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The concept and classification of the Stock Exchange transactions
1. Definition and structure of the stock-exchange transactions; 2. Stock-exchange transactions handled in the international practice; 3. Transactions with primary financial securities; 4. Transactions with derivatives; 5. Types of stock-exchange transactions from the investor’s motivation point of view.
=1= Generally speaking, transaction can be defined as a convention between two or more parts, through which certain rights are passed, or a commercial exchange is made. Stock exchange transactions are seen as contracts of purchase of titles and of other financial assets, concluded on the secondary capital market, with the agents de change from the respectively authorized societies of financial intermediation as a go-between. These transactions are to be handled according to the law on securities from the respective country and to the regulations of the implied institutions (Stock exchange Market, OTC, etc.). The interpretations of the notion of stock exchange transactions have gradually evolved over time, especially recently, so that, if traditionally stock exchange transactions were considered only that contracts concluded inside the Stock exchange and during the trade, now the only condition to be accepted as such is for them to be registered at the Stock exchange. Besides, this occurred as a result of the bourse delocalization phenomenon, the globalization one as well as the OTC market’s appearance.
=2= There is a big diversity of types of stock exchange transactions. Regardless to their nature, the transactions’ technique is marked by the way of their settlement and the price at which these are realized. This way, two big categories occur: Spot transactions;
Time bargain (forward);
According to their object, stock exchange transactions can be: Transactions with primary financial securities;
Transactions with derivatives;
As what concerns the transactions with primary financial securities the attention is focused on two models of transactions:
for cash. Transactions with financial derivatives are represented by futures and options. On margin.short Transactions with derivatives Transactions according to the European model: 1.1. Au reglement mensuel (time bargain). au reglement mensuel. The European model includes the following types of transactions (according to the French securities market model): • • • Au comptant (spot). European. Main categories of stock exchange transactions Transactions with primary financial securities Transactions according to the American model: 1. 3. 2. A prime (conditional operations). 2. 3. Short selling. au comptant. transactions can be: • • • For cash. Futures Options Fig. a prime. on margin.• • American. According to the American model. Types of stock exchange transactions 2 .
3 . at a value of collateral. and respectively the seller has to own them and immediately to deliver them to the broker who had placed the order. as well as the evidence of the obtained credits and of their guarantee payment. Of course. and here is where the guaranties are needed. Through this account the evidence of titles traded on credit. according to their risk. As long as the agency does not bear the risk of the investment. This way. Transactions on margin are those in which the investor has the possibility to obtain credits from the agency of the broker he works with. This guarantee can be granted in money or in value papers accepted by the agency of the broker. In order to execute such transactions. the investor has to open a special account named margin account. On the stock exchanges corresponding to the American model. this titles of collateral are kept in an agency’s account (service also known as “street name”). because the agency of the broker or the investment bank does not finance the entire sum necessary for the operation.for financial securities that had not been yet issued. Regular settlement. Until the loan is refunded. are held.=3= As what concerns the transactions with primary financial securities the attention is focused on the transactions according to the American model (which are specific to the Asian stock exchange. of owned securities.where the execution of the contract is made after/in a certain number of days from the moment of entering into the contract. entirely with cash. but it is known the date of their issue. When issued. Through this account the evidence of transactions. too) and to the European model. in order to enter into and execute the transactions. of their price. the necessary sum is composed from the investors guarantee and the obtained credit. the investor has firstly to open a simple investment account or a cash account at the agency of a broker that acts as an intermediary. In order to operate with his margin account. To benefit of such a credit. can be met the following types of transactions: Cash delivery. but he can sell them only after paying the loan. dividends). but not later than 60 days after concluding the contract. the value papers are to be evaluated. the investor must put money in advance. of prices and others is held.when the execution (delivery/payment of the securities) takes place in the same day with the entering into the contract. according to the moment of the execution of the contract. Agreement based settlement – usually executed at a date arranged by parts. the investor remains the owner of these titles and benefits of all the rights that result from their ownership (interests. Transactions according to the American model Transactions for cash are those market operations in which the buyer has to pay for all the securities he is going to buy.
in the same time when placing the order. If the gaining possibilities are big. Here we firstly deal with a sale. more appropriate) borrows the value papers and sells them at the market price of that day. price that is estimated by the investor to be lower than the one from the moment of sale. Theoretically thinking. in order to give them back at a certain future date.Due to various techniques and types of transactions the investor can gain profit from an increase in price as well as from a decrease. the investor (speculator. Transactions with value papers according to the European model Transactions on EU securities markets are divided in two main categories: spot transactions and time bargain (forward transactions). whilst its risk is limited to the loss of the invested amount of money (in the worst case. au comptant) are the transactions in which the contract (payment and delivery of the titles) is settled immediately or in a very short period. the investor firstly executes a purchase transaction. Here. as it is explained higher. Thus. according to the position of the investor towards the market evolution. and after with a purchase. The main conditions for these transactions to unfold well are: first that the investor. are cash delivery transactions. Spot transactions (fr. the risk at short sales is theoretically unlimited. As a measure of protection against such risks. Transactions in the long margin account (M) are transactions made when an increase in market price occur. this type of transaction offers the possibility to the investor of an unlimited profit. to obtain profit. 4 . but borrows from the agency of a broker. hoping that after all he will buy them at a lower price in order to give them back. The main difference is that this type of transactions can lead to theoretical unlimited losses (thinking that the purchase price of the borrowed value papers can increase infinitely). Forward transactions are also divided. the price of bought titles can reach zero). too. In this situation. Their equivalent on the American stock exchanges. Short sales main motivation is the profit gaining through speculation. All the details about this process are recorded in the long margin account. anticipating the decreases in prices or speculating on the temporary price fluctuations. This is characteristic for the transactions on margin. the seller must deliver the titles to the broker and simultaneously or in a very short period place the sale order. in which a speculator has the possibility to sell value papers that he doesn’t own at the moment of transaction. special stock exchange products. and secondly. like options can be used. but the transactions order is inverse. Transactions in the short margin account (V) are transactions executed when market price is decreasing. to transfer the sum of money in the account. whilst the possible profit gaining is limited (the maximum profit is the value cashed from the sale). so that the idea of making profit is the same as in the long margin account (M). so that the difference represents his profit. there are 2 types of margin account: long margin account (M) and short margin account (V). thus they can be firm or conditional. The return means the purchase of these value papers at the market price in the settling day. short sale can be defined as the procedure used in securities markets. and after a certain period he sells that value papers at a higher price. On the securities markets in the USA.
when initiating such offers.The spot transactions weight from the total amount of stock exchange transactions is relatively low. with the help of which their initiator tends to buy certain securities no matter the price. This time period differs from a stock exchange to another. in exchange to prime paid to the seller. the investor gives a purchasing/selling order to his broker. on one hand the necessary sum of money. Firm transactions represent the forward transactions that are entered into at a certain moment and must be executed after a period of time. and in the settling day it is received/delivered exactly what had been negotiated. the settling day and the rest of the conditions are stipulated in the forward contract. Time bargain with primary titles can be firm or conditional. these allow the buyer to choose between two possibilities: to execute the contract or to give up on it. handled on stock exchanges. in France. it is applied the monthly regulation. This way. the value papers. the bourse will look for a counterpart. 5 . The main objectives. which are to be settled at a certain date and at a certain rate. the client who is buying takes on the pledge to pay the seller for the certain amount of titles at the established rate. A special category of transactions are the public secondary offers. but there also are situations with aggressive purchasing offers. called “reglement mensuel”). but unlike the firm ones.. Swap offer – similar to the purchasing offer. Time bargain transactions (forward) Time bargain are transactions with securities. in the settling day. The rate. at an established rate.e. Respectively. the seller engages to deliver to the buyer the fixed amount of securities at the established price. resulting from public offers. unlike the future contracts. handled at the moment of transactions initiation. in the settling day. Conditional transactions are also forward transactions. such take over’s. respectively the value of that titles. etc. i. Treasury bill. These transactions have an extremely speculative character and can be handled only with certain value papers. and they can be of three main types: • • • Purchasing offer – the investor that announces it is willing to buy securities. a seller/buyer who would accept the quantity and price conditions. Selling offer – the investor has the intention to sell titles. Usually. are settled in a friendly way. on its basis. To handle a transaction. and it is usually regulated in each country separately (for example. but in return to the given titles the investor requires another ones. in the settling day. To obtain a majority of voting stock. bonds. where the object of negotiations is the contract itself. mainly because these kind of transactions cannot be settled if at that moment its initiator doesn’t have. and on the other. Through forward transactions can be marketed shares. are: For an investor to take over the corporate control.
Their main characteristic is that the buyer’s loss cans maximum reach the value of the bonus. the seller. is negotiable and on bourses where such transactions are held. the advantage is taken by the seller. if the settling of it would bring losses.000 he wins by taking the position of the buyer. In such a contract there are established two prices (for example 15. The value of the bonus is established by the market. respectively to buy certain values. If in the settling day.e. 6 . One of their characteristic is that they have a standardized form. =4= Futures Futures are firm contracts. the price will be besides these limits (less than 15. In the case when the price is between these limits. the initiator gains profit if he chooses the position of the seller. respectively when the price is higher than 20.000). but it cannot exceed a certain percent according to the price of the title at that moment (for example. by paying a bonus to the seller. This way. which are extremely equilibrated.000 or greater than 20. Premium transaction are stock exchange operations. The reason of entering into such transactions is either a speculative one. through which the buyer gets the possibility to cancel the contract. usually when the market is disturbed. The investor will complete a straddle as a buyer with those titles. Premium transaction bring profits. or hedging. this type of transactions has been replaced by the straddle transactions. or to sell the contract to another person. b) Straddle. or can cover his position of debtor by purchasing the same type of contract from the market. Premium transaction are mainly practiced with a view to speculating or hedging.000) the initiator (buyer) wins. in a future date.There are two main categories of conditional transactions: a) Premium transaction. on the French bourse it must be lower than 10%).000.000/20. i. to sell. which means that the initiator (buyer). Straddle are that conditional transactions through which the buyer has the right to choose the position of the buyer. that are considered to be volatile and for which it is impossible to predict the sense of their evolution (increase or decrease). in the settling day. will purchase the securities at the highest price or will sell them at the lowest. the futures. at an established price. But on the modern markets. enters into when foresees a small variation in price. b) The seller can deliver the assets in the settling day. The contract in which are stipulated the obligations of parts. The partner of this straddle. which evolved very well in last years. between two parts. In the case when in the settling day the price is lower than 15. or of the seller at one of the settling day. each part has two alternatives: a) The buyer can wait the settling day and accept the normal settlement.
that is. there were only classical options. treasury bonds. Until 1973. can be currencies. which are the object of the contract. This price of futures is related to the assets that this contract has as object of the transaction. b) with financial instruments: • • • with currency. At this date. that is attractive for speculators in search of big profits. stock exchange indexes or even futures.The futures value is given by the market. the transactions with futures are handled with a trading margin. which supposes a high gearing effect. These assets. Options appeared a few centuries ago and were offering the possibility of entering into transactions that didn’t require the obligation of settling them. then the negotiable options give the possibility buy/sell them from/to third party. the implied parties can close their positions until the settling day. with interest rate for different value papers (bonds. thus. From the presented characteristics. 7 . that couldn’t be passed to somebody else. to open a position on the market. Like futures. and not the obligation. guaranteeing that the parties will carry out their obligations. negotiable options (further just options) are derivative bourse products because they are made on basis of other assets. to sell or buy some values (until) in a certain future date. It important to notice that not receiving or the delivery of the values that make the object of the contract is the main objective when entering into futures transactions. For futures. independently. we may notice that futures can be assimilated to some financial titles (that are negotiable and have a market value) and represent a good investment for the clients. but it doesn’t strictly depend on it. it is needed a minimum guarantee deposit. with bourse indices. For the options to become negotiable and get this way the characteristics of a financial title. etc. at an initially established price. Chicago Option Exchange (CBOE) realizes a decisive financial innovation: negotiable options. but only if it were necessary.). it was needed to standardize the terms of the contract and to set up a clearing institution that would issue and record the contracts. Futures transactions can be: a) Commercial (especially characteristic for the market of goods). primary financial titles. Options transactions Options give the buyer the right. in exchange to a bonus. If at classical options the buyer and the seller stood linked by the contract till the settling day. There are two types of options: call (purchasing) and put (selling). but obtaining profit from the differences between the moments of entering into the contract and the settling day. their price being established by confronting their demand and supply.
and he gets the maximum profit that can from such a transaction – the bonus. is committing to deliver the assets at the agreed price. Through its liquidation. Related to these options. In the case of put options. the investor can take the following attitudes: • • Bullish – when expecting a growth in the price of the object. short position (as a seller): a) short call. within a certain time period. the logic is the same. the seller of the call option (short call). he is expecting that the market will not grow and the buyer won’t use his right over the call contract. this is specific to the long call and short put positions. The buyer of a call option (long call) obtains the right to buy certain assets (an amount of securities) at a predetermined rate. 3. from one position. the clearing institution will find the correspondent positions that will execute the transaction. 8 . thus obtaining profit from their selling at the market price. Through its expiration. He foresees that in future the value of the assets will grow over that rate. The liquidation of the option means closing the initial position by an inverse operation. This way.Those investors who wish to enter into transactions with options can take one of the four positions: 1. Through this closing of positions the losses. in exchange to the bonus got from the buyer. are compensated with the gaining from the other. On the other hand. 2. the buyer of a call option will close his position by selling a call option. 2. The execution of an option can be done in the following ways: 1. 2. Taking a bearish position. The operations in the case of put options are symmetrical and follow the same logic. and it is characteristic to the short call and long put positions. Through its settlement. Through its settlement. Bearish – when expecting a decrease in the price of the object. b) long put. For this operation to take place. this way obtaining a reduced profit or loss. and respectively the seller will deliver the titles whilst the buyer will pay them at the established price. whilst the seller of a call option – by purchasing such an option. b) short put. long position (as a buyer): a) long call. the buyer of the option exerts his rights over the object of the option. 1. as regards the market.
Exchange speculations are successive buy-sell operations with financial titles. with fixed revenue (bonds). Hedging. Such placements have five main forms: 1. This means that a reasonable investor will place his money in more different titles. The buyer will give up the option. interest and/or capital gain. =5= The final goal of the stock exchange operations is. Besides this. the evolution of which he will follow permanently. This risk comes from the fact that the speculator cannot precisely forecast the evolution of the rate. this way compensating eventual losses obtained from ones with revenues obtained from another. options are considered to be a special tool that helps to making the investments more advantageous and obtaining big profits due to its speculative character. through which the investor tends to obtain profits from the differences of rates. This is how he builds his investment portfolio. Although through a simple placement titles are bought for keeping them. These value papers are represented by titles with variable revenue (shares). Arbitrage in securities. The main solution when diminishing this risk is diversification. sell high. the investment in value papers. Simple placements are investments of available capital (of private persons or firms) on stock exchanges by buying or selling securities. not in single typed ones. In this case he loses the bonus given to the seller. and takes place only when the price of the assets didn’t evolve according to the investor’s expectations. Often it is hard to make the difference between the simple placements and speculations. 2. in the same time knowing the typical risk of these placements and that is usually bigger as the investment is more rentable. 4. Simple placements. Technical transactions. it becomes a speculation if these are soon sold with the aim of making profit. as well as other stock exchange products.3. 3.versa. letting it lose its validity. and will modify its composition when the initial conditions will change. The basic principle of the exchange speculations is the one of every business: buy low. as 9 . This way and vice. Through simple placements it is aimed to obtain revenues and safety of the investment. 5. Exchange speculations. Of course. The options expiration means actually the abandon. The main rationale of the options is hedging against risks. knowing all conditions. These placements goal is to obtain revenue such dividends. in fact. the aimed objectives are different. An investor who places his available capital on stock exchanges is expecting to fructify as much as possible this capital. Exchange speculations are characterized by the profits aimed by the speculator and the risk that this assumes.
It is important to make the difference between the speculator and player. There are different types of speculators: a) Those who speculate rate variations from one day to another. 10 . d) Permanent speculators. goes on hazard and in this case. their profit being the difference gained because of the fact that he bought cheaper and sold expensive.when the speculator stakes on the increase of rates. etc.the great speculator and financial expert George Soros was saying: “an unsuccessful speculation becomes an investment”. For example. c) Long. gambler. Speculation is necessary on the stock exchanges and it is ethical because the profit earned by the speculator is not for free. years). Usually. handled transactions seem more like to a gamble. but of different senses and it actually consists from buying one value paper from one stock exchange. Arbitrage in securities Through arbitrage an investor aims obtaining profits through successive placements. In practice there are two big types of speculations according to the way of titles rate evolution: a) Bull speculations. Agiotage is also a false speculation and it is a work through which it is aimed the artificial increase/decrease of the rates by hawking false news about the situation of a certain company. Due to this fact the speculator won’t take into account ethical problems and. In fact. roulette. the speculator is a well informed person. who regard rate variations over linger time periods (months. b) Bear speculations. buy and subsequently sell them at a higher price after also they will increase it. with deep knowledge concerning stock exchanges and who are based on rational forecasts. sufficiently low. where its price is lower and then sell it simultaneously or immediately on a market where the price of the respective value is higher. Each speculators objective is to obtain profit from each and every transaction he concludes and expects that this happens because of the assumed risk. will “get rid of” those titles which he doesn’t trust anymore and will sell them to less acknowledged investors. for example. The player. Their intervention diminishes bourse fluctuations and thanks to them. b) Those who speculate rate fluctuations according to the registered average for a certain period. but is the result of the assumed risks.when the speculator stakes on the decrease of rates. the investors interested in placements or sales have the possibility to find easier the opposite position. their profit being represented by the positive difference gained when selling at higher rates and buying back at lower.term speculators. those who practice agiotage artificially decreases the price and when it reaches the wanted level. it is better when on stock exchanges act well informed speculators.
It is important to underline that arbitrage is not accessible to everyone. Transactions expenditures and the commissions payed to intermediaries. Unlikely the speculation. Before handling an arbitrage an investor has to study attentively besides the titles rates. the buyer of securities becomes in the same time a speculator seller for the same titles. losing on speculative contracts that he signed. respectively the seller becomes also a speculator buyer. always knowing the rates variations and to have the possibility of operating on more stock exchanges. Practically. when handling an arbitrage the next must be taken into account: • • • • Firstly. for him it is equal if the risk takes place or not. Hedging Hedging operations are those bourse operations through which the person who initiate them aims to cover his investment against the risks of changes in his titles rates. in order to establish the differences. Even if the purpose of the hedging differs from the one of speculators. hedging means investors securities protection in the conditions of an instable market. a number of other factors that could annihilate the expected earnings. or in the speculative one that he initiated). but also are canceled the chances of obtaining profits. Hence. this is the price of protecting his securities against the depreciation. As in the case of a speculation. that is to issue buy and sell orders. the hedging takes place this way: parallel to the buy-sell bourse operations exposed to risks. the arbitrage is based on already known rates and not on forecasts and this way the only result for the investor is the gain. the technique of its realization is the same. the one who wishes to cover will initiate speculative transactions of the same type and in the same conditions (sum. This way. But. So. the rate of the securities on different markets. it is necessary to be very well informed. On one of those two positions on which he is (in the initial transaction. are transferred. along with the gain. 11 . in the case of hedging the loss. In fact. and not earning profits. settling day). given by the certain differences between rates. This way. More. Currency rates and their converting (if the arbitrage takes place on international markets). where one of the partners implied in transaction wins whilst the other loses. but of different sense. but only to the stock exchange transactions specialists or even more to those from the interior of the bourse system.Arbitrage is considered to be riskless and owing to this the investor may remain with low revenues. the hedging initiator will win and will lose on the other. Insurance expenditures. if the events evolve in a favorable way the investor has canceled any chance to obtain the profit. This is because in order to obtain profits arbitrage. through hedging are avoided losses.
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