Trading in Financial Markets Chapter V

The Markets Financial markets consists of exchange-traded and over-the-counter (OTC) markets. Exchange-traded market has a role in ensuring the contracts and organizing trading. Over-the-counter market is not officially conducted through an exchange.

Long and Short Positions in Assets Long is buy position. Example: the purchase of 100 IBM shares (exchange-traded) and the purchase of 1,000 ounces of gold (OTC).

Long and Short Positions in Assets Short is sell position. Example: the sale of GBP1 million for dollars (exchange-traded) and the sale of $1 million of General Motor’s bonds (OTC).

Short Sales Short sales is selling an asset which is not owned with the intention of buying it back later. The process is conducted through a broker who borrows shares from another client and sells them on an exchange. At some position, the investor will close out the position by buying shares returned to the previous client.

Short Sales The investor gains from a declined share price and vice versa. If, at any time, the broker runs out of shares to borrow, the investor is short-squeezed and forced to close out the position immediately, although not ready to do so. Investors are required to maintain a margin account.