INTRODUCTION

CAPITAL MARKET
Capital market is a market where buyers and sellers engage in trade of financial securities like bonds, stocks, etc.
The buying/selling is undertaken by participants such as individuals and institutions. Capital markets help
channelise surplus funds from savers to institutions which then invest them into productive use. Generally, this
market trades mostly in long-term securities

Primary Market Secondary Market

Primary markets deal with trade of new issues of stocks and other securities. Initial Public Secondary Market is where investors buy and sell securities from other investors; for
Offering (IPO) is the first sale of stocks issued by a company to the public. Prior to an IPO, a example, if you go to buy Apple stock, you would purchase the stock from investors who
company is considered a private company, usually with a small number of investors (founders, already own the stock rather than Apple. Apple would not be involved in the transaction
friends, family, and business investors such as venture capitalists or angel investors)

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 CAPITAL MARKET PLAYERS
Intermediary whose role is to put two counterparties in
communication without any risk assumption. It therefore does not
Broker
Market Players take a stand on its own. He receives a brokerage fee from both
counterparties

Market participants can come in many

varieties: Specialists, Market makers,
dealers, brokers, prop traders,
institutional traders, retail traders,
hedgers, gamblers, investors, etc.
One way to classify market participants
is as sell side, and buy side:
• Buy-Side – is the side of the financial
market that buys and invests large
portions of securities for the purpose
of money or fund management.
Company that buys and sells financial instruments in their own name
Dealer and on their own behalf or on behalf of third parties, also taking on
positions at risk
Equity Financial intermediation company, whose business mainly consists of
Investment placing securities and participating in the capital of other companies,
Position
Bank mainly with the aim of promoting their corporate reorganization, production
Keepingdevelopment or the satisfaction of financial needs

• Sell-Side – is the other side of the
financial market, which deals with
the creation, promotion, and selling
of traded securities to the public
Central Public issuing institutions that deal with managing the monetary policy of the
countries or economic areas that share the same currency. Some examples:
Bank FED, ECB, Bank of England

Asset Asset management refers to the management of people’s assets. The term also
applies to dealing with other organizations’ or companies’ investments. Assets
Manager include either intangible or intangible assets

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 DEALING/TRADING ROOM
WHAT IS EXAMPLES

A Dealing-room gathers traders operating on

financial markets. The dealing room is also
often called the front office. The banks’ capital
market and money market (domestic and
currencies) businesses, foreign exchange,
long-term financing, bond market are
gathered in today’s dealing room operation.

A trading-room serves two types of business:

• Trading and arbitrage, a business of
Investment banks and brokers, referred to
as the sell side
• Portfolio management, a business of asset
management companies and institutional
investors, referred to as the buy side

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 BULL AND BEAR MARKET
BULL MARKET
The Market going up aggressively over a period of time. As the market starts to rise,
there becomes more and more greed in the stock market. You see more and more
people thinking, “Oh yeah let’s put money into the market because it’s going up”
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BEAR MARKET
It is a Market where quarter after quarter the market is moving down about 20
percent. That signals a bear market, and when that happens people start to get
really scared about putting money into the stock market
 LONG POSITION
BULLISH STRATEGY

You bought a financial instrument and aim to

appreciate it
We consider an operator who holds securities
in the portfolio. Its profit or loss (P&l) are
directly proportional to the change in price
during the time (P)

The graph shows the profit and loss profile as

a function of the price of the security, where P0
is the current price of the security ("spot") or, in
the case considered, the purchase price of the
security.
Ø If the price remains unchanged at P0 there is no loss or profit
Ø If the price increases, the profit is equal to the difference between the
P&l = P - P0 current price and the purchase price
Ø If the price falls the loss is the difference between the purchase price and
the market price.

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 SHORT POSITION
BEARISH STRATEGY

You sold a financial instrument and are aiming

for its depreciation

The graph shows the profit and loss profile as a

function of the price of the security, where P0 is
the current price of the security ("spot") or the sell
price of the security.

The profit and loss profile can be represented by

the following equation:

P&L = P0 - P Ø If the price remains unchanged at P0 there is no loss or profit

Ø If the price decreases, the profit is equal to the difference
between the sell price and the market price
Ø If the price rises , the loss is equal to the difference between the
market price and sell price

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 LEVERAGE
Leverage is a mechanism used by investors to amplify their exposure to any market by paying less than what is actually required as a full investment.
Consequently, leverage in stock transaction means the trader can have more positions in the stock without actually paying the full purchase price and this is
also referred to as margin trading. In such a scenario, an investor will buy a certain percentage of shares (according to current regulations, at least half of
the amount) and will borrow the remaining from a broke

Theory Trading Places

Let's assume that our capital is € 100 and we can still
invest for a value of € 1,000. In this case the leverage is Orange juice future is sold as concentrate (all water is
removed) in units of "pounds solid", which are
greater than in the previous example, because the
amount invested (€ 1,000) is 10 times higher than the approximately 1.17 pounds per unit (All prices are in
How do you invest € 1,000, having only € 100? cents per pound). For example, the September
equity (€ 100): the leverage is therefore equal to 10 = There are two main ways: contract closed at 76.5 cents per pound solid. At
INVESTED CAPITAL / CAPITAL OWN = 1,000 / 100 = 10 • Borrowing money from your financial
The effects of leverage are manifested in the case of a 15,000 pounds per contract, this was the equivalent of
intermediary (collateral) $11,483 per contract
profit, but also in the case of a loss:
• Using financial instruments that have leverage
a. Suppose to invest € 100 for a value of € 1,000,
into their structure (futures, options) Winthorpe and Valentine make a gazillion bucks and
using a leverage of 10. We assume that the
simultaneously break Duke and Duke
return on the investment is 10%, or € 100. Our
capital is now € 200, so we have a 100% return
Valentine and Winthorpe have delivered on all their
on € 100.
b. Suppose to invest € 100 for a value of € 1,000, short-sold contracts
Winthorpe says "20.000": total number of contracts
using a leverage of 10. Our investment ended
they sold at an average price per contract of 122 cents
with a 10% loss on the value invested: we lost €
100 (€ 1,000 - 10 * € 1,000). So a 10% loss on the per pound. Let's assume they bought at an average
price per contract of 38 cents per pound.
invested value, using a leverage of 10, translates
into a 100% loss of our capital! Profits: (122 cents/pound - 38 cents/pound) * 15000
pounds/contract * 20000 contracts = $252.000.000
The previous examples, although extremely simplified,
clearly show the pro- con of leverage:
a favourable investment will generate higher profits, There's a margin call to settle the Dukes'
account…..but Duke & Duke have no money and
because there is a multiplicative effect, while a wrong
investment will result in a greater loss, compared to Market is closed!!!
using only equity

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 TRADE ORDERS

When trading asset classes that are highly volatile or trading in a fast-
moving market, slippage can be the difference-maker between a
winning and losing position. Understanding trade orders beyond the
traditional “buy” and “sell” is very important. Placing a trade order
seems intuitive – a “buy” button to initiate a trade and a “sell” button
to close a trade. Although executing trades is possible in such a way, it
is very inefficient as it requires constant monitoring of the trade. Using
just the buy and sell buttons can result in slippage. This is the
difference between the price expected and the price at which the
order is actually filled. There are different common types of orders that
can be placed

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 Is a trade order to purchase or sell a stock at the current market price. A
key component of a market order is that the individual does not control
the amount paid for the stock purchase or sale. The price is set by the
market. A market order poses a high slippage risk in a fast-moving
market. If a stock is heavily traded, there may be trade orders being
executed ahead of yours, changing the price that you pay

Is a trade order to purchase or sell a stock at a

specific set price or better. A limit order
prevents investors from potentially purchasing
Time Weighted Average Price is an or selling stocks at a price that they do not
order that attempts to execute an order
want. Therefore, in a limit order, if the market
uniformly over a given time horizon. The
price is not in line with the limit order price, the
main goal of this order is the time-
order will not execute. A limit order can be
weighted average price calculated from
referred to as a buy limit order or a sell limit
the time you submit the order to the time order
it completes

The Volume Weighted Is a trade order designed to limit (and therefore

Average Price is a trading protect) an investor’s loss on a position. A stop
benchmark used by traders order sells a stock when it reaches a certain price.
that gives the average price a Although a stop order is generally associated with
security has traded at a long position, it can also be used with a short
throughout the day, based on position. In that case, the stock will be purchased
both volume and price if it trades above the stop order price

Is a conditional trade order that combines the features of a stop

and limit order. A stop-limit order requires placing two prices – the
stop price and the limit price. Once the stock hits the stop price,
the order becomes a limit order. Stop-limit orders, as opposed to a
stop order, guarantee a price limit. On the other hand, a stop order
guarantees an order execution but not necessarily at the stop
order price

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 INSIDER TRADING
Insider trading refers to the practice of purchasing or selling a publicly-traded company’s securities
while in possession of material information that is not yet public information. Material information
refers to any and all information that may result in a substantial impact on the decision of an investor
regarding whether to buy or sell the security.
By non-public information, we mean that the information is not legally out in the public domain and
that only a handful of people directly related to the information possess

“And he had an ethical by-pass at birth. A funny

line. “Ethical” is another word for moral, and a
“by-pass” is a serious heart operation”
This is a way of saying that Gekko was born without
morals or ethics, or that that were by-passed at birth

A young and impatient stockbroker is

willing to do anything to get to the top,
including trading on illegal inside
information taken through a ruthless
and greedy corporate raider who
takes the youth under his wing
“If the SEC found out, I could go to jail. That’s
inside information, isn’t it?”
The SEC is the Securities and Exchange
Commission, which regulates the sale of stocks.
“Inside information” is a key legal term which
refers to information that is not allowed to be
passed on by company executives or employees “Start buying Anacott Steal across the boards.
to others, since it could effect stock prices Use the off-shore accounts and keep it quiet”
In this case, to buy something “across the boards”
is to buy it using many different accounts. An “off-
shore” account is one that is located outside the
US, often in small island-nations like the Cayman
Islands

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