Read the following text, paying particular attention to the highlighted words.
Trading in Other Securities
Exchanges trade in all forms of securities. While the general operations of exchanges apply to all securities trading, there are some differences. In particular, trades in nonstock securities are often managed by financial intermediaries other than brokers.
Bonds provide a way for companies to borrow money. People who invest in bonds are lending money to a company in return for yearly interest payments. Bonds are traded separately from stocks on exchanges. Most bonds are bought in large quantities by institutional investors - large investors such as banks, pension funds, or mutual funds.
Options are traded on many U.S. stock exchanges, as well as over the counter. Options writers offer investors the rights to buy or sell - at fixed prices and over fixed time periods - specified numbers of shares or amounts of financial or real assets. Writers give call options to people who want options to buy. A call option is the right to buy shares or amounts at a fixed price, within a fixed time span. Conversely, writers give put options to people who want options to sell. A put option is the right to sell shares or amounts at a fixed price, within a fixed time span. Buyers may or may not opt to buy, or sellers to sell, and they may profit or lose on their transactions, depending on how the market moves. In any case, options traders must pay premiums to writers for making contracts. Traders must also pay commissions to brokers for buying and selling stocks on exchanges. Options trading is also handled by options clearing corporations, which are owned by exchanges.
Futures contracts are also traded on certain U.S. exchanges, most of which deal in commodities such as foods or textiles. Futures trading works somewhat like options trading, but buyers and sellers instead agree to sales or purchases at fixed prices on fixed dates. After contracts are made, the choice to buy or sell is not optional. Futures contracts are then traded on the exchanges. Commodities brokers handle this trading.
Futures and options traders often judge markets trends by monitoring compiled indexes and averages of stocks, usually organized by industry or market ranking. Among the most closely watched U.S. indexes are the Dow Jones averages and Standard & Poor's.
Now try the exercises. Exercise
Back to AWL Exercises: Contents