Trade Talk 101: Your Essential Trading Terms Cheat Sheet

Jumping into the world of trading can be overwhelming since there are a lot of concepts and ideas you need to grasp before getting started with your first trade. There are some basic trading terms you need to master to become a successful trader. Ever wonder what ‘bearish’ or ‘bullish’ means? Whether you're a newbie excited to start your first trade or a seasoned pro looking to brush up on the basics, this trading terms cheat sheet will get you started in the dynamic world of trading.

Trading Terms A-E

A

Arbitrage: The practice of exploiting price differences for the same asset in different markets to make a profit.

Ask Price: The minimum amount a seller is willing to accept for a financial instrument, representing the price at which buyers can purchase the asset.

Assets: Assets are possessions, tangible or intangible, owned by individuals or entities, with the expectation of future economic benefits.

Asset Classes: A common trading term that refers to groups of financial instruments with similar characteristics and behaviors such as stocks, currencies, or commodities.

Averaging Down: The investment strategy of purchasing more of a financial asset at a lower price to reduce the overall average investment cost.

B

Bar Chart: A bar chart is a visual representation of data using rectangular bars. The length of each bar corresponds to the quantity it represents, facilitating easy comparison between different categories or time periods.

Base Currency: In a currency pair, a base currency is the first currency listed, representing the unit against which the exchange rate is quoted in the foreign exchange market (Forex).

Bear Market: A common trading term that refers to the state when prices of financial assets consistently fall, indicating a pessimistic market outlook.

Bearish: Bearish refers to a negative sentiment or expectation that the price of a financial asset is likely to decline.

Bid: A bid is a trading term that refers to the highest price that a buyer is willing to pay for a financial instrument.

Bid-Ask Spread: The bid-ask spread represents the difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (ask) for a financial instrument, indicating the liquidity and transaction costs in the market.

Bonds: Bonds are debt securities issued by governments, municipalities, or corporations to raise capital.

Broker: A broker is a financial intermediary or agent who facilitates the buying and selling of financial instruments on behalf of clients. The broker earns a commission or fee for their services.

Bull Market: A common trading term that refers to the state when prices of financial assets consistently rise, indicating an optimistic market outlook.

Bullish: Bullish refers to a positive sentiment or expectation that the price of a financial asset is likely to rise.

Buy: Taking a long position on an asset, anticipating its value to rise for potential profit.

C

Call Option: A financial contract that gives the holder the right to buy an asset at a predetermined price within a specified time frame.

Carry Trade: A carry trade is a strategy where an investor borrows money in a low-interest-rate currency to invest in a higher-interest-rate currency, aiming to benefit from the interest rate gap.

Cash In Advance: A trade arrangement where the buyer pays for goods or services before receiving them, minimizing the seller's risk.

Cash Flow: The money that comes in and goes out of a business, showing how well it can cover its expenses.

Closed Position: A common trading term that refers to the situation where an investor has completed the buying or selling of a financial asset, thereby exiting the market for that particular position.

Closing Price: The closing price is the last price at which a financial asset is traded during a specific trading session, marking the end of that period.

Commodity: A commodity is a basic raw material or primary product that can be bought and sold, like gold, oil, or agricultural products.

Contracts for Difference (CFDs): Contracts for Difference (CFDs) are financial derivatives that allow traders to speculate on the price movements of various financial instruments without owning the underlying assets.

Currency Pair: A currency pair is a pairing of two different currencies, showing how much one is worth in terms of the other in the foreign exchange market.

D

Day Order: A day order is a type of trading order that is only valid for the duration of a single trading day, and if not executed by the market close, it is automatically canceled.

Day Trading: Day trading is a trading term that involves buying and selling financial assets within the same day, trying to profit from short-term price movements.

Derivative: A derivative is a financial contract that gets its value from the changes in the price of something else, like stocks, bonds, or commodities.

Devaluation: Devaluation is when a country intentionally lowers the value of its currency compared to other currencies, usually to boost exports or address economic issues.

E

End-of-Day Order: An end-of-day order is a trading request to buy or sell a financial asset, and it gets executed at the closing price of the trading day.

Exchange Rate: The exchange rate is the value of one currency in terms of another, representing the rate at which one currency can be exchanged for another in the foreign exchange market.

Expiry Date: The expiry date is the deadline for using or trading a financial contract like an option or futures agreement.

 

Trading Terms F-L

F

Financial Instrument: A financial instrument is something you can buy or sell that represents a certain value, like stocks, bonds, or options.

Fixed Costs: Fixed costs are a trading term that refers to regular, predetermined expenses that remain constant regardless of the level of production or sales.

Forex: Forex, or foreign exchange, involves the trading of currencies in a decentralized global market.

Forward Contract: A forward contract is a private agreement between two parties to buy or sell an asset at a predetermined price on a future date.

Futures Contract: A futures contract is a financial agreement to buy or sell an asset at a predetermined price on a specified future date, traded on exchanges.

G

Gross Domestic Product (GDP): GDP is the total value of goods and services a country produces, helping to measure its economic health.

Gross Margin: The profit a company makes from selling its products after accounting for the production costs.

Guaranteed Stop: A trading safety net, ensuring that an asset is bought or sold at a specific price to limit potential losses.

H

Hedge: Hedging is a common trading term that refers to having a financial safety net to protect against potential losses by making smart investments.

High-Frequency Trading: The super-fast buying and selling of assets, often done by computers using algorithms to take advantage of tiny price changes.

I

Illiquid: An asset or market with low trading activity, making it challenging to buy or sell without impacting its price.

Indices Trading: Indices trading involves buying or selling financial instruments based on the performance of a market index, representing a broad snapshot of market conditions.

Inflation: Inflation is the overall increase in the prices of goods and services over time, corrupting the purchasing power of a currency.

Interest Rate: The cost of borrowing money or the return on investment, expressed as a percentage, and it influences various financial markets and economic activities.

L

Leverage: Leverage is a common trading term that refers to using borrowed money to increase the potential return (or loss) on an investment.

Liability: A financial obligation or debt that a person or company owes to others.

Limit Orders: Instructions to buy or sell an asset at a specified price or better, ensuring control over the execution price.

Liquidity: Liquidity refers to how easily an asset can be bought or sold in the market without significantly impacting its price.

Long Position: The buying of an asset with the expectation that its price will increase, allowing for potential profit upon selling.

 

Trading Terms M-S

M

Margin: The borrowed money used to trade financial assets amplifies potential gains and losses.

Margin Call: A demand from a broker for additional funds when a trader's account balance falls below the required level to cover potential losses.

Market Capitalization: The total value of a company's outstanding shares of stock.

N

Net Asset Value (NAV): The total value of a fund's assets minus its liabilities, representing the per-share value of the fund.

Net Position: A net position is the difference between the total long and short positions held by an investor or trader, indicating their overall market exposure.

O

Open Position: An active trade that has been initiated but not yet closed, representing exposure to market fluctuations.

Option Contract: A financial derivative that gives the holder the right to buy or sell an underlying asset at a predetermined price within a specified timeframe.

OTC Trading (Over-the-Counter): OTC trading is a common trading term that involves the direct exchange of financial instruments between parties outside of a centralized exchange, often in more customized or less standardized transactions.

P

Pip: A pip, or percentage in point, is a standard unit of movement in currency exchange rates, typically representing the smallest price change.

Portfolio: A portfolio is a collection of financial assets, such as stocks, bonds, and other investments, held by an individual or institution.

Pullback: A pullback is a temporary reversal in the price of a financial asset within an overall trend, often seen as a brief counter-movement before the trend resumes.

R

Rate: Rate is a trading term that generally refers to the cost of borrowing or the return on investment, expressed as a percentage.

Reserves: Assets held by central banks or financial institutions to maintain stability, provide liquidity, or meet obligations.

Retention: The practice of keeping a portion of earnings or profits within a company rather than distributing them as dividends.

Risk Management: Risk management involves strategies and techniques used to identify, assess, and mitigate potential losses in financial or investment activities.

Rollover: Extending the maturity or expiration of a financial arrangement, such as a loan or a futures contract.

S

Scalp: Scalping is a trading strategy where traders aim to make small profits from frequent and quick trades, capitalizing on short-term price fluctuations.

Securities: Tradable financial assets, such as stocks or bonds, representing ownership in a company or a promise to repay a debt.

Sell: The action of offering a financial asset for purchase, typically with the expectation of profiting from a future decline in its value.

Settlement: Settlement is the process of completing a financial transaction and transferring assets or funds between parties, often involving the delivery of securities or the finalization of a trade.

Shares: Represent ownership in a company and entitle shareholders to a portion of its profits and a say in corporate matters.

Short Position: A short position is taken by a trader who sells an asset with the expectation that its price will decrease, aiming to buy it back at a lower price.

Slippage: Occurs when the actual execution price of a trade differs from the expected price, often happening during volatile market conditions.

Spread: The difference between the bid (buying) and ask (selling) prices of a financial asset, representing the transaction cost.

Spread Betting: A form of speculation where participants bet on the price movements of financial instruments, and the payoff is determined by the accuracy of the bet.

Stocks: Stocks, or shares, represent ownership in a company and are traded on stock exchanges, allowing investors to buy and sell ownership stakes.

Stop Order: An instruction to buy or sell an asset once it reaches a specific price, designed to limit losses or secure profits.

Swap: A financial derivative where two parties exchange cash flows or other financial instruments, often used for managing interest rate or currency risks.

 

Trading Terms T-Y

T

Technical Analysis: A method of evaluating financial assets by analyzing historical price and volume data to predict future price movements.

Trading Floor: A physical or virtual space where financial professionals engage in buying and selling activities, often associated with stock exchanges or brokerage firms.

Trading Level: Trading level is a trading term that refers to the authorization level granted to an investor by a brokerage, dictating the types of trades they can execute based on their experience and risk tolerance.

Trading Range: The price range within which a financial asset fluctuates over a specific period, indicating levels of support and resistance.

Transaction Cost: Transaction cost is the expense associated with buying or selling a financial asset, including brokerage fees, commissions, and other related charges.

Trend: Trend in trading refers to the general direction in which the price of a financial asset is moving over time, such as an uptrend (rising prices) or a downtrend (falling prices).

V

Value at Risk (VAR): A risk management measure that estimates the potential loss in the value of a portfolio or investment within a specific confidence level and time frame.

Volatility: Volatility measures the degree of variation in the price of a financial instrument over time, indicating the level of risk or uncertainty associated with its price movements.

W

Working Order: An instruction or request in trading that has been entered into the system but has not yet been executed, remaining active until specific conditions are met in the market.

Y

Yield: Yield is a trading term that represents the income generated by an investment, usually expressed as a percentage of the asset's value, and it can include dividends, interest, or other earnings.

Trading Terms: Conclusion

To sum it up, this glossary of trading terms is your key to getting a grip on the trading language, offering clear definitions and practical insights. It empowers both beginners and experienced traders, turning financial complexities into beginner-friendly knowledge. With this guide, you'll approach markets confidently, make informed decisions, and navigate the intricacies of the trading world.