Useful Financial and Trading Terms
Appreciation – When a currency or asset strengthens in price due to increased demand it is said to ‘appreciate’.
Arbitrage – Occurs when you are trying to take advantage of small price differentials between two different markets. The cryptocurrency market is a good example because you often see price differences between exchanges. You can purchase a coin from one exchange and sell it immediately in another, and profit from the difference in price.
Ask (Offer) Price – The price a market-maker is prepared to sell an asset. This would be the price you buy from a retail broker. For instance if the quote was 1.3210/13, the ask price would be the 1.3213.
Assets – These can be any traded instrument. This can include anything outside of the financial markets as well. In the financial markets they could be; commodities, stocks, currency, etc.
Bear Market – A market where the price is going down. The cryptocurrency market from January 2018 was in a bear market for over 6 months.
Bid – The price a market-maker is prepared to buy an asset. This would be the price you would sell back to the retail broker. Back to the example above, if the quote was 1.3210/13, the bid price would be the 1.3210.
Bretton Woods Accord – An agreement that established fixed FX rates for major currencies, allowed central bank intervention in the FX market and set the price of gold at US $35 per ounce. The agreement lasted until 1971.
Bull Market – A market where price is going up. Since the 2008 financial crash the S&P 500 has been in a bull market to the time of writing this (September 2018).
Broker – Someone who handles investors orders to buy and sell assets. They will match a buyer with a seller and for the service will charge a commission. For more information about brokers, click the link.
Cable – Traders slang term for the GBP/USD exchange rate.
Call Rate – The overnight interbank interest rate.
Cash Market – The market for buying and selling of physical currency rather than debt or contracts.
Commodities – A commodity is a raw material or an agricultural product that is traded between buyers and sellers. There are too many commodities to list but some of the most prevalent ones include; oil, copper, coffee, natural gas, gold, etc.
Counterparty – The customer or bank with whom the trade is made. Essentially the person on the other side of the deal.
Cross Rate – An exchange rate between two currencies, normally constructed of two currencies that are measured against the US dollar. You would measure the rate of USD/CAD and USD/JPY, this would then be able to give you the exchange rate of the cross CAD/JPY.
Currency Risk – The risk of losing money due to a change in the exchange rate.
Currency Swap – Contract that commits two counterparties to exchange streams of interest payments in different countries for an agreed period of time and to exchange principal amounts in different currencies at a pre-agreed exchange rate at maturity.
Currency Option – An option contract that gives the owner the right to buy or sell a currency vs another currency at a specific exchange rate during a specific period.
Day Trading – This is when you open and close a trade / position on the same day.
European Monetary Unit – This was set up to establish a single European currency called the Euro and was introduced in 2002.
Federal Reserve (Fed) – The central bank of the USA.
Flat Position – To have fully closed a position or trade. If by the end of the day you have a ‘flat book’, you no longer have any trades open.
Fundamental Analysis – Thorough analysis of the economic and political data and climate with the purpose to determine the future price movement of an asset.
GTC – ‘Good Till Cancelled’. An order left in the market to buy or sell and is only removed once cancelled by the client.
Hawkish – Refers to an aggressive stance taken in regard to a certain topic. If a central bank saw that inflation was increasing, a hawkish member of the bank would recommend aggressive monetary policy, which may include increasing interest rates quicker in order to dampen inflation. The opposite would be referred to as dovish.
Hedging – This is when you may invest in an asset in order to protect against losses that might happen in another asset. While hedging will reduce your losses, it also reduces the upside of your potential profits.
High/Low – Usually referred to as the highest and lowest trading prices of that day.
Initial Margin – The required initial deposit to enter into a position as a guarantee on future performance.
Interbank Rates – The FX rates that one bank will quote another bank.
Limit Order – An order to buy at a specific price or below or to sell at or above a specific price.
Long Position – When you do not own an asset and then buy it, you are said to be in a long position, in the hope that the market will rise.
Margin – This is the required amount you must deposit to cover any potential losses from adverse market movements.
Margin Call – A demand for additional funds. This is when a broker will tell you that you need to deposit more funds in order to cover any potential losses from adverse market movements. Normally all your positions will be automatically closed if you receive a margin call.
Market Maker – Someone who supplies prices and is prepared to buy and sell at either quote, the bid or the ask price.
Offer – The price, or rate, that a seller is willing to sell at.
One Cancels Other Order (OCO Order) – When the execution of one order automatically cancels another order.
Open Position – Any deal that has not been settled or any trade that is still open and live.
Over the Counter (OTC) – Any transaction that is not conducted over an exchange.
Overnight Trading – Refers to the buying and selling of assets between 9pm and 8am.
Pip (or Points) – The term used in the FX market to represent the smallest incremental move an exchange rate can make. Depending on the currencies involved it will either refer to the 4th decimal place or in the case of the JPY, it will be the 2nd decimal place.
Political Risk – The risk surrounding a return on an investment due to the potential actions of a government.
Quote – A price offered to a client from a market maker. It will have a bid and an ask price.
Resistance – A price level where you would expect to see selling come in.
Risk Capital – The amount of money someone can afford to lose without it affecting their life.
Short – To go short is to have sold an instrument without actually owning it and to hold the position in the expectation that the price will decline, and hence bought back lower to a profit.
Slippage -The difference between the expected price of a trade and the price at which the trade is actually executed.
Spot – A transaction that happens immediately (at that price), but the exchange of funds may happen within 2 days of the deal being struck.
Spread – The difference between the bid and the offer (ask) prices. This is often used to measure market liquidity, the tighter the spreads, the more liquid a market, and vice versa.
Stop Loss Order – An order to buy or sell at the market when the price has gone against you a pre-determined amount. These are essential for risk management.
Support Levels – A price where you would expect buyers to step into the market.
Technical Analysis – An effort to forecast the future market movements by analysing market data such as charts, price trends and volume.
Volatility – A statistical measure of a markets price movement over time using standard deviation. High volatility tends to lead to a higher degree of risk.
Whipsaw – Slang for a condition of high volatility where a sharp price movement is soon followed by a sharp movement in the opposite direction.
Yard – Slang for a billion dollars.