This chapter will help you to understand some common terms and concepts related to the market.
You may be a gadget lover like me and know that Xiaomi, a Chinese manufacturer of smartphones, recently entered into an exclusive partnership to sell their flagship smartphone model, the Mi3, in India. According to some reports, the price of Mi3 is around Rs.14,000/. To buy Mi3, one had to register on Flipkart. The phone wasn't available to non-registered users and registration was only open for a limited time. Rajesh, my colleague, had not registered for the phone. He wanted to purchase the phone but he couldn't because he hadn't registered in time.
Rajesh approached me out of pure desperation and offered to buy my phone. He offered to buy my phone for Rs. 16,500/- I was a trader by nature and agreed to sell the phone. In fact, I demanded that he pay me immediately.
I was shocked when I realized how much I had spent on the money. Take a look at the mess I have created for myself. Rajesh bought a phone that I didn't have yet, so I sold it! Thank you!
It was an okay deal. Yes, I sold a phone I didn't own. But, I could buy the phone on Flipkart, and then pass the unopened box on to Rajesh. The only thing that I was concerned about in this transaction was what happens if the price of the phone goes beyond Rs.16,500? I would lose my money in that situation and would regret having entered into this transaction. If the phone was priced at Rs.18,000, my loss is Rs.1,500 (18,000-16,500).
To my surprise, the phone was priced at Rs.14,000/. I bought it immediately on Flipkart and after delivery, I gave the phone to Rajesh. I made a tidy profit of Rs.2,500/ - (16500 -14000).
You can see that I sold the phone first to Rajesh. Then I bought the phone later on Flipkart and delivered it to Rajesh. It was sold first and then bought it later.
This type of transaction is known as a "Short Trade".
Shorting is a very strange concept. This is because shorting is not something we are used to. This transaction netted you a profit in the amount of Rs.20.
You were bullish on this stock and bought Wipro at Rs.405. The second leg was to purchase Wipro at Rs.425.
The stock trades at Rs.425, which is why you are still bearish. You believe that the stock will trade at Rs.405 within a few days. Is there any way to profit from your bearish expectations? You can profit from your bearish expectation by shorting the stock.
The stock is sold at Rs.425, then, 2 days later, assuming that the stock trades at Rs.405, the stock is repurchased.
Realize that the first leg of the trade was to sell the stock at Rs.425, while the second was to purchase the stock at Rs.405. This is the usual case when shorting: you sell the stock at a price that you believe is too high and then you buy it back at an even lower price.
The trade was actually the same as buying at Rs.405 then selling at Rs.425 in reverse.
You may be asking yourself a simple question: How do you sell Wipro shares if you don't own the company? You can, just as I did with a phone I didn't own.
You borrow the shares from another person in the market when you sell your first share. When you repurchase the shares, you return them. This happens backend. The stock exchange facilitates borrowing it and returning it.
It is so seamless that when you short stock, you won't even notice that you are borrowing it from another person. You only need to understand that if you are bearish about a stock, you can short it. The exchange will then take care of borrowing the stock for you. The exchange will return the stock if you repurchase it.
This summarizes the short and long positions.
Square off- This is an expression that indicates you are going to close an existing position. Square off is the term used to indicate that you intend to sell a stock, if you are long in a stock. You are not selling the stock to close a long position.
Squaring off a stock position is a way to repurchase it if you are short. Repurchase the stock to close an existing position. You are not taking a long position.
Intraday position-This is a trade position that you open with the expectation of securing the position in the next day.
OHLC - OHLC is open, high, low, and close. This will be explained in the technical analysis module. Open is the opening price for the stock, high is at the top of the stock's trading day, low is at the lowest trade price during the day and close is at the stock's closing price. The OHLC for ACC is 17Th June 2014: 1486, 1511, and 1467 respectively.
Volume- Stock prices and volume are important concepts we will discuss in detail in the technical analysis module. Volumes are the sum of all transactions (both buy-and-sell) that occurred for a stock on a given day. On 17ThJune 2014 volume on ACC: 5, 33,819 shares
Market Segment - This is the division in which a particular type of financial instrument can be traded. Each financial instrument has its own risk and reward parameters. There are three major segments that the exchange operates.