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Meaning / Definition of

Netting

Categories: Banking,

Netting is a process the national securities clearing corporation (NSCC) uses to streamline securities transactions.To net, the NSCC compares all the buy and sell orders for each individual security and matches purchases by clients of one brokerage firm with corresponding sales by other clients of the firm. Those orders can be finalized internally by adjusting the firm's books to reflect changes in ownership.The small percentage of trades that aren't netted require firms with net short positions, whose clients sold more than they purchased, to deliver the required securities to the NSCC, or more precisely have them debited from their Depository Trust Corporation (DTC) custodial account for delivery to the NSCC. The NSCC credits those shares to the firms with a net long position, whose clients purchased more shares than they sold.In the final step, the DTC nets the total costs of buying and selling throughout the trading day to limit the amount of money that must be exchanged among firms. Firms with a net debit wire payment to the DTC, and firms with a net credit receive funds.

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Definition / Meaning of

Convertible Hedge

Categories: Strategies,

When you use a convertible hedge, you buy a convertible bond, which you can exchange under certain circumstances for shares of the company's common stock. At the same time, you sell short the common stock of the same company. As in any hedge, your goal is to make more money on one of the transactions than you lose on the other. For example, if the price of the stock falls, you're in a position to make money on the short sale while at the same time knowing that the convertible bond will continue to be at least as valuable as other bonds the company has issued. On the other hand, if the stock gains value, you hope to be able to realize more profit from either selling the convertible or exchanging it for shares you can sell than it costs you to have borrowed and repaid the shares you sold short.There are no guarantees this strategy or any other hedging strategy will work, especially for an individual investor who faces the challenge of identifying an appropriate security to hedge and the appropriate time to act.

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