# Derivative Markets 101

• Ask Price: Price at which you can buy a stock. [Bask]. Also referred to as as Offer price.
• Bid Price: Price at which you can sell. [BidS]

The prices above are defined from the Market-makers perspective. Market-makers sell for a high price and buy for a low price. Hence you end up buying for a higher price and selling for a lower price if you deal with a market-maker.

• Bid-Ask spread: The difference between the price at which you can buy and the price at which you can sell. $Bid-Ask -spread = 48$  – 50 i.e You buy at $50$ $and sell at$48 per share. If you buy and sell immediately, your transaction cost would not just be the bid-ask spread but would also include twice the commission.
• Market order: Instruction to trade a specific quantity of the asset immediately, at the best price that is currently available.
• Limit order: Instruction to trade a specific quantity of the asset at a specified or better price.
• Long and Short Positions
1. Long => Buyer, Going Long ≡ Lending. Long position profits when prices go up.
2. Short => Seller, Going Short ≡ Borrowing. Short position profits when prices go down.
• Short Sale: A short sale is a form of borrowing money which typically involves the sale of a stock that you do not own (Originally borrowed from a lender) and is done so on a premise that you would purchase the stock back when the price goes down and return it to the lender, thus benefiting from the price variations.
1. Lease rate:  Payment you make to the lender to borrow the asset. [ ≡ Dividends when dealing with short-sold stocks]
2. Haircut: Extra amount that the lender charges to protect himself from credit risk. The percentage by which securities are devalued when used as collateral to provide a ‘cushion’ for the lending parties in case the market value falls.
3. Repo rate: In the bond market, this is the interest that the lender pays to you for holding your collateral. [Also called as short rebate in the stock market]. It is determined by the demand of the asset in the market and is generally less than the market rate of interest. The difference between the Repo rate and the market rate of interest is is another cost on your short sale.