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MENTORING - Fundamentals - Financial institutions and instruments - Coggle…
MENTORING - Fundamentals - Financial institutions and instruments
Cash, futures, options
Cash - own house - If you are buying a cash stock, you are buying ownership.
Futures - Rent/lease - Monthly expiry contracts - If you are buying futures, it means you are staying on rent in a house or in that stock.
Options - Token amount (premium) - If you are buying options, it means you are paying a token amount (or premium) for a decision to stay or leavel.
Institutions buy cash stock for long term, that is decades.
Options are different from cash and futures. Cash need real money for buying or selling. That is the reason why big institution are also called "real money"
Futures need a margin amount to be maintained in the account. There are two types of margin. Initial margin and variable margin.
An open interest is an open position in a futures contract, involving a buyer and a seller.
For a call option, a premium is paid to buy. But an initial margin is maintained (like in a future) to sell.
For a put option, also, a premium is paid to buy. But an initial margin is maintained (like in a future) to sell.
Selling of calls and puts for the first time is called writing of an option.
Options are driven by five dynamic forces: (1) delta; (2) gamma; (3) theta; (4) vega; (5) rho - and many other options greeks.
Financial institutions are those that manage other people's money. That means mutual funds, sovereign wealth funds and hedge funds and many other endowment funds.
These institutions are very powerful and have deep pockets.
That is why they need trading execution services. That means they will not buy or sell stocks or futures on their own. They want someone to execute the orders for them.
Hence these institutions buy trading services. So they are called "buy side institutions".
They go to investment banks, which offer trading services. They are called sell side institutions. Because they sell trading services. These institutions get trading commission from buy side institutions.
These sell side institutions manage the market to execute trades.
When they are managing the market, we get trades.