What are stops, puts and calls?

Wednesday 23rd January 2002 1 Comment

Q: Apart from selling/buying at market or at a limit, what other conditions can be put on a share transaction? In particular I see references to stops, puts, calls etc. What are these and can I use them in NZ?

A: The new FASTER trading system allows NZ brokers to input orders with start/stop limits or stop loss orders. If you purchase some shares and wish to sell them if they fall past a certain point then you can give your broker a stop loss order.

For example, say I buy some TEL shares at $6.45 and believe they will continue to rise. However, just in case they start to fall, I decide that I will sell them if the price drops below $6.00. I can give my broker a 'stop loss order' so that as soon as the shares drop below my set price, they will be sold. If the price continues to rise, nothing happens.

Puts and calls aren't types of orders. They are derivatives. A derivative gives the holder the right to buy (call option) or sell (put option) the underlying security at a known fixed price (exercise price) up until a known fixed time (expiry date) in the future. Options and warrants can be traded prior to exercising but become worthless after the expiry date.

Comments from our readers

On 13 February 2013 at 5:08 pm Paul said:

Does this mean "A derivative gives the holder the right to buy (call option) or sell (put option) the underlying security at a known fixed price (exercise price) up until a known fixed time (expiry date) in the future", that I can sell once the price works in my favour, and I can sell or buy, before the expirey date? So I don't have to wait until the expiry date? Thanks :-))