Shares are purchased and sold on the primary and secondary share markets. To invest in the share market, investors acquire a call option, which is the right to buy a share, or a put option, which is the right to sell a share. In general, investors buy put options if they expect prices to rise, and call options if they expect prices to fall.
For currency rate exchanges, investors may buy a swap option. The value of a derivative depends on the value of the underlying asset.
The various classifications of derivatives relevant to share market investment are:
A forward contract is agreements between two parties purchase or sell a product in the future, at a price determined now. This mutual agreement satisfies the profit motive of both the buyer and seller, and the uncertainties and risks of price fluctuations in the future are aborted.
A future contract is different from a forward contract in the sense that the former requires the presence of a third party and the commitment for trade is simply notional.
Before a share is chosen for investment, a technical analysis of the share is performed. The price and volume of a share over a period of time are tracked and then a business plan is constructed. A fundamental analysis involves a close study of the company associated with the share, and its performance over time. The fundamental analysis is important for the share market investor.
The price levels of a traded share are as follows:
Opening Price: This is the price at which the market opens. In other words, it is the price of the first transaction.
Closing Price: This is the price at the time of closing of the market or the price of the last trade.
Intra-Day High: This denotes the maximum price at which the share was traded in the day.
Intra-Day Low: This is the minimum price at which the share traded in the day.
Last Updated on : 5th July 2013