What is Limit Order: Definition & Meaning Explained

Derivative

A derivative is a financial contract that is designed to derive its value from a single or group of underlying assets, generally between two parties or more. It contains a pre-agreed date of delivery and price.

The most common examples of a derivative contract are:

Futures
Options
Forwards
Swaps

A derivative can be bought and sold on an exchange or over the counter. Since derivatives derive value from underlying assets, their price is known to fluctuate when the underlying asset gains or loses value.

Common Stocks

A common stock is a type of share that gives the holder the right to a part of a company’s profits, voting on key policies and decisions. Common stockholders have an advantage over preferred stockholders because they can:

Get higher returns
A part of the assets left after a company is liquidated (in case of default)

Debt To Equity Ratio

The debt to equity ratio is a measure of a company’s financial health that’s calculated by dividing liabilities from shareholder equity.

Debt to equity ratio: Total liabilities / Shareholder equity

A high debt to equity ratio means that a company is taking on more debt to run its business. A low debt to equity ratio means that a company is operating at low debt.

That’s why investors calculate the D/E ratio to understand a company’s ability to operate without debt. Generally, D/E is used for comparative analysis within sectors, not across industries because the ideal debt ratio may vary.

Gold ETF

A gold ETF is an exchange-traded fund that invests in gold bullion. Every unit of a gold ETF is backed by one gram of gold of assured purity that is held in the physical or demat form (digital).

Gold ETFs combine the lucrative value of gold with the liquidity of stocks. Thus, gold ETFs track the price of gold bullion and are traded on stock exchanges like NSE and BSE.

Fair Value

The fair value of a stock, product, or service is the price at which the buyer and seller willingly agree on without being on the losing end of the deal. Think of fair value as a win-win situation for both parties, assuming that all conditions are normal.

Say Mr. Apple is offered to buy shares of Mr. Orange’s company at Rs. 1000 per share. Mr. Apple evaluates the business and figures out that he can sell the same shares for Rs. 1200, even though Mr. Orange is content to sell the shares at Rs. 200 lower. Both parties agree on the deal at Rs. 1000 because both view it as a good deal.

The formula for the fair value of a stock or index is:

Fair Value = Cash * { 1 + r (X / 360)} - D

Where,

Cash = Latest stock or index value

r = interest rate on purchase

x = number of days to contract expiry

Dividend = Dividends

The definition of fair value is slightly different in the futures market. In the futures market, the fair value is reached when the supply meets the demand, which simply means that the spot price is equal to the futures contractprice.

However, due to inherent volatility of the markets, the price of a futures contract is known to fluctuate around the fair value of a stock or index. Thus, in the fair value in the context of futures is what the price of the contract should be, given the value of the stock or index, dividends, and others.

*All securities mentioned on this website are exemplary and not recommendatory.

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Limit Order