Slide MGT305 Slide05

Trading in Financial
Markets
Chapter V

The Markets
• Financial markets consists of exchange-

traded and over-the-counter (OTC) markets.
• Exchange-traded market has a role in
ensuring the contracts and organizing
trading.
• Over-the-counter market is not officially
conducted through an exchange.

Long and Short Positions in
Assets

• Long is buy position.

• Example: the purchase of 100 IBM shares
(exchange-traded) and the purchase of

1,000 ounces of gold (OTC).

Long and Short Positions in
Assets

• Short is sell position.

• Example: the sale of GBP1 million for
dollars (exchange-traded) and the sale of
$1 million of General Motor’s bonds
(OTC).

Short Sales
• Short sales is selling an asset which is not owned

with the intention of buying it back later.
• The process is conducted through a broker who

borrows shares from another client and sells them
on an exchange.

• At some position, the investor will close out the

position by buying shares returned to the previous
client.

Short Sales
• The investor gains from a declined share price

and vice versa.
• If, at any time, the broker runs out of shares to

borrow, the investor is short-squeezed and forced
to close out the position immediately, although
not ready to do so.
• Investors are required to maintain a margin

account.