Glossary of trading terms

When it comes to trading financial instruments such as CFDs, spread betting, and shares, it's important to have a good understanding of the terminology used in the industry. Familiarising yourself with these trading terms can help you make informed decisions and navigate the markets with greater confidence. Whether you're a novice trader or an experienced investor, having a comprehensive glossary of trading terms at your fingertips can be invaluable. From basic concepts like "bid" and "ask" to more advanced topics like "quantitative analysis" and "zero sum game," this guide aims to provide you with a thorough understanding of the language of trading. 

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A

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• Algorithmic trading: The use of computer programs to execute trades automatically based on pre-defined rules and parameters.

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• Arbitrage: The practice of profiting from price discrepancies between different markets or assets.

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• Ask price: The price at which a trader can buy a security or financial instrument from a seller or market maker.

 

B

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• Bear market: A market characterized by falling prices and a generally pessimistic outlook.

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• Bid price: The price at which a trader can sell a security or financial instrument to a buyer or market maker.

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• Blue chip: A term used to describe established, financially sound companies with a track record of stability and reliability.

 

C

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• Candlestick chart: A type of chart used to represent price movements over time, with each "candle" representing a single time period (e.g. one day).

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• CFD (Contract for Difference): A derivative instrument that allows traders to speculate on the price movements of an underlying asset, without actually owning the asset itself.

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• Closing price: The final price of a security or financial instrument at the end of a trading session.

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• Counterparty: The other party in a financial transaction, such as a broker, bank, or other financial institution.

 

D

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• Derivative: A financial instrument that derives its value from an underlying asset, such as a stock, commodity, or currency.

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• Diversification: The practice of spreading investments across a range of different assets and markets in order to reduce risk.

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• Day trading: The practice of buying and selling securities or financial instruments within the same trading day, with the aim of profiting from short-term price movements.

 

E

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• ETF (Exchange-Traded Fund): A type of investment fund that trades on a stock exchange like a regular stock, but tracks the performance of a particular index or asset class.

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• Execution: The process of actually placing and completing a trade, either manually or through an automated system.

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• Exchange: A marketplace where buyers and sellers can trade securities and other financial instruments.

 

F

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• Fundamental analysis: A method of analysing financial markets by examining economic, financial, and other qualitative and quantitative factors that can affect the value of securities.

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• Financial instrument: A tradable asset, such as a stock, bond, or currency, that has value and can generate returns.

 

G

• Gamma: A measure of how much the delta of an option (i.e. its sensitivity to changes in the underlying asset's price) will change for every $1 change in the underlying asset's price.

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• Going long: The practice of buying a security or financial instrument with the expectation that its price will rise.

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• Going short: The practice of selling a security or financial instrument with the expectation that its price will fall.

 

H

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• Hedge: A strategy used to reduce investment risk by taking a position in a second security or financial instrument that has an opposite or inverse relationship to the first security or financial instrument.

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• Hedging: The practice of taking a position in one market or asset in order to offset the risk of adverse price movements in another market or asset.

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• High-frequency trading: The use of high-speed computers and algorithms to execute trades at lightning-fast speeds, often taking advantage of small price discrepancies that can occur in a matter of milliseconds.

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• Historical volatility: A measure of how much the price of a security or financial instrument has fluctuated in the past.

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O

 

• Option: A contract that gives the holder the right, but not the obligation, to buy or sell an underlying asset at a predetermined price within a specific time frame.

 

• Order book: A record of all buy and sell orders for a particular security or financial instrument, which can provide insight into market sentiment and potential price movements.

 

• Options trading: The practice of buying and selling options contracts, which can be used for hedging or speculation.

 

P

 

• Portfolio: A collection of investments, such as stocks, bonds, and other financial instruments, held by an individual or institution.

 

• Put option: An options contract that gives the holder the right, but not the obligation, to sell an underlying asset at a predetermined price within a specific time frame.

 

• Price-earnings ratio (P/E ratio): A financial metric used to measure the relative value of a company's stock by dividing its current stock price by its earnings per share (EPS).

 

• Portfolio diversification: The practice of spreading investments across a range of different assets and markets in order to reduce risk.

 

Q

 

• Quote: The current market price of a security or financial instrument, typically provided by a broker or exchange.

 

• Quantitative analysis: A method of analysing financial markets using statistical and mathematical models, often used for high-frequency trading and algorithmic trading.

 

• Quiet period: A period of time, typically after an initial public offering (IPO), during which insiders and underwriters of a company are prohibited from making public statements about the company.

 

R

 

• Resistance level: A price level at which a security or financial instrument has historically struggled to exceed, which can indicate potential selling pressure.

 

• Risk management: The practice of identifying, analysing, and mitigating potential risks associated with investments or trading positions.

 

• Return on investment (ROI): A financial metric used to measure the profitability of an investment by dividing its profit or loss by its initial cost.

 

S

 

• Short selling: The practice of selling a security or financial instrument that the seller does not own, with the aim of buying it back at a lower price later and profiting from the difference.

 

• Stop-loss order: An order placed by a trader to automatically sell a security or financial instrument if its price falls below a certain level, in order to limit potential losses.

 

• Support level: A price level at which a security or financial instrument has historically found buyers, which can indicate potential buying pressure.

 

T

 

• Technical analysis: A method of analysing financial markets using price charts and other technical indicators, often used for short-term trading and day trading.

 

• Trading platform: An online software application used by traders to access financial markets and execute trades.

 

• Trend: The general direction in which the price of a security or financial instrument is moving, which can be upward (bullish), downward (bearish), or sideways (range-bound).

 

U

 

• Underlying asset: The asset on which an options contract is based, such as a stock, commodity, or currency.

 

• Unrealized gain/loss: The profit or loss on an investment or trading position that has not yet been realized through a sale or closure of the position.

 

• Unwinding: The process of closing out a trading position, either to realize profits or limit losses.

 

V

 

• Volatility: A measure of how much the price of a security or financial instrument fluctuates over time, which can affect the potential risks and returns of an investment or trading position.

 

• Volume: The number of shares or contracts traded for a particular security or financial instrument within a given time period, which can provide insight into market activity and sentiment.

 

• Value investing: A method of investing that seeks out undervalued stocks and other securities based on fundamental analysis of their financial metrics and potential for growth.

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W

 

• Warren Buffett: One of the world's most successful investors, known for his long-term value investing strategy and his role as chairman and CEO of Berkshire Hathaway.

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• Wall Street: The financial district in Lower Manhattan, New York City, home to the New York Stock Exchange and many other financial institutions.

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• White candlestick: A technical term used to describe a candlestick chart pattern in which the closing price is higher than the opening price.

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• Whipsaw: A sudden and sharp price movement in a security or financial instrument that can cause traders to incur losses or miss out on potential profits.

 

X

 

• Xetra: A trading system used by the Frankfurt Stock Exchange to facilitate electronic trading of securities and financial instruments

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• XIRR (Extended Internal Rate of Return): A financial calculation used to determine the rate of return on an investment, taking into account both the size and timing of cash flows.

 

Y

 

• Yuan: The currency of China, also known as the renminbi.

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• Yield: The income generated by an investment, expressed as a percentage of its current market value.

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• Yield curve: A graph showing the relationship between the yields on bonds of different maturities, used as a predictor of future economic growth and inflation.

 

Z

 

• Zigzag pattern: A technical term used to describe a chart pattern in which the price of a security or financial instrument moves in a series of up and down waves, forming a "zigzag" shape.

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• Zone of support: A technical term used to describe a price range at which a security or financial instrument has historically had strong buying interest, potentially acting as a floor for future price movements.

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• Zero-coupon bond: A bond that does not pay interest during its term, but is sold at a discount to its face value and redeemed at full face value upon maturity.

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• Zero-sum game: A situation in which one participant's gain is exactly offset by another participant's loss, such as in a financial market where every trade has a buyer and a seller.

 

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