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STOCK MARKETS 101

Welcome to Stock Markets 101. Whether you are new to investing, or just want to brush up on the basics, this page will provide a helpful introduction to the most popular products traded on the stock market. Please click on the links below to learn more.

What are Shares?

What is an Option?

What is a Warrant?

What are CFDs?

What are Futures?

Once you have familiarised yourself with the products above, you will be ready to visit our Trading Strategies page where you can find the strategy that best suits you.

What are Shares?

Shares represent partial ownership in a company. When you purchase shares in a company, you own part of that company. Shares may only be traded in publicly listed companies. As a shareholder, you are entitled to the following benefits:

  • A share in the company's profits. These profits can be distributed by means of dividends and/or or capital growth if there is a rise in share price.
  • The ability to vote in annual meetings.
  • The eligibility to participate in Rights and Bonus issues.

From a company's perspective, issuing shares is an effective way to raise capital to fund business growth. It can also provide a market valuation for a company, legitimising their perceived worth and future potential.

Learn more about Shares from the ASX

What is an Option?

An Exchange Traded Option (ETO) or Option is a derivative, meaning that its value is derived from another instrument. In the case of an equity Option, its value is based on the underlying share. In the case of an index Option, its value is based on the underlying index.

An Option is a contract between two parties giving the buyer the right, but not the obligation, to buy or sell a security at a predetermined price (strike) on or before a predetermined date (expiry). To acquire this right, the buyer of the contract pays a premium to the seller (writer) of the contract.

Type of Options:

  • Call Option - A call Option gives the buyer the right, but not the obligation, to buy the underlying shares at the strike price, on or before the expiry date.
  • Put Option – A put Option gives the buyer the right, but not the obligation, to sell the underlying security at the strike price, on or before the expiry date.

Terminology:

  • Underlying Security – Options traded on the ASX are only available on a limited number of shares and indices. The shares and indices that the options are traded on are referred to as the 'Underlying Security' or'Underlying'.
  • Contract Size – For equity Options, the standard number of shares covered by one option contract is 100.
  • Expiry date – This is the date the Option expires. If you plan on exercising the Option you must do so on or before the expiration date. For equity Options, this date is commonly the last Thursday in a calendar month where there is also a corresponding Friday (e.g., if 30 April was a Thursday, Options expiry for that month would fall on Thursday 23 April as this is the last Thursday that has a corresponding Friday).
  • Exercise Price – The exercise price is the predetermined buying or selling price for the underlying shares if the Option is exercised.

Trading Options comes with many advantages. For one, you may gain exposure to shares at only a fraction of the share price. Options can even allow you to enjoy limited risk with unlimited upside potential.

Learn more about Options from the ASX

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What is a Warrant?

A Warrant is a derivative security that provides the buyer with the right, but not the obligation, to buy or sell a security at a predetermined price (strike) on or before a predetermined date (expiry). However, unlike an Option, a Warrant is issued and guaranteed by the company and consists of non-standardised features. These features vary between warrant types, and are modified to meet the needs of a wide range of investors.

Types of Warrants:

  1. A Call Warrant gives the buyer the right, to buy the underlying shares at the strike price, on or before the expiry date.
  2. A Put Warrant gives the buyer the right to sell the underlying shares at the strike price, on or before the expiry date.

Terminology:

  • Underlying instrument – Warrants are issued over an underlying instrument. This can be a share, basket of shares, index, currency or commodity.
  • Expiry date – This is the date the Warrant expires. If you plan on exercising the Warrant you must do so on or before the expiration date, depending on the Exercise Style.

    Exercise Style – The exercise style of Warrants can be either American or European style. American style means that you can exercise the Warrant at any time on or before the expiry date. European style means that you can only exercise the Warrant on the expiry date of the warrant.
  • Exercise price – The exercise or strike price is the amount that must be paid in order to either buy the call warrant or sell the put warrant. The payment of the strike price results in a transfer of the specified amount of the underlying instrument.
  • Conversion Ratio – A ratio used to calculate the number of equity Warrants needed in order to buy or sell one underlying asset. For example, if the conversion ratio to buy stock XYZ is 3:1, this means that the buyer needs three Warrants in order to purchase one share. In the case of an index Warrant, an index multiplier would be listed instead of a conversion ratio. This figure would be used to determine the amount payable to the holder upon the exercise date.

Similar to most derivative products, Warrants can provide an investor with great leverage and flexibility. The extremely customisable nature of their characteristics make Warrants an ideal solution for an array of investment purposes.

Learn more about Warrants from the ASX

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What are CFDs?

CFD is an abbreviation for Contract for Difference – and CFDs are simply that: a contract where the buyer is credited or liable for the difference in value of a particular financial instrument between the time a position is opened and closed. When you buy a CFD, you own a contract over the movement in the price of the underlying asset that is revalued in real time. The structure of CFDs allows you to gain exposure to the performance of the underlying asset – without having to own the underlying asset itself. CFDs can be traded on an extensive range of markets including shares, commodities, indices, and currencies.

It is important to be aware that there are two types of models used by CFD providers:

  1. Market Maker (MM) – MM CFDs are traded through a market maker, a CFD provider that offers synthetic CFD prices which have the potential to differ from the underlying market. Through this model, you may only trade at prices determined by the CFD provider – which may be higher or lower than the prices in the underlying market.
  2. Direct Market Access (DMA) - DMA CFDs are passed directly through to the physical market without the intervention of a broker or market maker. This provides complete order transparency, allowing clients to see their orders processed in the underlying market.

The most common advantage associated with CFDs is the power of leverage – as you can trade CFDs with margins from as low as 1%.

Learn more about CFDs from the ASX

What are Futures?

A Futures contract is an agreement to buy or sell a specified asset at a pre-determined price (futures price) and date in the future (delivery date). However, unlike an Option, a Futures contract requires the buyer to purchase the specified asset (or the seller to sell the specified asset) at the end of the contract. In other words, as the buyer of an Option may decide to exercise the contract, the buyer of a Futures contract must fulfill the contract on the settlement date. Depending on the settlement terms, physical delivery of the asset may be replaced by the cash equivalent. Futures contracts can be traded over a wide a range of financial instruments including indices, currencies, commodities and bonds.

Learn more about Futures from the ASX