Theory question 105
Stock Exchange(a) Differentiate between the following: (i) a factor and a broker; (ii) a stock exchange and a commodity exchange.
(b) Explain the following terms as used in the commodity market: (i) open outcry; (ii) futures contract; (iii) clearing system; (iv) pit outcry.
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(a)(i) A factor is an agent who has possession of the principal's goods, may sell in his own name and fix the price; a broker does not hold the goods, only brings buyer and seller together for a commission (brokerage) and sells in the principal's name.
(ii) A stock exchange is a market for second-hand securities (shares, stocks, bonds); a commodity exchange is a market for raw materials and produce (cocoa, coffee, grains, metals) traded by grade, sample or description.
(b)(i) Open outcry: trading in which dealers shout bids and offers aloud (and use hand signals) on the trading floor so that all can hear.
(ii) Futures contract: an agreement to buy or sell a stated quantity of a commodity at a price fixed now, for delivery at a future date; used to guard against price changes (hedging).
(iii) Clearing system: the arrangement (clearing house) that records, matches and settles trades between members, guaranteeing that deliveries and payments are made.
(iv) Pit outcry: open outcry taking place in a 'pit', a ring or sunken area of the exchange floor where dealers in one commodity gather to call out prices.
A factor holds the goods; a broker does not.