Financial Mumbo Jumbo Demystified

By November 28, 2014 Trading No Comments
Financial Mumbo Jumbo Demystified

 

The Long and Short of It!

I’m sure all of us have come across financial terms that sound daunting at first but in reality have a very simple meaning. People who trade tend to use words like long, short, mark to market etc. with the assumption that everyone understands what they mean. For those of us who aren’t familiar with financial jargon, let’s take a look at some basic terminology.

Going Long – When a trader goes long on a security, it suggests he has an optimistic view about the market or that security in particular. It also indicates that he has ownership of that stock and would benefit from its price rising.

Short Selling – A trader can go short or sell a security without actually possessing that security. Let’s look at a simple example – You believe the price of coconuts will fall from Rs. 10 to Rs. 8 in the near future. So you borrow a coconut from your friendly neighbourhood coconut man and sell it to your friend (or enemy?)at Rs. 10. If your prediction is right, when the price reaches Rs. 8 you pay the coconut man for the coconut you borrowed. Thus making a neat profit of Rs.2. On the flipside if the price of coconuts rises from Rs. 10 to Rs.12.. Well,tough luck!

Also Read : Why New York is the Financial Capital of the World!

Mark to Market Profit/Loss–‘Mark to market’ profit in a nutshell is unrealised profit. For instance you purchase a security at a certain price and the price of that security rises. You choose not to liquidate your position (sell your security) and stay invested in the hope of prices rising further. Your profit in this case would be a ‘Mark to Market’ profit.

Stop Loss – The term ‘stop loss’ is quite self-explanatory, it literally stops your loss at a price specified by you. Typically, you would need to instruct your broker to sell your security if the price drops below a certain point, in order to limit your losses. This option is useful for people who do not have time to monitor their investments closely or have a limited risk appetite. Stop loss is one of many stop orders available to traders. We don’t want to be worrying about our investments depreciating while relaxing at the beach do we?

Entry/ Exit load –These are charges levied in the case of mutual funds. Entry load is a fee charged at the time when the investment is made, to cover up for sales costs and other overheads.Exit load is a fine charged to investors for liquidating their investments, with a view to discourage people from selling their units in the mutual fund.

Also Read : Fixed Deposit v/s Equities – Which is better?

Bullish or Bearish Market – A bull market is one where indexes and stock prices are rising, investors are filled with optimism and the economy in general is doing well. On the other hand, a bear market indicates a downward spiral, falling markets, economy is not doing well and at times even the job market is affected. It doesn’t take a genius to invest in a bull market as prices of most securities are going up. In a bear market however, investments can be tricky. One of the many strategies that can be used, is to time investments in a way that you enter the market when the bear phase has run its course.Then again, it’s difficult to determine when that would be.

And finally, a term that we couldn’t resist mentioning. One that every Indian trader is familiar with and without which this post would be incomplete..“Maal Lao!” which roughly translated means ‘Give me my profits’. Happy investing!

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