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 securities such as shares and stocks.

(a) Bull

(i) A bull is a speculator on the Stock Exchange who expects the prices of shares to rise.

(ii) He buys shares at the current price in the hope that their prices will rise before the end of the account period, so that he can sell them at a higher price and make a profit.

(b) Bear

(i) A bear is a speculator on the Stock Exchange who expects the prices of shares to fall.

(ii) He sells shares, sometimes shares he does not yet own, at the current high price. He hopes to buy them later at a lower price before delivery is due, thereby making a profit.

(c) Option

(i) An option is the right, obtained on payment of a premium, to buy or sell a specified quantity of shares at an agreed price within an agreed future period.

(ii) The holder is free to exercise the right or allow it to lapse if it is not profitable to do so.

(iii) An option to buy is called a call option, while an option to sell is called a put option.

(d) Backwardation

(i) Backwardation is a fee or premium paid by a seller, especially a bear, who is unable to deliver the shares sold on the agreed settlement date.

(ii) The fee is paid in order to postpone or carry forward the delivery of the shares to the next account or settlement date.

(e) Contango

(i) Contango is a Stock Exchange term meaning the postponement of payment for securities until the next account or settlement date.

(ii) It is the extra charge or interest paid by a buyer, especially a bull, for delaying payment and taking delivery of the securities purchased.

(iii) The day on which the postponed payment is made is called the contango day.