Write explanatory notes on the following Stock Exchange terms (a) Bull (b) Bear (c) Option (d) Backwardation (e) Contango

Answer Details

The following are terms used on the Stock Exchange, the organised market for buying and selling existing (second-hand) shares and stocks.

(a) Bull

A bull is a speculator on the Stock Exchange who expects the price of shares to rise in the near future. He therefore buys shares now at the current low price with the intention of selling them later at a higher price to make a profit. A market in which prices are generally rising is called a bull market.

(b) Bear

A bear is a speculator who expects the price of shares to fall. He therefore sells shares now (sometimes shares he does not yet own) at the current high price, hoping to buy them back later at a lower price to make a profit. A market in which prices are generally falling is called a bear market.

(c) Option

An option is a right, bought for a fee (premium), which gives the holder the choice either to buy or to sell a stated quantity of shares at an agreed price within a fixed period. The holder may exercise the option or allow it to lapse; his loss is limited to the premium paid.

(d) Backwardation

Backwardation is the fee or premium paid by a bear (a seller who has sold shares he does not possess) to the buyer in order to postpone the delivery of the shares to the next account or settlement date.

(e) Contango

Contango is the fee or interest paid by a bull (a buyer) to the seller in order to postpone payment for and delivery of the shares he has bought until the next settlement date. It is the opposite of backwardation.