Risk of Higher Volatility
Volatility refers to the dynamic changes in price that a security/derivatives contract
undergoes when trading activity continues on the Stock Exchanges. Generally, higher
the· volatility of a security/derivatives contract, greater is its price swings.
There may be normally greater volatility in thinly traded securities / derivatives
contracts than in active securities /derivatives contracts. As a result of volatility,
your order may only be partially executed or not executed at all, or the price at
which your order got executed may be substantially different from the last traded
price or change substantially thereafter, resulting in notional or real losses
Risk of Lower liquidity
Liquidity refers to the ability of market participants to buy and/or sell securities
/ derivatives contracts expeditiously at a competitive price and with minimal price
difference. Generally, it is assumed that more the numbers of orders available in
a market, greater is the liquidity. Liquidity is important because with greater
liquidity, it is easier for investors to buy and/or sell securities / derivatives
contracts swiftly and with minimal price difference, and as a result, investors
are more likely to pay or receive a competitive price for securities / derivatives
contracts purchased or sold. There may be a risk of lower liquidity in some securities
/ derivatives contracts as compared to active securities / derivatives contracts.
As a result, your order may only be partially executed, or may be executed with
relatively greater price difference or may not be executed at all.
- Buying or selling securities / derivatives contracts as part of a day trading
strategy may also result into losses, because in such a situation, securities /
derivatives contracts may have to be sold / purchased at low / high prices, compared
to the expected price levels, so as not to have any open position or obligation
to deliver or receive a security / derivatives contract.
Risk of Wider Spreads
Spread refers to the difference in best buy price and best sell price. It represents
the differential between-the price of buying a security / derivatives contract and
immediately selling it or vice versa. Lower liquidity and higher volatility may
result in wider than normal spread for less liquid or illiquid securities / derivatives
contract. This in turn will hamper better price information.
The placing of orders (e.g., “stop loss” orders, or “limit” orders) which are intended
to limit losses to certain amounts may not be effective many a time because rapid
movement in market conditions may make it impossible to execute such orders.
- “market” order will be executed promptly, subject to availability of orders
on opposite side, without regard ‘to price and that, while the customer may receive
a prompt execution of a “market” order, the execution may be at available prices
of outstanding orders, which satisfy the order quantity, on price time priority.
It may be understood that these prices may be significantly different from the last
traded price or the best price in that security / derivatives contract.
- “Limit” order will be executed only at the “limit” price specified for the
order or a better price. However, while the customer receives price protection,
there is a possibility that the order may not be executed at all.
- A stop loss order is generally placed “away” from the current price of a
stock / derivatives contract, and such order gets activated if and when the security
/ derivatives contract reaches, or trades through,· the stop price. Sell stop orders
are entered ordinarily below the current price, and buy stop orders are entered
ordinarily above the current price. When the security / derivatives contract reaches
the pre -determined price, or trades through such price, the stop loss order converts
to a market/limit order and is executed at the limit or better. There is no assurance
therefore that the limit order will be executable since a security / derivatives
contract might penetrate the pre-determined price, in which case, the risk of such
order not getting executed arises, just as with a regular limit order
Risk of News Announcement
News announcements that may impact the price of stock / derivatives contract may
occur during trading, and when combined with lower liquidity and higher volatility,
may suddenly cause an unexpected positive or negative movement in the price of the
security / contract.
Risk of Rumors
Rumors about companies / currencies at times float in the market through word of
mouth, newspapers, websites or news agencies, etc. The investors should be wary
of and should desist from acting on rumors
High volume trading will frequently occur at the market opening and before market
close. Such high volumes may also occur at any point in the day. These may cause
delays in order execution or confirmation.
- During periods of volatility, on account of market participants continuously
modifying their order quantity or prices or placing fresh orders, there may be delays
in order execution and its confirmations.
- Under certain market conditions, it may be difficult or impossible to liquidate
a position in the market at a reasonable price or at all, when there are no outstanding
orders either on the buy side or the sell side, or if trading is halted in a security
/ derivatives contract due to any action on account of unusual trading activity
or security / derivatives contract hitting circuit filters or for any other reason.
Trading on exchanges is in electronic mode, based on satellite/leased line based
communications, combination of technologies and computer systems to place and route
orders. Thus, there exists a possibility of communication failure or system problems
or slow or delayed response from system or trading halt, or any such other problem/glitch
whereby not being able to establish access to the trading system/network, which
may be beyond control and may result in delay in processing or not processing buy
or sell orders either in part or in full. You are cautioned to note that although
these problems may be temporary in nature, but when you have outstanding open position
or unexecuted order, these represent risk because of your obligation to settle all