Trading Basics

Trading Basics

The ultimate glossary for trading terminology.

A

Abnormal Market Conditions

A term used by brokers to describe a rapidly moving or thinly traded market.

Depending on the terms and conditions, this allows brokers to examine and possibly change trades placed during these conditions.

Read More »

ABS

Asset-backed securities.

These are securities backed by assets, like mortgages, which are claimable if the creditor defaults.

Read More »

ADR

American Depositary Receipts or ADRs. These are shares of foreign companies listed on exchanges in the USA in dollars.

They allow US investors to get access to overseas shares without the hassle of having to exchange currency, open brokerage accounts overseas and so on.

Read More »

After-Hours Dealing

After-hours trading involves buying or selling securities outside of specified trading hours.

However, trading after hours may offer less liquidity, as fewer traders are operating at these times and spread betting firms may offer wider spreads as fluctuations can occur during these times.

Read More »

AIM

Alternative Investment Market. A small cap stock market in the UK.

Lighter listing rules reduce the costs for the companies listing and seeking external equity finance.

A good starting point for growth companies not quite ready for the main LSE.

Read More »

Alerts

Where the broker or a third party sends a notification to a trader that a securities price has hit a certain preset condition.

A useful tool that allows traders to go make a cup of tea.

Read More »

Alpha

This is a measure of price performance vs a benchmark.

If a trader makes 10% per annum and the index makes 7% the trader has an alpha of 3%.

Read More »

Analysts

Those that conduct analysis on markets, with the view of providing insights to market participants.

Read More »

Annual Report

The annual audited full year accounts of a particular company along with statements from the Chairman and Chief Executive.

Poured over by analysts for any gems.

Read More »

Annuity

A guaranteed income for the rest of someones life.

Historically purchased with pension lump sums.

The buyer is swaping cash now for future income.

Read More »

Arbirtage

Simultaneously buying and selling a security at two different prices in two different markets, with the aim of making a profit without the risk of prices fluctuating.

Read More »

Ask Price

The ask price is the level at which a seller is willing to accept a bid on a security.

The ask price is always higher than the bid price.

Also known as the offer price.

Read More »

Asset Classes

Types of asset that have similar characteristics.

There are four broad classes: Equities, Foreign Exchange, Debt and Commodities.

Read More »

Assets

Anything that is owned that is expected to generate a return to the owned.

Opposite to a liability.

Read More »

ASX 200

A term used for the index of the top 200 shares on the Australian Securities Exchange, also AUS 200.

Read More »

At Best

An order type that instructs the broker to get the best possible price they can obtain for a trader or investor

Read More »

At The Money

A term used in options trading where the strike price of the option is similar to the current underlying spot price of the instrument.

Read More »

Averaging Down

Once an initial long trade is place this is the practice of opening additional positions at a lower price with the view of bringing the average opening price of the position down.

Read More »

B

Backwardation

Backwardation occurs when a bid price exceeds the ask price.

This usually occurs when stock is suspended or under a share repurchase scheme.

It can also mean that a futures contract will trade at a higher price when it is coming close to expiring.

The opposite of backwardation is known as contango.

Read More »

Balance

A summarised financial result of all funds deposited in, and withdrawn from the customer’s account, and of all closed positions in that account.

Read More »

Balance of Payments

Also BoP. This is the difference between payments into or out of a country. It can be negative or positive and is used by traders in fundamental analysis.

Read More »

Balance of Trade

Also BoT. This is the difference between trade into or out of a country.

Experts and imports. It can be negative or positive and is used by traders in fundamental analysis.

Read More »

Bank of England

The UK’s central bank responsible for setting interest rates for Sterling and maintaining stability in the UK’s financial industry.

Read More »

Basis Point

A basis point is 0.01% and is typically used when quoting interest rate changes.

A move of 0.25% is described as 25 basis points.

Read More »

Bear Market

A Bear Market occurs when the price of a security is falling, and the negative outlook of the security causes the security’s price to continue to fall, causing a self-sustaining problem.

For a downturn like this to be officially considered a bear market, it must be on-going for longer than two months, otherwise it is known as a correction.

Bears are generally traders with a pessimistic view on markets that look to profit from a decline in prices.

Read More »

Bear Raid

When bears team up to push the price of a security down, normally by short selling and/or rumours.

This is illegal.

Read More »

Bear Trap

When a piece of analysis points to the market falling and the price instead goes up, trapping the bears.

Read More »

Bearer Stocks

Ownership of shares is typically held on a register.

The owner of bearer shares do not get registered, instead they must possess the certificate the prove ownership.

Keep them safe.

Read More »

Bid

Traders can go short at the bid price.

The terminology is from the broker point of view, they are bidding to buy from you.

Read More »

Bid-Ask Spread

The difference between the price the trader and buy at and the price they can sell at.

Also bid-offer spread. The wider the spread, the more the trader pays, reactively.

Read More »

Black Box Trading

Also referred to as automatic or algorithmic trading.

The trader does not need to see the system in operation, in effect its a black box.

Read More »

BoE Rate Decision

The Bank of England’s interest rate decision is announced following the meeting of its monetary policy committee, which meets eight times a year.

Read More »

Bollinger Bands

A technical indicator developed by John Bollinger.

The bands help a trader visualise changes in price volatility.

Taught in our Technical Trading course.

Read More »

Book Building

When a new share is issued book building is the process institutions go through to gauge demand and therefore price.

This goes on before the share is available to trade on the exchange.

Read More »

Book Value

A valuation of something using its net assets on the balance sheet.

A very rough way of valuing an asset because it ignores the intangibles.

Read More »

Bottom Up Analysis

A form of fundamental analysis which starts with analysis of the individual parts.

Bottom up analysis of an index would involve the analysis of each company in that index.

Read More »

Brexit

The process of the United Kingdom (UK) leaving the European Union (EU) – it is a combination of ‘British’ and ‘exit’.

Read More »

Broker

Provides access to the financial markets for traders.

Brokers come in all shapes and sizes.

Read More »

Bulls

Bulls are market participants and commentators that believe the price of a security will rise.

Read More »

C

Cable

Another name for the GBP – USD exchange.

Around half a trillion dollars is traded between the two currencies everyday, making it the third most popular currency pair to trade in behind EUR – USD and USD – JPY.

Read More »

CAC40

Cotation Assistée en Continu.

The short name for the headline french index which includes 40 companies.

Read More »

Call

An option that gives the purchaser the right, but not the obligation, to buy a security at a certain price.

Read More »

Capital

The economic resource used to buy assets, normally with the view to provide a product or service.

Read More »

Carry Trade

A forex trading strategy of borrowing funds in a low-interest rate currency and buying assets in higher yielding currency.

For years this was selling Yen to buy Dollars.

Read More »

Cash Call

When your broker asks you to deposit more cash into your brokerage account to cover margin requirements.

Read More »

Cash or Spot Market

Also known as a spot market, cash markets are different to futures contracts, as commodities are traded immediately for cash at the current market price.

Read More »

CFD

Contract for difference.

An OTC financial derivative where the counterparties agree to exchange the change in a price.

No underlying assets are exchanged.

Read More »

Closing Trade

A trade to close a position. Most trading requires the trader to place the opposite trade to that done when opening their position.

This will crystallise the profit or loss.

Read More »

Collateral

The resources put up by the trader to enter a trade.

Requested by the counterparty and normally in the form of cash but sometimes other liquid assets like shares.

Read More »

Commercial Paper

How big companies finance short-term cash flow.

Like bonds but without the coupon, instead, the APR is determined by the discount the agreements are entered into and the length of time to repayment.

For example, a blue chip company might borrow $9.95m dollars today and repay $10m in a month’s time.

Read More »

Commission

A charge levied on a client to place trades in certain asset types. FX and CFD trading attracts commission.

Read More »

Commodities

A commodity is a basic good where the quality of the product won’t differ depending on where it’s sourced.

Read More »

Contango

This is when the futures price of a security is above the cash price at maturity. The opposite is backwardation.

Read More »

Cost of Carry

The cost to a trader of maintaining a position. This might be in form of overnight financing on simple CFD trades but can also include the costs to insure, transport or finance on more complex trades.

Read More »

Currency Futures

A future is an agreement to buy or sell something at future point in time. A currency future is when that agreement is on an FX market.

Read More »

What is a Central Bank

A central bank or monetary authority is a monopolised and often nationalised institution given privileged control over the production and distribution of money and credit.

Read More »

D

Daily Bets

Spread bets that close at the end of the trading day. These used to expire but now they get rolled, with a financing charge, by default into the next trading day.

Read More »

DAX

The German stock index, representing 30 of the largest German companies that trade on the Frankfurt Exchange.

Read More »

Day Trading

A day trader attempts to make a profit by making short, sharp transactions on a day-to-day basis, rather than letting their investments mature. A day trader will try to avoid keeping any positions open overnight to avoid charges that may cut into their profits.

Read More »

Debt

A form of capital funding where there is an obligation to repay what is borrowed, normally with interest.

Read More »

Deep in the Money

In options trading, this means when the strike price is the right side of the current price and a long way from it. The option is in the money and there is little chance of it not being so.

Read More »

Deep Out of the Money

In options trading, this means when the strike price is the wrong side of the current price and a long way from it. The option is out the money and there is little chance of it being in the money.

Read More »

Delta

The rate at which a derivative’s price changes relative to the price of the underlying asset.

Read More »

Derivatives

A derivative is a security whose price is dependant on or derived from one or more underlying assets. The derivative itself is just a contract between two or more parties that’s value is determined on the fluctuations of the underlying assets. The most common assets include; stocks, interest rates, bonds, currencies, commodities and market indexes.

Read More »

Dividend

A dividend is a variable payment from a company to its shareholders. We touch on dividends here.

Read More »

Dividend Adjustment

An adjustment made to an equity derivative to reflect a dividend in the underlying. Typically this is offset by a change in price from the underlying moving to reflect the payment.

Read More »

Dividend Yield

The amount an investor generates annually as a percentage from their investment in a share. Calculated by dividing the dividend payment per share by the share price.

Read More »

DMA

Direct Market Access. Provides advanced trader direct access to large liquidity providers and exchanges. Bypasses the broker’s pricing.

Read More »

Double Bottom

A price pattern forming at the bottom of a trend, interpreted by technical analysts as suggesting a reversal in price.

Read More »

Double Top

A price pattern forming at the top of a trend, interpreted by technical analysts as suggesting a reversal in price.

Read More »

Dove

Refers to someone that is relaxed about leaving interest rates low; opposite to a hawk.

Read More »

Dow Jones Industrial Average

An index created to see how 30 of the largest publicly owned companies in the U.S. have traded in a single session in the stock market. The ‘Industrial’ part of the average is largely defunct, as many of the companies compared by the index have no involvement in heavy industry.

Read More »

E

EBITDA

Earning Before Interest Tax Depreciation and Amortization. A profit measure of a company that approximates to cash earned before financing and capital purchases.

Read More »

ECN

Electronic Communication Network, which amalgamates liquidity for the trader.

Read More »

Economic Indicators

Economic indicators are pieces of economic data that are used by investors to judge the overall health of the economy and make decisions on current and future trading opportunities.

Read More »

EDSP

Exchange Delivery Settlement Price. The price at which an exchange settles a derivative, like a future.

Read More »

Equities

Typically shares or indices of shares. Ordinary shares share the economic gains from a company after debt has been serviced.

Read More »

ETFS

Exchange Traded Fund. An investment fund traded on a recognized exchange. The fund can give the investor exposure to a certain sector, index or risk. The investor just has to make one purchase of the fund and not all the underlying investments.

Read More »

Euribor

Euro Inter Bank Offered Rate. This is the rate banks can borrow form one another for 3 months. Set daily the rate is used to settle and price trillions of dollars of Euro denominated debt and derivative agreements around the world.

Read More »

Eurodollars

Dollar denominated deposits held outside the US, and thus outside the control of the US federal reserve. These deposits don’t have to be held in the euro area.

Read More »

European Central Bank

Being a trader requires staying up-to-date on various market developments, news and macroeconomic releases. However, if we would have to pick only one specific report to follow, that would be a country’s monetary policy. Central banks determine the monetary policy of a country, and the European Central Bank, or ECB, is one of the most important central banks in the world.

Read More »

F

FED

The FED is the Federal Reserve Bank and its the US’s central bank. It is a network of twelve federal banks.

Read More »

Flat Price or Position

A flat price is one that is neither rising nor falling. In forex, a flat position means that you are neither going long or short in a currency, or your positions cancel each other out.

Read More »

FOMC

The Federal Open Market Committee is the branch of the Federal Reserve bank in charge of monetary policy decisions.

Read More »

Forex

Shorthand for foreign exchange trading. When one country’s currency is traded for another.

Read More »

FTSE 100

The FTSE 100 is an index of the top 100 performing blue-chip stocks on the London Stock Exchange< as ranked by their market capitalisation.

Read More »

FTSE 250

An index of the medium-sized shares listed on the LSE’s main market. These are the 250 largest shares outside the top 100, so for shares with capitalizations ranked 101 to 350.

Read More »

FTSE 350

An index of the top 350 companies listed on the LSE by market capitalisation. It is a combination of the FTSE100 and FTSE250.

Read More »

Fundamental Analysis

Fundamental analysis involves evaluating a security’s value by examining economic, financial and other factors. This may involve studying a company’s assets, management and niche in the market.

Read More »

Futures Contract

A futures contract is an agreement to buy or sell a commodity or financial instrument at a certain time for a pre-defined price.

Read More »

G

Gapping

Have you ever seen a break between the closing and opening price of a stock, without any trading between the prices? If yes, you probably didn’t know that this market phenomenon has its name – it’s called gapping. In this article, we’ll cover why a stock price gaps, what types of gaps exist and what does “gap up” mean in stock trading.

Read More »

GFD

An order type that is ‘Good For the Day’. If not filled it will expire at the end of the trading day.

Read More »

Going Long

A long bet refers to a transaction by a trader who believes the market for a stock, commodity or currency is going to increase in value.

Read More »

GTC

Good Till Cancelled. An order type that is live until cancelled by the trader.

Read More »

Guaranteed Stop

Similar to a guaranteed order, this is a bet where a spread betting provider will guarantee you will exit a position once a certain price level is reached. This cuts out the risks associated with volatility but there may be a small charge applied to the bet to put a stop order on a bet.

Read More »

H

Hedging

Traders will hedge a bet in order to reduce the risk associated with the initial position they have taken up. This normally means placing a bet in the opposite direction to their original bet, occasionally in the form of a futures contract. A hedge bet won’t necessarily cover the entire cost of a lost bet, however it will cover some of the loss made on a trader’s original position.

Read More »

I

Illiquid

A market without much trade happening, this can result in the price jumping around on small trades. Illiquid markets increase the gapping risk.

Read More »

Index

The aggregate performance of a group of individual equities. Examples include the FTSE100, DJIA and Dax indices.

Read More »

Inflation

Inflation is the rate at which the level of prices for goods and services is increasing. Typically a country’s central bank will aim for inflation to be between 2-3%. When inflation increases too quickly, that country’s currency loses value on a global scale and goods within the country become more expensive for the population.

Read More »

Initial Margin Requirement

A spread better will require an initial margin requirement to cover a certain percentage of the price of a security. For a futures contract, the initial margin is set by the exchange. Placing a stop loss can reduce the initial margin requirement on a trade.

Read More »

Interest Rates

An interest rate is the amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets. Interest rates are typically noted on an annual basis, known as the annual percentage rate (APR). The assets borrowed could include cash, consumer goods, and large assets such as a vehicle or building.

Read More »

J

Junk Bonds

A junk bond is a higher-risk bond that has a speculative appeal as they can offer much higher yields. However, companies that issue junk bonds typically have a poor credit rating, and although the price appreciation of a junk bond is substantial if the company manages to turn itself around, it isn’t always able to do so.

Read More »

K

L

Libor

London Interbank Offered Rate. The rate at which banks are happy to lend to each other for 3 months.

Read More »

Long

When a trader buys an asset they become long the asset and hope to profit from an increase in price.

Read More »

M

Market Capitalisation

A company’s market capitalisation is the total value of all of its outstanding shares. This can be calculated by multiplying the current number of the company’s shares that are outstanding by the market value of one share; investors then use this figure to determine a company’s size.

Read More »

N

New York Stock Exchange

The NYSE is the largest equities-based exchange in the world based on market capitalisation. The NYSE became a public entity in 2005, and merged with the Euronext exchange in 2007. For years the NYSE relied solely on only floor trading, however now more than half of the trades placed on the exchange are electronic.

Read More »

Nikkei 225

The Nikkei 225 is the leading index of Japanese stocks. It is price-weighted and includes the largest blue-chip companies on the Tokyo Stock Exchange. It is the Japanese equivalent of the Dow Jones Industrial Average Index.

Read More »

O

Offer Price

The offer price is the highest price that a buyer will pay to purchase an asset, or the lowest a seller will accept on an asset. Offering an asset is the act of making traders aware that it is available for sale.

Read More »

P

Parity

Parity is when two things are equal. This can occur in many different situations, such as the exchange rate for two currencies being 1 to 1, or two traders bidding exactly the same price for a security.

Read More »

PIP

A pip is the smallest price change that an exchange rate can make. Most currency pairs are priced to four decimal points, meaning that the smallest change that can be calculated is one hundredth of a per cent. This is also known as a basis point, hence where the term ‘per point’ comes from. The EUR/USD will trade to four decimal places, however the USD/JPY only trades to three decimal places.

Read More »

PIT

This was the physical location where traders used to trade. Now largely redundant and replaced with virtual trading.

Read More »

R

Recession

A recession is period of negative economic growth over the period of at least two quarters. This is measured in a country’s Gross Domestic Product (GDP), although this isn’t always necessary to declare that a country is in a recession.

Read More »

Resistance

Support and resistance levels are an extremely important concept in technical trading. A large number of market participants continuously follow and monitor major support and resistance levels to identify trade setups and price-levels which could potentially invalidate that setup, i.e. stop-loss levels. In this article, we’ll take a close look at what support and resistance levels are, how they form and how to trade them.

Read More »

S

Scalping

A scalper is a trader who attempts to make profits from small price changes in the market. This means that they tend to place lots of small bets throughout the day and constantly monitoring the price levels of each trade. If a strict exit strategy is implemented, a scalper can be very profitable by taking advantage of small changes in the price of a commodity that may not necessarily reflect the overall movement of the commodity’s price for the day.

Read More »

Selling

Selling an asset involves liquidating the asset in exchange for cash that was in a long position previously. A sell bet is placed when a trader believes that the price of a security is going to fall.

Read More »

Shorting

Shorting is when a trader sells an asset that they do not own, so that they can buy it back at a lower price. When spread betting, investors will short using a ‘down bet’ and sell a security until they plan to buy it back when the price has fallen.

Read More »

T

Tick Size

The tick size is the smallest measurable amount the price of a financial instrument can move. Different instruments have a different tick size, for example, the tick size of a share is 0.01 because that equals one cent. Some futures contracts have designated tick sizes, which can be up to $10.00.

Read More »

Trailing Stops

A trailing stop is a stop order that is set a certain percentage away from the current market price of an asset. A trailing stop would be set above the current price for a short position and set below the current price for a long position.

Read More »

U

UK 100

A broker name for the FTSE 100 index. For trademark reasons brokers aren’t allowed to name the market the FTSE 100.

Read More »

Underlying Instrument

An underlying instrument is an asset that gives derivatives their value, and the term is commonly used in derivatives trading. Derivatives contracts are financial instruments with a price that is derived from the underlying instrument they track.

Read More »

US Unemployment Rate

The Unemployment Rate released by the US Department of Labor is reported as a percentage worked out by dividing the number of unemployed workers by the total civilian labour force in America. The figure is released at 8.30 am eastern standard time, 1.30pm GMT, on the first trading Friday of the month.

Read More »

US30

A broker name for the Dow Jones Industrial Average, the benchmark bluechip US index. For trademark reasons brokers aren’t allowed to name the market the DJIA.

Read More »

V

Vix

A really important measure of expected future volatility as implied by the pricing of options of S&P 500 equities. When VIX is high fear is considered rife, when low greed widespread.

Read More »

Volatility

Volatility describes how quick and how much the price of a security or market index has changed. Volatility is linked to risk, as normally the more volatile an asset is, the riskier it is for a trader.

Read More »

W

Wall Street

The street in downtown Manhattan at the heart of America’s financial industry. The term Wall Street is slang for all things finance.

Read More »

Warrant

The right to buy new shares at a set price in a company at a future point in time. Similar to an option which gives similar right but over existing shares.

Read More »

What is GDP

Gross Domestic Product is a measure of the total value of all goods and services produced by a particular country or region. In the UK this is release by the Office for National Statistics. In the Eurozone it is released by Eurostat. In the US the figure is released by the US Bureau of Economic Analysis. GDP is considered a broad measure of that country’s or region’s economic activity and health. Usually, a rising trend has a positive effect on currency and equity markets, while a falling trend is seen as negative.

Read More »

What is NFP

The nonfarm payrolls figure released by the US Department of Labor presents the number of new jobs created during the previous month, in all non-agricultural business, within the States. The figure is released at 8.30 am eastern standard time, 1.30pm GMT, on the first trading Friday of the month.

Read More »

Whipsaw

When the price in a market is volatile it can create a scenario when a trader goes one direction, gets stopped out, only for the price to return to where it would have been profitable.

Read More »

WTI

West Texas Intermediate oil is a type of oil. Because of its constituent elements and cost to transport, it can differ in price to other oil types, like Brent Crude.

Read More »

Y

Yield

The yield is the income return from an investment. This can refer to the final pay out from a bet on a trade, or the interest gained from a bond or security and is usually expressed as a percentage based on the cost of the investment, the market value or its face value.

Read More »