical analysis in an effort to identify and participate in market
movements.
Trading costs, market volatility, and difficulty in accurately
predicting market sentiment are some of the key challenges
facing sentiment traders.
While professional traders have more
experience, leverage, information, and lower commissions,
their trading strategies are restricted by the specific
securities they are trading.
 For this reason, large financial institutions and
professional traders may choose to trade currencies or
other financial instruments rather than stocks.
Arbitrage Trader
Arbitrage traders simultaneously purchase and sell assets in

an effort to profit from price differences of identical or similar
financial instruments, on different markets or in different
forms.
Arbitrage exists as a result of market inefficiencies—it
provides a mechanism to ensure prices do not deviate
substantially from fair value for long periods of time.
This type of trading is often associated with hedge funds, and
it can be a fairly easy way to make money when it works.
 For example, if a security trades on multiple exchanges and is
less expensive on one exchange, it can be bought on the first
exchange at the lower price and sold on the other exchange at
the higher price.
4. Mechanics of a future market
1. Placing an order
• A futures order originates with the customer. A futures
order is simply a set of instructions for the executing
broker.
• A customer ( trader ) uses futures orders to instruct his
broker exactly what to trade (buy or sell), when to trade
and at what price.
• Thus a futures order refers to a set of instructions given
to a broker by a trader requesting the broker to take
certain actions in the futures market on behalf of the
customer.
2. Role of clearing house
•A clearing house plays a key role in the trading of futures
contract.
•It acts as an intermediary for each contract. if one person
fails to commit the obligation (to pay for the asset or to
deliver the asset) the future exchanges would die very
soon.
•once a futures price is agreed upon between the buyer and
seller and the trade is completed, the clearing house of the
exchange becomes the opposite party to each one of the
parties
3. Daily settlement
•The clearing house uses the fees it collects on
transactions to provide the necessary funds for this
purpose.
•Besides buyers and sellers are required to deposit a
margin on the contract.
•Thus when a contract is entered into, both the buyer and
seller are required to deposit an initial margin. This is
typically 5 to 10% of the value of the contract.
•The exact amount is determined by the exchange.
4. Delivery and cash settlement
•All contracts eventually expire.
•each contract has a delivery month.
•Other contracts permit delivery only after the contract has
traded for the last day.
•Still others are cash settled , thus there is no delivery at all.
•Most non-cash settled financial futures contracts permit
delivery on any business day on the delivery month.
•Usually delivery is a three day sequence beginning two
business days prior to the first possible delivery day.
THANK YOU

Futures and Options-19Cop27: fg7nbt5

Uploaded by

Copyright:

Available Formats

Futures and Options-19Cop27: fg7nbt5

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Futures and Options-19Cop27: fg7nbt5

Uploaded by

Copyright:

Available Formats

SRI KRISHNA ARTS & SCIENCE

FUTURES AND OPTIONS- 19COP27

BASIS FOR OTC (OVER THE

Used by Small companies Well established

Physical Location No Yes

Trading hours 24×7 Exchange hours

Stocks Unlisted Stocks Listed Stocks

Transparency Low Comparatively high

Contracts Customized Standardized

1. The Day Trader

Arbitrage traders simultaneously purchase and sell assets in

You might also like

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.