Trading Basics
The ultimate glossary for trading terminology.
A
ABS
Asset-backed securities.
These are securities backed by assets, like mortgages, which are claimable if the creditor defaults.
Account History
This refers to a traders account with their broker.
It is a register of their completed transactions, balances and orders.
Acquisition
When the majority of shares changes hands in a company.
This is typically when one company buys another.
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.
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.
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.
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.
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%.
American Option
An option that can get exercised at any time during its life.
European options can only be exercised at the end.
Analysts
Those that conduct analysis on markets, with the view of providing insights to market participants.
Annual General Meeting (AGM)
This is where shareholders meet each year to vote on the various decisions a company needs to make.
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.
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.
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.
Asian Session
When the majority of Asian markets are open and trade.
Typically 23:00 to 08:00 GMT.
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.
Asset Classes
Types of asset that have similar characteristics.
There are four broad classes: Equities, Foreign Exchange, Debt and Commodities.
Assets
Anything that is owned that is expected to generate a return to the owned.
Opposite to a liability.
ASX 200
A term used for the index of the top 200 shares on the Australian Securities Exchange, also AUS 200.
At Best
An order type that instructs the broker to get the best possible price they can obtain for a trader or investor
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.
Automated Trading
Where the buying and selling of securities is automated and driven by algorithms.
Available Margin
The amount of margin a trader has available to trade with.
This is account balance minus margin used on open positions.
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.
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.
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.
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.
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.
Bank of England
The UK’s central bank responsible for setting interest rates for Sterling and maintaining stability in the UK’s financial industry.
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.
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.
Bear Raid
When bears team up to push the price of a security down, normally by short selling and/or rumours.
This is illegal.
Bear Trap
When a piece of analysis points to the market falling and the price instead goes up, trapping the bears.
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.
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.
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.
Binary Bet
A binary bet offers a win or loss outcome, nothing in between.
Binary options are now banned in the EU.
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.
Blue Chip
Well established, big companies.
A blue chip is an expensive chip on the poker table
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.
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.
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.
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.
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.
Brexit
The process of the United Kingdom (UK) leaving the European Union (EU) – it is a combination of ‘British’ and ‘exit’.
Broker
Provides access to the financial markets for traders.
Brokers come in all shapes and sizes.
Bull Market
A Bull Market is any financial market where prices are rising or are expected to rise.
Bullish and Bearish Markets
A bullish market means that the price is going up and higher.
Bulls
Bulls are market participants and commentators that believe the price of a security will rise.
Buy Stop
An order type where the trader wishes to go long above the current market price.
Buyback
When companies purchase their own shares.
This reduces the amount of shares issued.
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.
CAC40
Cotation Assistée en Continu.
The short name for the headline french index which includes 40 companies.
Call
An option that gives the purchaser the right, but not the obligation, to buy a security at a certain price.
Candlestick Chart
A type of chart using a security’s opening, closing, high and low price for a particular period.
Capital
The economic resource used to buy assets, normally with the view to provide a product or service.
Capital Gains Tax
Also, CGT.
A tax on the profits obtained from a capital investment or transaction.
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.
Cash Call
When your broker asks you to deposit more cash into your brokerage account to cover margin requirements.
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.
CFD
Contract for difference.
An OTC financial derivative where the counterparties agree to exchange the change in a price.
No underlying assets are exchanged.
Chart Patterns
Technical analysts use repeatable chart patterns to try to spot changes or continuations in participant sentiment.
Chartist
A market participant or commentator that uses charts to analyse the price of a security.
Circuit Breaker
When exchanges stop the trading in a security that has fallen significantly.
This is done to stop an uncontrollable panic.
Close A Position
When a trader places a trade to reduce their position to zero.
They are closing their position.
Close to the Money
In options trading when the underlying price of the security is close to the strike price of the option.
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.
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.
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.
Commission
A charge levied on a client to place trades in certain asset types. FX and CFD trading attracts commission.
Commodities
A commodity is a basic good where the quality of the product won’t differ depending on where it’s sourced.
Contango
This is when the futures price of a security is above the cash price at maturity. The opposite is backwardation.
Contingent Orders
Orders that instruct a broker to another action if filled. The typical action is to place a stop or limit order on the trade.
Contrary Opinion
An approach to trading where traders take the opposite view and therefore the position of the retail participants in a market.
Controlled Risk Bet
A trade where the maximum downside is predefined, usually with a guaranteed stop-loss order.
Convertible Stocks
A loan that the owner can convert to ordinary shares in that company, given a set of conditions defined in the original loan.
Corporate Action
An event that requires approval or notification of the shareholders of a business.
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.
Counterparty
You need at least two parties in a financial transaction, they are counterparties.
Credit Account
For those with excellent credit some brokers will provide a credit account. This means the trader puts up less margin.
Credit Rating
An entities perceived ability to repay its debt. Provided by credit rating agencies. AAA is the best credit rating.
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.
Currency Options
A option is the right to buy or sell something in the future but not the obligation. A currency option is on an FX market.
Cut and Reverse
When a position is fully reversed and an opposing position taken in a single trade.
Cyclical Shares
Equities that follow the economic cycle. For example banking shares typically rise and fall with a cycle.
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.
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.
DAX
The German stock index, representing 30 of the largest German companies that trade on the Frankfurt Exchange.
Day Trader
Someone that trades in a short term time horizon. Typically, not leaving opening positions overnight.
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.
Debenture
A form or capital, similar to debt, issued by companies and backed by particular assets.
Debt
A form of capital funding where there is an obligation to repay what is borrowed, normally with interest.
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.
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.
Delta
The rate at which a derivative’s price changes relative to the price of the underlying asset.
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.
Digital Options
A digital option pays out a fixed amount when the price of an instrument moves past the strike price with a set timeframe.
Dividend
A dividend is a variable payment from a company to its shareholders. We touch on dividends here.
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.
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.
DMA
Direct Market Access. Provides advanced trader direct access to large liquidity providers and exchanges. Bypasses the broker’s pricing.
Double Bottom
A price pattern forming at the bottom of a trend, interpreted by technical analysts as suggesting a reversal in price.
Double Top
A price pattern forming at the top of a trend, interpreted by technical analysts as suggesting a reversal in price.
Dove
Refers to someone that is relaxed about leaving interest rates low; opposite to a hawk.
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.
Down Trend
When prices are generally falling, defined as lower lows and lower highs in price.
Draw Down
The amount the equity balance in a trading account falls by, either in a trade or time period.
Dutch Auction
An auction process where the price starts high and is gradually lowed. Very useful when auctioning bond issues.
E
Earnings Per Share
Also EPS. Its the net earnings of a company divided by the number of shares in issue.
EBITDA
Earning Before Interest Tax Depreciation and Amortization. A profit measure of a company that approximates to cash earned before financing and capital purchases.
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.
EDSP
Exchange Delivery Settlement Price. The price at which an exchange settles a derivative, like a future.
Emerging Markets
Countries with developing economies. Generally considered high risk and high reward.
Equities
Typically shares or indices of shares. Ordinary shares share the economic gains from a company after debt has been serviced.
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.
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.
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.
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.
F
FED
The FED is the Federal Reserve Bank and its the US’s central bank. It is a network of twelve federal banks.
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.
FOMC
The Federal Open Market Committee is the branch of the Federal Reserve bank in charge of monetary policy decisions.
Forex
Shorthand for foreign exchange trading. When one country’s currency is traded for another.
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.
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.
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.
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.
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.
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.
GFD
An order type that is ‘Good For the Day’. If not filled it will expire at the end of the trading day.
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.
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.
H
Hang Seng
An index of the thirty three largest companies on the Hong Kong stock exchange.
Head and Shoulders
A complex price pattern that forms in an uptrend and suggests a reversal.
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.
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.
Index
The aggregate performance of a group of individual equities. Examples include the FTSE100, DJIA and Dax indices.
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.
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.
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.
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.
K
L
Libor
London Interbank Offered Rate. The rate at which banks are happy to lend to each other for 3 months.
LIFFE
London International Financial Futures and Options Exchange. Now owned by Euronext.
Long
When a trader buys an asset they become long the asset and hope to profit from an increase in price.
Long Position
When a trader is betting the price will rise, they will take a long position.
M
Margin Call
When a broker requests additional funds are placed on account to keep positions open.
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.
Market Hours
The opening hours for a market. Markets can sometimes be traded after hours.
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.
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.
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.
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.
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.
PIT
This was the physical location where traders used to trade. Now largely redundant and replaced with virtual trading.
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.
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.
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.
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.
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.
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.
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.
Triple Witching
A quarterly event whereby index futures, index options and options of individual equities expire.
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.
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.
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.
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.
V
Virtual Trading
Also practice trading. Brokers will normally provide a virtual account to practice trade with virtual funds.
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.
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.
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.
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.
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.
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.
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.
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.
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.
