Terminal Transactions with Securities
In jurisprudence, there are concepts of terminal and perpetual transactions. If the contract is terminal, the date for its fulfillment or the termination of the transaction is clearly stated, while in a perpetual transaction there is no such date. It's simple. In the stock market it is just a bit more complicated.
Depending on the term there are terminal, cash and combinatory transactions. Cash transactions (cash, spot) are known to every investor who at least once tried purchasing shares or currency: you apply, pay off securities at the current rate and receive them immediately (within two to three working days, depending on the exchange). As a rule, terminal transactions are a province of traders: it is more complicated and risky.
Terminal transactions in financial markets are operations with deferred liabilities: you conclude a contract in which at least the payment date is fixed, and when the time comes, you purchase or sell securities (currency).
The main goal of terminal transactions is to gain profit with minimal risk. Thus, operating with warrant certificate, you can refuse buying (selling) securities, if competitive environment is not in your favor.
The concept and types of terminal transactions
By conditions and the order of execution they destinguish :
- Simple term transactions: the parties fix the quotation and the date of assets transfer in the contract, and the transaction itself may be conducted outside the exchange.
- Futures: a transaction with fixed quote and execution date is conducted on the stock exchange and meets its standards.
- Warrant certificates: term transactions where a trader buys out from the seller a right to purchase securities on specified terms or to refuse.
Futures and warrant certificates act as secondary securities or derivative financial instruments. Through those you can earn money without redeeming the asset itself. It requires experience and good market knowledge.
Cash and Term Transactions Schemes
The procedure for conducting cash transactions is simple: you select and pay for the asset, and within 1-2 days it is at your disposal. With term transactions things a little more complicated. So, in the case of a simple transaction outside the exchange:
1. you contact the seller of a desired asset;
2. sign a contract in which you set the date of payment and asset transfer, as well as its rate (value);
3. When time comes, you purchase the asset on the terms fixed in the contract.
If the current quotes of an asset are higher than the price fixed in the contract, the buyer profits. If it is lower, the seller profits.
The futures, warrant certificate and other terminal transactions are more complicated on exchange floor: as secondary securities, they can be resold unlimited number of times (within the established term) and, accordingly, have their own rate. When buying futures, you can purchase an asset at a certain price. If you buy a warrant certificate, you have the right to withdraw from a bargain. In this case, you lose only the certificate value.
Only experienced traders should undertake terminal transactions. To accurately assess the quotations of assets in the future (as a rule, it is about 30-90 days) you need to know the market well enough.