Securities - a short introduction

Here we will briefly go through the different types of securities and related financial instruments: stocks, options, bonds, currencies, shorting, leverage, CFD, ETF, warrants, futures and forwards.

Stocks

Stocks are shares of a corporation. The nominal share value is the same for all stocks, but should not be confused with the stock price, which will often be different than face value. The share price will fluctuate according to supply and demand in the market and determined by the underlying value of the company as well as other external factors affecting the company.

Options

Options give you the right to buy or sell securities such as stocks on a given date at a price agreed in advance. Although you have a right to buy, does not mean you are required to purchase, and there is thus no obligation that you have to buy, but a voluntarily purchase. Options may also apply to other goods and benefits than securities.

There are both call options (CALL) and put options (PUT). In the booklet " Derivatives - options, forwards and futures " from the Oslo Stock Exchange, we find the following definitions:

CALL options on stocks gives the buyer the right to buy the underlying shares at the agreed strike price up to and including expiry date.

Put option gives the buyer the right to sell the underlying shares to strike price on or before the expiration date.

Bonds

Bonds is an interest-bearing promissory notes. The issuer (issuing bonds) thus owes the holder (the one who buys the bond) money. The coupon rate and maturity for payment as provided in the bond defines the issuer owes the holder at any time. It is primarily the State (Norges Bank issuing government bonds), municipalities and major corporation and banks issuing bonds.

For an operator to borrow a lot of money, it is often easier to borrow amount from several lenders, but to take out loans in just one or a few banks. Instead of one large loan, you can issue bonds, so that you can split the loan. Bonds may for example be bought on Oslo ABM (Oslo Børs) ​​.

Currency

Currency is simply money. This is a means of payment used in one or more countries. We have, for example, Canadian dollar, euro, Swiss franc, Japanese yen, Chinese yuan, Indonesian rupiah, Russian ruble, and the British pound. The value of a currency can be seen in relation to the value of another currency, and the value is expressed in currency. Currency trading is also called Forex trading (Foreign Exchange).

Shorting

Short Sales (also called shorting, blankosalg, loan sales) provides an investor the opportunity to make money on the decline, for example, if a stock goes down in value.

It is easiest to understand shorting with an example:

You buy shares in the hypothetical company Downturn Ltd. It retails for £ 10 today. You decide to borrow 100 shares of Downturn Ltd. from an online broker (Note: you buy any shares, but the borrower ie shares). Immediately after you receive the shares you borrowed, you sell to the market and get NOK 1000 for sale (10 $ per share x 100 shares). Now you owe your broker 10 shares of Downturn AS, yet with 1000 million in cash. After a time falling share price Downturn Ltd. (and it's fall you hope for when shorter shares). Now a share in the Downturn AS worth only 8 million. You can now buy back the 100 shares you owe the bank $ 800 (remember, it shares you borrow, not cash). First, did you borrow the shares and therefore they sold and received NOK 1000 for sale, and so did you buy them back later for 800. Your profit is then the 200 (minus commissions and any other fees to your broker).

Strategy by shorting then, is to borrow shares (or other securities) and sell at the best price you get as soon as you receive the shares. The sale means that you are now sitting with values ​​in the form of cash instead of shares. What you owe is not a dollar amount, but a given number of shares. So after a time to buy back the shares, hopefully shares declined in value, so you can buy the cheaper than what they sold for to begin with. You earn money ie when stock prices drop, but you risk having to pay expensive and lose a lot of money if the stock price rises.

The immense problem with shorting is that the downside is virtually unlimited, while the upside is limited. That is the opposite of what is true for traditional stock trading. In a recession, or if you strongly believe that a company's share price down in value, are still shorting a financial strategy to consider.

Leverage / Margin trading

Shifting (also called gearing, share credit, leverage trading, margin trading, trading on margin) is the leverage of investments. When you hear about such as: "Invest 1,000 and get 100,000 to trade for." It might seem too good to be true, but this is quite simply an offer of shifting. Looking at risk are still not so amazing.

CFD - Contract for difference

Contract for difference is a derivative in which one speculates prisforendringer the underlying instruments. Short, which is a CFD a reflection of a security, such as a mirror image of a share (or a currency pair, one commodity, stock indices). The return you get on a CFD equals the return on the stock, even if you do not own the stock. Dividends, however, you just when you buy CFD.

ETF - Exchange - traded funds

ETF stands for exchange - traded funds, are funds (eg mutual funds) that are traded just like a stock. You can then speculate on the performance of the index.

Warrants

Warrants (warrant) is a security that the owner of the warrant may use to buy the underlying stock or index at a specified price before the end of the warrant.

Warrants are similar to options in that there are special rights. Unlike options, warrants is an issue of new shares, so that the original stock price must fall when the company issues shares (in options, we are talking rather than promissory notes). Warrants often have a longer maturity than options. Warrants will be traded as securities on the stock exchange. Settlement of warrants happens at a final settlement (cash) on the expiry date.

Futures

Futures contract is an agreement between two parties to buy or sell the underlying security at a specified price and at a specific time in the future. Unlike options is where a duty to conduct trade and both parties committed to the future trade. Buy futures when you think the market will be up.

Forwards

Forwards are as futures, an agreement between two parties to buy / sell the underlying security, where both price and dates for future trade is determined. The trade is contractually bound to the futures. The difference in futures contracts, however, in the form of settlement.

Arbitrage

Arbitrage means to achieve a risk-free profit by exploiting price distortions on securities. Let's say a company is listed with the same shares on both NYSE and another foreign exchange. If there is a price difference you can buy shares in which it is the cheapest and selling where it is most expensive, and thus earns the difference completely risk free. In practice arbitrage not as easy as it might sound.