Financial Trading Glossary

Financial Trading Glossary

These are some basic financial trading terms from A-Z

-A-

∟ What is Arbitrage? Arbitrage is the simultaneous purchase of cash commodities against the sale of cash commodities in the same in order to profit from a discrepancy in prices.

∟ What is an Asian Option? An Asian option is an option contract in which payoffs depend on the average price of the underlying asset during some portion of the life of the option.

∟ What is At-the-Market Order? An At-The-Market order or Market Order is an order to buy or sell a futures contract at whatever price is obtainable. These orders are particularly risky when trading low-volume financial assets.

∟ What is At-the-Money? At-the-Money is an option whose exercise price is the same as the current trading price of the underlying commodity.

∟ What is Auto-Trade? Auto-trade means opening and closing trading orders automatically without any human intervention. An auto-trade system uses computer algorithms to analyze the market 24/5 and place buy/sell orders when a certain set of criteria is met. » Expert Advisors (EAs)

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∟ What is Back pricing? Back pricing is the procedure when fixing the price of a commodity for which the commitment to purchase has been made in advance.

∟ What is Back-testing? Back-testing is the process of testing a trading strategy or a trading system against historical prices. That means you may know if a certain strategy/system has proved profitable in the past.

∟ What is the Basis? The basis is the difference between the spot/cash price of a commodity and the price of the nearest futures contract for the same or a related commodity.

∟ What is Basis Point? The basis Point is the measurement of a change in the yield of debt security. One basis point equals 1/100 of one percent.

∟ What is Bear Market? A bear market is called a financial market where prices are falling. The opposite is a bull market.

∟ What is Beta? Beta is a statistical way to measure the variability of a stock or portfolio compared to the value of the overall market. If beta = 1 that means that the price behavior of the individual security imitates ideally the price behavior of the whole market. If beta is 1.20 that means that the individual security is 20% more volatile than the market itself. If beta is 0.80 that means that the individual security is 20% less volatile than the market itself.

∟ What is the Benchmark Rate (or Base Rate)? A Benchmark Rate is the reference rate of interest charged on borrowing.

∟ What is the Bid? A bid is an offer to buy a specific quantity of a commodity at a stated price.

∟ What is the Black Scholes Model? Black-Scholes Model is a world-known option pricing formula introduced by F. Black and M. Scholes for securities options.

∟ What is Break? A break is a quick and sharp price decline.

∟ What is the Breakout Strategy? This is a very popular trading strategy that is based on entering long/short trades when the price of an asset breaks through a strong support or resistance level.

∟ What is a Broker? A broker is a person or a company that is paid a commission for executing buying or selling orders on behalf of its customers. » Forex Brokers

∟ What is Bullion? Bullions are bars or ingots of precious metals in standardized sizes.

∟ What is a Bull Market? Bull Market is a market in which prices are rising. The opposite is a bear market.

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∟ What is a Call Option? A Call Option is a contract that gives its holder the privilege but not the obligation to buy a fixed quantity of an underlying asset at a predefined price and at a predefined date in the future.

∟ What is Carry Trade? A trading practice involves selling an asset offering a low yield and at the same time buying an asset offering a higher yield. Usually, carry traders sell the Japanese Yen to buy high-yielding currencies such as the New Zeeland Dollar and the Australian Dollar. » More about Carry Trade on » CarryTrader.com

∟ What is the Cash Market? A Cash Market is a market for the cash commodity.

∟ What is a Cash Settlement? A Cash Settlement is a method used for settling certain futures or options contracts.

∟ What is CFTC? The Commodity Futures Trading Commission (CFTC) is the Federal regulatory body of the US established in 1974 to administer the Commodity Exchange Act. » Visit CFTC

∟ What is a Chartist? A Chartist is a trader who is buying and selling financial assets according to signals provided from the technical analysis (charts, indicators, etc).

∟ What is a Clearing House? A Clearing House is a division of a commodity exchange responsible to settle the transactions executed on the floor of the exchange.

∟ What is a Closing Price? The closing Price is the last price recorded at the closing of a trading day.

∟ What is the Commission? A commission is a fee paid to a broker in order to execute an order.

∟ What is the Contract for difference (CFD)? A CFD is a financial instrument that can be used for trading any financial asset on margin and has the same price behavior as the underlying asset itself. The CFD is a contract whereby you will make a profit if the price of the underlying asset moves in your favor and you will make a loss if the price moves against your prediction.

∟ What is a Conversion? Conversion is a position created by selling a call option, buying a put option, and buying the underlying futures contract, where the options have the same strike price and the same expiration.

∟ What is a Coupon Rate? A Coupon Rate is a fixed dollar amount of interest paid annually.

∟ What is Credit Allocation? The maximum credit level to which a CFD client can trade on his account.

∟ What is a Cross Rate? A Cross-Rate is the price of one currency in terms of another currency in the market of a third country.

 

-D-

∟ What is Data Release? It refers to the release of important economic news usually by government bodies such as a central bank. These releases follow a predetermined calendar schedule.

∟ What is Day Order? A Day Order is an order that lasts only until the end of a day's trading session.

∟ What is Day Trading? Day Trading is the trading method of buying and selling financial assets on the same day.

∟ What is a Default? A Default is a failure to perform any obligation, for example, the failure to meet a margin call.

∟ What is the Delivery Date? Delivery Date is the date on which a financial instrument must be delivered according to the terms of a contract.

∟ What is Delta Ratio? The Delta measures the rate of change (%) in the price of a derivative product compared to the change in the price of the underlying asset. If Delta is 1 then for every $1 change in the price of the underlying asset the derivative price changes also $1. Delta=1 is a common phenomenon in CFD trading.

∟ What is a Derivative Product? A derivative product is a financial product whose price is formed according to the price of an underlying asset such as a currency, a commodity, a share, etc. Derivatives are traded on/off exchanges and are mainly used to hedge against risk, but they are also used for market speculation.

∟ What is Direct Market Access (DMA)? DMA Brokers offer their clients direct access to the relevant exchange. DMA brokers do not act as market makers.

-E-

∟ What are Economic Drivers? The Economic Drivers are key changes in the real economy that had led in the past the price of certain financial assets to change accordingly (assets such as commodities, currencies, shares, property, or else).

∟ What is an Efficient Market? An efficient market is a financial market in which new information is immediately incorporated into the prices of traded assets.

∟ What is an Exchange Rate? An Exchange Rate in the Forex Market is the price of one currency in terms of another currency.

∟ What is an Exercise or Strike Price? Exercise or Strike price is the price specified in the option contract at which the buyer of a call can purchase the commodity during the life of the option.

∟ What are Exotic Options? Exotic Options are options contracts without standard payout structures. Exotic options include Asian options and Lookback options.

-F-

∟ What are Financial Instruments? Financial Instruments are financial assets like futures or options contracts that are based on Forex Currencies, Indices, etc, and not on agricultural commodities or natural resources.

∟ What is the Fiscal Policy? This refers to the government’s fiscal policy. Basically, it includes taxation, government spending, borrowing, and investment. The fiscal policy affects any domestic financial market including the stock market and the domestic currency.

∟ What is the Fixed Percentage Model? This refers to a risk management practice according to which no investment position must exceed a certain percentage of the total portfolio value. For example, the maximum fixed percentage can be 5% or 2%.

∟ What is Forward Market? Forward Market refers to non-exchange trading of commodities to be delivered at a future date.

∟ What is Fundamental Analysis? Fundamental Analysis incorporates all the fundamental factors which are able to affect the future demand & supply of a financial asset.

∟ What are Futures Contracts? A Futures Contract is an agreement to buy or sell a particular commodity for delivery in the future.

-G-

∟ What is Globex? Globex is an international electronic trading system for futures and options that enable participating exchanges to list their products for trading after the close of the exchanges' open outcry trading hours. » Visit Globex

∟ What is a Gold Certificate? A Gold Certificate is a certificate that ensures a person's ownership of a specific amount of gold bullion.

∟ What is the Gold/Silver Ratio? The gold/Silver Ratio is the number of ounces of silver needed to buy one ounce of gold at current spot prices.

∟ What is a Good 'Til Cancelled Order (GTC) Order? A Good 'Til Cancelled Order (GTC) order is an order which is valid at any time during market hours until executed or canceled.

-H-

∟ What is Hedging? Hedging means taking an opposite position in a futures market to a position held in the cash market. Hedging as a practice aims to reduce the risk of an investment portfolio using derivative products.

∟ What are Hedge Funds? This refers to an investment fund that is open only to investors who can place a high amount of money.

∟ What is Hedged Exposure? Practice according to which a trader opens a position in the opposite direction of an existing position. For example, if you are Long on IBM stock you open a Short position on the Dow Jones Industrial. This practice is useful when a certain financial asset is particularly overbought or oversold compared to the general market. 

-I-

∟ What is an Index Fund? An investment fund that creates a portfolio by imitating the structure of a particular index. Each individual asset is weighted according to the underlying index.

∟ What is the Initial Margin? The amount of free cash a trader must have available in his account in order to open a new CFD position. For example, a CFD broker requires a $150 initial margin for 1 position of Dow Jones Industrial, a $350 initial margin for 1 position of Gold, and a $75 initial margin for 1 position of Crude Oil.

∟ What are Interest Rate Futures? Interest Rate futures are contracts traded on fixed-income securities. They may be U.S. Treasury issues, or CDs but not currency futures.

-L-

∟ What is LIBID? Stands for London Interbank Bid Rate.

∟ What is the LIBOR? What is Stands for London Interbank Offer Rate? This is actually the overnight lending rate between international banks.

∟ What are Limit Orders? An order to buy or to sell an asset but with an upper price limit if you buy it and a lower price limit if you sell it.

∟ What is Lot? A Lot is the smallest size of a Forex currency that can be bought or sold. A standard lot size is equal to 100,000 units of Forex currency. There are three main types of lots

(i) Standard lot size equals 100,000 units

(ii) Mini lot size equals 10,000 units (iii) Micro lot size equals 1,000 units.

-M-

∟ What is a Market Maker? Market Maker is a professional dealer who can buy when there is an excess of sell orders and who can sell when there is an excess of buy orders.

∟ What is Maturity? Maturity is the period within which a futures contract may be settled by the delivery of the actual commodity. After maturity, a Futures contract is expired.

∟ What is Momentum? Momentum is used in technical analysis, to describe the relative change in price over a specific time interval.

-N-

∟ What is NFA? The National Futures Association (NFA) is a regulatory organization in the US, composed of futures commission commodity pool operators, merchants, etc. » Visit NFA

∟ What are Net-Tangible Assets (NTA)? Refer to physical assets, such as property, machinery, etc.

-O-

∟ What is Overnight Trade? Overnight Trade is a trade that is not liquidated on the same trading day on which it was established.

-P-

∟ What is Paper Loss? Refers to a capital loss that has not yet been realized.

∟ What is Paper Trading? Trading without real money. Traders record the prices where they would have bought or sold particular assets and then evaluate their performance according to actual prices.

∟ What is Pip? The smallest amount by which the quote of a financial asset can change.

∟ What is the Portfolio Diversification? Anyone familiar with investment knows the importance of portfolio diversification. Diversification means dividing your investment capital into many different trading positions. Diversification must focus on many different aspects for example investing in different asset classes, different markets, and different currencies.

∟ What is Price Manipulation? Price Manipulation is any planned operation or transaction made to cause or maintain an artificial market price.

∟ What is Pyramiding? According to this trading practice, traders buy more in a position that the price moves in their favor. That means increasing the exposure in profitable trades.

-Q-

∟ What is the Quotation? A quotation is the actual price of either cash commodities or derivative contracts.

 

-R-

∟ What is a Rally? A market Rally is a strong upward movement of the market prices after a recent decline.

∟ What is Requote? Requotes on prices occur when the market is moving in extreme volatility. For example, this is happening when important news is released.

∟ What is Resistance? Resistance is used in technical trading to define a price area where selling is expected to be enforced.

∟ What is Roll Over? Roll-Over is the shift of one month of a straddle into another future month.

∟ What is a Rolling Contract? A Rolling Contract is a type of contract that stays open from one day to the next.

-S-

∟ What is Scalping? Scalping is a common trading practice and it involves buying and selling financial assets after minor price fluctuations.

∟ What is the Settlement? When a position is closed manually or automatically on expiry, settlement refers to the final profit or loss.

∟ What is Slippage? Slippage occurs on trading orders that cannot be executed at the stipulated price. That is happening for example during important news releases.

∟ What is Spot? A Spot Market is a market for the immediate delivery of the product and immediate payment. Delivery varies from market to market, as concerns the Forex market delivery is T + 2.

∟ What is the Spread? Spread is simply the difference between the best buyer (bid) and the best seller (ask).

∟ What is Spread Betting? Spread betting is a financial instrument designed to trade the world financial markets. Spread betting used to be very popular in the United Kingdom.

∟ What is Straight-Through Processing? This is a brokerage practice. STP brokers guarantee that asks and bids prices will match the actual market prices.

-T-

∟ What is a Tick? Tick is the minimum price change of a particular CFD contract.

 ∟ What is Time-Stop? Time-stop means closing a position if a certain time period has elapsed.

∟ What are Treasury Bills? Treasury Bills are short-term U.S. government obligations. Treasury bills are often issued with 52, 26, or 13-week maturities.

∟ What are Treasury Bonds? Treasury Bonds or T-Bonds are long-term US government obligations that pay interest until they mature.

∟ What are Treasury Notes? Treasury Notes are mid-term Treasury Bonds that are not callable.

∟ What is the Trend? A trend is a general price direction, either upward or downward.

∟ What is Trendline? A Trendline is a line drawn across the bottom or top of a price chart indicating the general direction of price movement.

-W-

∟ What is a Warrant? A Warrant is a financial product that gives its holder the right, but not the obligation, to buy or to sell a stock or a commodity at a predefined price during a predefined period.

∟ What is the Wiggle Room? The term refers to the practice of avoiding trading false breakouts. Traders use price breakouts as a day-trading strategy but many times these breakouts are proving false. Therefore traders allow the price to move a small way below support or above resistance before opening a position.

-Y-

∟ What is a Yield Curve? A Yield Curve is a graphic representation of a market yield.

 

■ Financial Trading Glossary

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