Theory question 104
Stock ExchangeCommerce 2 (essay)
Write explanatory notes on the following Stock Exchange terms:
(a) Bull;
(b) Bear;
(c) Option;
(d) Backwardation;
(e) Contango.
Show the model answer
(a) Bull – a speculator who buys shares expecting prices to rise, so he can sell at a profit.
(b) Bear – a speculator who sells shares (often ones he does not have) expecting prices to fall, so he can buy back cheaper.
(c) Option – the right, bought for a fee, to buy (call) or sell (put) shares at a fixed price within a stated period.
(d) Backwardation – the charge a bear pays to postpone delivery of shares he has sold to the next settlement period.
(e) Contango – the charge a bull pays to postpone payment for shares he has bought to the next settlement period.
Bull buys expecting a rise; bear sells expecting a fall.