Trading Glossary

A

• Arbitrage: The simultaneous purchase and sale of an asset to profit from a difference in the price, typically on two different exchanges.

• Ask (Offer) Price: The price a seller is willing to accept for a security. It’s always higher than the bid (the price a buyer is willing to pay).

• Asset: Any resource with economic value that can be turned into cash. Examples include stocks, bonds, and real estate.

• Average True Range (ATR): A technical analysis metric that measures volatility. It’s the average of the true ranges over a specified period.

B

• Bear Market: When a market experiences prolonged price declines. It typically begins after prices drop 20% from their peak.

• Bid Price: The price a buyer is willing to pay for a security. It contrasts with the sell (ask or offer) price, which is the price a seller is willing to sell a security for.

• Bollinger Bands: A volatility indicator and technical analysis tool. It consists of a middle band being a simple moving average and two standard deviation bands above and below it.

• Bull Market: When a market sees prolonged price increases. It starts after a rise of 20% from a significant price decline.

C

• Candlestick Chart: A charting method that shows high, low, open, and closing prices for a specific period. It’s beneficial for understanding price movement and possible future trends.

• Capital Gain: The rise in value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price.

• Commodities: Basic goods that have a standardised value across markets. Examples include gold, oil, and wheat.

• Contract for Difference (CFD): A contract between a client and a broker to pay the difference between the current value of an asset and its value at contract time.

D

• Day Trading: The practice of buying and selling financial instruments within the same trading day, ensuring positions are closed before the market close.

• Dividend: A payment made by corporations to their shareholders, usually as a distribution of profits.

• Downtrend: A market condition where there is a series of lower highs and lower lows, indicating the prevailing trend is bearish or downwards.

E

• Equity: Represents ownership in a company and constitutes a claim on part of the company’s assets and earnings.

• Exchange: An organised market where tradable securities, commodities, foreign exchange, futures, and options contracts are sold and bought.

• Expiry Date (or Expiration Date): Refers to the date in which a derivative contract becomes invalid, and the right to exercise it no longer exists.

F

• Fibonacci Retracements: A popular tool among technical traders. It’s based on key numbers identified by mathematician Leonardo Fibonacci in the 13th century and can help predict areas of support or resistance on a chart.

• Forex (FX): Stands for foreign exchange. It’s the marketplace for buying and selling national currencies.

• Fundamental Analysis: The method of evaluating an asset’s intrinsic value by examining related economic, financial, and other qualitative and quantitative factors.

G

• Gap: Occurs on a price chart when there’s a difference between the opening price of one trading period and the closing price of the previous trading period.

• Gross Profit: Represents a company’s revenue with the cost of goods sold subtracted. It’s the first profit line on a company’s income statement.

H

• Hedging: A strategy to offset potential losses from a primary investment by making another investment.

• High-Frequency Trading (HFT): An algorithmic trading method used by large investment banks, hedge funds, and institutional investors which uses powerful computers to transact a large number of orders at extremely high speeds.

I

• Initial Public Offering (IPO): The process by which a private company becomes publicly traded on a stock exchange.

• Interest Rate: Amount charged, expressed as a percentage of the principal, by a lender to a borrower for the use of assets.

J

• Japanese Candlesticks: An ancient method of pricing up closing and opening market prices for the day, along with the high and low.

K

• Keltner Channel: A volatility-based set of envelope channels, similar to Bollinger Bands. It’s used to understand price trends and breakouts.

L

• Leverage: An investment strategy that uses borrowed money to increase the potential return on investment.

• Liquidity: The degree to which an asset can be quickly bought or sold without causing a significant movement in the price.

M

• Margin Call: A demand from a broker that an investor deposits further cash or securities to cover possible losses.

• Market Capitalisation (Market Cap): Total dollar market value of a company’s outstanding shares of stock. It’s calculated by multiplying a company’s shares outstanding by the current market price of one share.

N

• Net Profit: Calculated by subtracting total expenses from total revenues. It represents the amount of money a company has earned or lost during a specified period.

O

• Option: A contract giving the holder the right, but not the obligation, to buy (in the case of calls) or sell (in the case of puts) shares of an underlying security at a specified price on or before a given date.

P

• Portfolio: A collection of financial investments like stocks, bonds, commodities, cash, and cash equivalents, as well as their fund counterparts.

• Position: The amount of a security, commodity, or currency held by an individual, dealer, institution, or other entity.

Q

• Quantitative Analysis: The use of mathematical and statistical methods in finance to predict the behaviour of financial markets.

R

• Risk/Reward Ratio: Used by investors to compare the expected returns of an investment to the amount of risk taken to capture these returns.

S

• Short Selling: The selling of a security that is not owned by the seller or that the seller has borrowed, with the intention of buying it back at a lower price.

• Spread: The difference between the bid and the ask price of a security or asset.

• Stop-Loss Order: An order to buy or sell a stock once it reaches a certain price, ensuring a higher level of profit or limiting a potential loss.

T

• Technical Analysis: A trading tool employed to evaluate securities by analysing the statistics generated by market activity, such as past prices and volume.

• Trend Line: A sloping line drawn between two or more peaks or troughs on a price chart, representing support or resistance levels.

U

• Underlying Asset: The asset upon which a derivatives contract is based. It determines the contract’s value.

V

• Volume: The number of shares or contracts traded in a security or an entire market during a given period.

• Volatility: The relative rate at which the price of a security moves up and down, found by calculating the annualised standard deviation of daily change in price.

W

• Warrant: A derivative that gives the holder the right, but not the obligation, to buy or sell a security, most commonly an equity, at a certain price before expiration.

Y

• Yield: The income produced by an investment, typically calculated annually as a percentage based on its cost or its current market value.

Z

• Zero-Coupon Bond: A bond that doesn’t pay periodic interest but is sold at a discount from its face value.