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Finance GlossaryPrice Action
Price Action
Definition of Price Action
Price action is the movement of the price of a security plotted over time. Traders who study price action make trading decisions based on the analysis of raw price movements, which often includes patterns, swings, and support/resistance levels rather than relying on traditional technical indicators. Price action analysis is the skill of interpreting the sentiments and activities of the market by reading candlesticks, bar charts, and volume data.
Related Terms
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.
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.
Price Band
A price band is a regulatory mechanism or a voluntary limit set by an exchange or company that restricts the maximum and minimum price at which a security is allowed to trade for a given day. These bands, which are often expressed as a percentage above and below the previous day's closing price, are mainly implemented to prevent excessive volatility and market manipulation. Trading in the security is stopped or suspended if the price moves outside the set price band.
Portfolio
A Portfolio is a collection or grouping of financial assets of an investor. A portfolio can have a diversified mix of assets such as equity shares, mutual fund units, government bonds, fixed deposits, gold, and real estate. The aim of building a portfolio is to manage the risk by diversification, ensuring that the poor performance of one asset is compensated for by the high performance of another. Portfolio management is one of the most important elements of financial planning for an investor.
Commodity Futures
A commodity futures is a contract between two parties to buy or sell an underlying commodity like gold, silver, corn, and others are a pre-determined price and date.
A commodity futures contract is an obligation that’s entered into not just by retail traders but also companies who want to lock in a favorable price. This is the place to understand all about futures contracts in trading.
A commodity futures contract is an obligation that’s entered into not just by retail traders but also companies who want to lock in a favorable price. This is the place to understand all about futures contracts in trading.
Over-Allotment Option
An Over-Allotment Option, often referred to as a Greenshoe option in the Indian primary market, gives the underwriters the right to sell more shares (usually 15%) over and above the original IPO size if there is strong demand. If the share price drops below the issue price, the underwriters can use the proceeds from the extra shares to repurchase shares in the open market for support. If the price goes up, they exercise the option and sell the extra shares to the market. This mechanism is regulated by SEBI in India, and the primary purpose is price stabilisation.
Dividend Per Share
Dividend per share indicates the amount of dividends paid as a ratio of the number of shares outstanding. Or, dividend per share could also refer to the product of earnings per share and dividend payout ratio.
Thus, the formula to calculate dividend per share is:
DPS: Total dividend amount / Number of shares outstanding
Or
DPS: Earnings Per Share x Dividend Payout Ratio
An investor can determine how much dividends they stand to earn for each share they own by calculating dividends per share.
Thus, the formula to calculate dividend per share is:
DPS: Total dividend amount / Number of shares outstanding
Or
DPS: Earnings Per Share x Dividend Payout Ratio
An investor can determine how much dividends they stand to earn for each share they own by calculating dividends per share.
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