Trading Terms & Glossary Explained

In the world of trading stocks, forex, and other financial instruments, certain terms and words are considered trading terminology. In this article, I will give you definitions and a glossary of the most popular trading terms used by traders all over the world. As a trader, you should know how to speak in a trading language that makes sense to other traders and after reading this article you will be familiar with the most common trading jargon on the street. Stock trading and forex lingo are basic terms that day traders, swing traders, and investors should know about. To improve your vocabulary I recommend that you spend some time each day learning at least one or two new trade terms that you can use while talking to other traders and investors. I have chosen to list the glossary from A to Z with numbers at the end.

A

Alerts

Alerts in trading or investing are designed to signal to a trader or investor when a certain criterion is met or when something important happens in a chosen market. For example, a trader can add an alert to a computer program to get notified when the volume of a stock spike or when the price of an asset passes an important level. Alerts can come in different forms such as browser alerts, SMS alerts, or email alerts.

Arbitrage

Arbitrage in trading or investing refers to something that is essentially risk-free. An arbitrage trade happens when you have two different brokers with the same stock trading at different prices. In this case, you could buy the stock on one broker at a cheaper price, transfer it to the other broker where the price is higher, and earn the difference in profit. The only risk is when the stocks are carried over from one broker to the other.

Asset class

An asset class defines a certain type of investment or securities with similar characteristics and are traded on the same market. Different types of asset classes in trading and investing are stocks, forex, cryptocurrency, commodities, energy, metals, and bonds. Asset classes are usually traded on an exchange or broker either through direct market access or through so-called CFDs (Contract For Difference)

Asset management

Asset management in investing refers to the practice of acquiring, operating, selecting, tracking, and upgrading financial assets overtime to earn a financial yield by profiting from asset growth. An asset manager is in charge of taking care of the portfolio and will often manage other people or institutions’ money. This financial service is often seen at hedge funds, mutual funds, or private investors.

Ask price

Ask price is the lowest price that a seller is willing to sell a security for. If you want to buy a stock, a commodity, or a cryptocurrency, for example, the cheapest price in the order book is always the asking price. When you buy securities using the market order you will automatically buy the asking price first. The opposite of the ask price is the bid price which is the highest price a buyer is willing to buy for.

Automated trading

Automated trading is a process where a trader uses a computer program to automate his or her strategies. This can be done by coding your own algorithm or using a pre-coded trading program. With automated trading, the trader needs to input his or her criteria for when security shall be bought or sold. After the criteria have been implemented, the computer will trade according to these criteria.

Averaging down

Averaging down in investing or trading refers to the process of buying more of the same security when the price falls. Averaging down is the same as accumulating more of an investment as price falls. This will give the investor or trader a lower average break-even price of the security. Averaging down is used by many long-term investors and institutions after they have confidence in the investment.

Averaging up

Averaging up means short-sell more of an investment as the price rises to get a higher average break-even price. Averaging up is adding to the same short position to accumulate a bigger position to make a profit later on when the price falls. Many hedge fund managers use this approach in investing after they have a strong conviction about certain security.

B

Bear / Bearish

Bear or Bearish refers to a negative sentiment regarding a security or asset class among investors and traders. If you are bearish you believe the price of an asset or security will decline. Bears have a negative outlook on future price development and are often involved in short-selling the market to profit from declining prices. Being a bear, or bearish is a contrarian viewpoint among market speculators since most investors are buyers and want prices to rise.

Bear market

A bear market is a negative market environment where securities see declining prices for some time. During bear markets, many investors lose both money and trust in the market. 2008 was the start of the latest big bear market in stock market history. During this bear market prices fell nearly -50% and many investors were forced to liquidate their positions.

Bear trap

A bear trap refers to trapping bears, or short-sellers into shorting the market during a sell-off. During a bear trap, the market first sees a decline in price to attract negative speculators. After the decline, the market will then start to rise and “trap” all the eager bears who have recently shorted the market. When the market later on price increases, most of the bears and short-sellers are forced to sell or liquidate their positions.

Bid price

The bid price of a stock or security is the highest price that a buyer is willing to buy for. The bid price is at the top of the order book and is the closest price to the ask price. If a seller decides to sell with a market order, he or she will always sell at the bid price. The bid price changes all the time depending on the demand of the buyers and the fundamentals of the security.

Blue-chip stock

A blue-chip stock is a high-quality stock that is traded on a public stock exchange. Coca-cola and Nike are two examples of blue-chip stocks that are well-known. Many hedge funds and mutual funds invest in blue-chip stocks for the long-term growth of their portfolios. A blue-chip stock is always considered a more safe investment compared to buying other less valued stocks.

Bollinger band

The Bollinger band is a technical chart analysis tool that is used by traders and investors to gauge the current fluctuations or volatility of the market they are analyzing. The Bollinger band indicates a change in the volatility of a security or asset. The Bollinger band got its name after the man who created the tool, John Bollinger. The word band in the Bollinger band refers to the shaded area on the chart that is a visual representation of the current volatility.

Break-even

Break-even in investing or trading refers to when a position has made 0% profits or losses. It either means that the market has not moved at all, or it has come back to the break-even price and the investor or trader is in equilibrium. Being break-even in the market is a completely neutral state for a position and if the position were to be closed out at the break-even state, no losses or profits would incur.

Breakout

A breakout happens when a market breaks up or down from a previous price range. A breakout can happen both to the upside and to the downside. The characteristics of a breakout are usually when the price of a security increases or decreases rapidly on higher volume. A breakout is a well-known chart pattern that many investors and traders use as a signal to enter the market.

Broker

A broker is a company or institution that handles investment or trading operations and supplies a safe environment for investors and traders to access liquidity and quotes of stocks, forex, cryptocurrencies, commodities, metals, bonds, and other asset classes. A broker is an intermediary between investors and connects them through matching engines to enable transactions to be made.

Bull / Bullish

Being a bull or bullish refers to positive sentiment in regards to an asset class or underlying security. Bulls have a positive outlook on the short-term and long-term future of price development. A buyer is always a bull and therefore he or she is bullish. Most market participants are bullish when it comes to the long-term outlook of stocks and this is because the market tends to increase over time even though it is prone to short-term setbacks.

Bull market

A bull market is a positive market environment where prices have been rising and are thought to keep rising in the future. Bull markets are seen during periods of economic growth where market participants have access to extra capital. Bull markets are favorable for buyers that believe in the future of the assets purchased. Bull markets can last for many years and even decades.

Buying power

Buying power refers to the amount of capital an individual has to invest in financial assets. If an investor has a risk capital account size of $5000, his or her buying power would then be $5000. Buying power is what determines the full portfolio of an investor. The more buying power an investor has the more financial assets or securities he or she stand to accumulate.

C

Capital

Capital is another word for cash or other liquid assets. A trader or investor needs capital to buy financial assets or securities. The more capital a trader has the more financial assets he or she can accumulate. Capital is also what we call “un-spent” cash or goods that have not been put to use yet. When capital is invested it is no longer considered as capital and is instead characterized by whatever financial asset that is purchased.

Capital gain

Capital gain refers to the profit an investor or trader makes on his or her capital. It comes from the notion of gaining capital. After a profit has been made in the stock market or the currency market and the gain has been realized as cash, the investor or trader has made a capital gain. Capital gain can only come after a financial asset or traded security has been sold.

Cash Flow

Cash flow refers to the movement of income and expenses for a company or an individual. When a company is earning consistent profits each month and is paying for services or goods, the company has a cash flow. Cash flow is calculated by combining the total spending and the total income of a business or individual.

Closing Price

The closing price of a financial asset refers to the last sold price of the day. The closing price is the last traded price after a market has been closed. For example, when the stock market closes on Friday afternoon, each stock will have a last quote for the day, the closing price. The closing price is also a term used when analyzing candlestick and bar charts. Here, the closing price indicates the last traded price during a specific period for each bar or candle such as 1 minute, 2 hours, or 1 day.

Collateral

Collateral in investing and trading refers to the amount of capital an investor puts down to take a loan. The collateral capital is seen as risk capital and is most often used in margin or leverage trading products such as futures, derivatives, and forex trading. When trading with leverage, an initial margin deposit has to be made, this margin capital is called the collateral capital.

Compound Interest

Compound interest refers to the process of re-investing profits of a yearly yield to earn a bigger yield the next year. Compound interest is a very common investment strategy among fund managers and private investors due to the growth potential of the portfolio. Compound interest is an exponential investment process where each investment becomes bigger and scales up for each year the portfolio increases in value.

Commission

Commission in investing or trading is a fee paid to the broker for each executed trade or investment. It is a fee for making transactions on the broker platform or exchange. Commissions are what brokers use to make money and vary in price from platform to platform. Whenever you buy or sell a stock on the stock exchange you pay a commission of a few percent or a pre-set dollar value.

Correlation

Correlation refers to the measurement of how two financial assets move in sync with each other. If something in the financial market is correlated it means that there is a statistical similarity. If something is uncorrelated there is a statistical unsimilarity. For example, each time that the central bank of the United States decides to increase the interest rate there is usually a setback in stock market prices which means that this event correlates.

D

Day trading

Day trading is the practice of buying and selling financial assets or securities during one day without keeping open positions overnight. Day trading is usually done during the most volatile hours of the day and then before the markets close all positions are closed out. Day traders are very short-term in their investment approach and they focus on the daily movements of the financial markets.

Depreciation

Depreciation refers to the gradual or rapid decrease in the value of an economic activity or stock. If something is depreciating it is losing value over time. Depreciation can come from several factors such as demand for a service or any type of goods and also from physical depreciation. When the monetary value of an asset drops or depreciates it is usually from some new competition that has entered the market.

Derivative

A derivative is a special type of financial contract that relies on some kind of underlying value such as a stock or a cryptocurrency. The value of a derivative derives from something else and it is only a contract not full ownership of the underlying asset. Many brokers and exchanges offer derivatives trading instead of the real underlying asset.

Divergence

Divergence is the statistical measure of something that is moving contrary or in an opposite direction. In investing or trading, divergence is used to see how the price of a stock, forex currency pair, a commodity, or any other financial asset moves in the opposite direction of an indicator. There are two types of divergences, positive and negative.

Dividends

Dividends in investing refer to a recurring payout of a financial asset, such as a stock. If a company is paying dividends to the owners of its stock, the payout will be received as a dividend. Many dividends are paid out monthly or every quarter. The amount paid out in each dividend depends on how much money of the profit a company wants to give back to its shareholders.

Dollar-cost averaging

Dollar-cost averaging is the same as averaging down or buying more of a financial asset or security as the price falls. Dollar-cost averaging is a common investment strategy among investors and it is most often used in large-cap stocks that are considered a safe investment. When an investor uses dollar-cost averaging, he or she is accumulating more of the selected financial asset as the price declines.

E

Earnings

Earnings in trading and investments refer to the profit of a company or individual. Earnings can be calculated each month, quarter, or year and are always visible in the balance sheet of a company. Earnings are a popular investment indicator to measure the overall health of a company before committing to invest or trade in a certain financial asset. 

ECB

ECB is the European Central Bank that controls the supply of EUR and is responsible for the monetary policy in the Eurozone. All of the 19 countries that are using EUR as their fiat currency are supported by the ECB. One of the main objectives of the ECB is to maintain price stability in the eurozone to keep up the purchasing power of the EUR.

Economic Growth

Economic growth is a financial term that refers to the process of economic expansion. During economic growth, goods and services increase in price. Economic growth is usually a time of good prosperity for a country or a region. Economic growth is also measured as an increase of GDP (gross domestic product) which is the measure of all goods and services bought and sold during a calendar year. 

Equity

Equity is a shareholder’s ownership of assets of a company. Equity is calculated by the total assets minus the total liabilities. Equity in the stock market is the ownership of stocks in a certain company. When an investors purchase a stock of a company, he or she is purchasing parts of the equity of the whole company and is now a part-owner through the equity.

Exchange rate

The exchange rate is the price or value of a nation’s currency. It measures how much of one currency you can buy with another currency. Every country has a different exchange rate when compared to a different currency. The exchange rate is used to determine the cost of goods and services when countries are doing business with each other.

Exchange Traded Fund (ETF)

An exchange-traded fund is an electronically traded fund that consists of underlying financial assets or indexes. Exchange-traded funds are bought and sold on stock exchanges such as the NYSE (New York Stock Exchange). ETFs are often seen as an easy investment vehicle for investing in securities that are not always easy to buy on your own. Some new ETFs even track cryptocurrencies as underlying assets.

Execution

Execution refers to the completed deal of either buying or selling a financial asset. When you execute a stock purchase, you buy a stock. Your execution can be good or bad depending on the liquidity of the market you are trading. The better your execution is the more liquid the financial asset is and it means that bigger order executions can be made.

F

FAANG Stocks

FAANG stocks refer to these five large-cap stocks, Facebook, Amazon, Apple, Netflix, and Google. The word FAANG comes from the first letter of each company. These are the five most reputable companies and also the most famous stocks to trade on the US market and they have gotten famous for sometimes carrying the whole NASDAQ index both up and down, there for the nickname.

FED

FED stands for the Federal Reserve System and is the central bank of the United States. Created in 2013, the FED has had central control over price stability and economic activity in the US for more than 100 years. The current chairman of the FED is Jerome Power. The main objective of the FED is to maintain economic stability and a stable monetary system.

Fiat money

Fiat money is all the government-issued currency such as the USD, EUR, GBP, CAD, and AUD. Fiat money is used for daily transactions and is governed by a central authority for each country or region. Fiat currencies are not backed by a commodity such as gold or silver, instead, it is solely controlled and issued by a government. Fiat currencies are traded on the foreign exchange market.

Filled

The term filled in investing or trading refers to when a position is bought or sold. When you add an order to an order book, this order can be partially filled or completely filled depending on the demand for that underlying security. When you get filled you will be notified that your order has been bought or sold by another individual or institution. If you don’t get filled, your position will remain in the order book without getting bought or sold.

Financial Institution

A financial institution is a company that is involved in financial transactions such as investing, trading, transfers, or any other kind of exchange of financial assets. Financial institutions can be large or small and can serve many different functionalities in the financial system. Some institutions act as stockbrokers while others handle deposits and transfers between countries.

Forex

Forex stands for foreign exchange and refers to the market where all government-issued fiat currencies such as USD, EUR, and GBP are traded. The forex market is the biggest market in the world with 24-hour liquidity of over $5 trillion. Forex trading is very popular among both retail traders and big financial institutions. Forex is also sometimes called just FX.

Fundamental Analysis

Fundamental analysis refers to the process of analyzing the underlying intrinsic value of a financial asset such as a stock, a currency pair, or a cryptocurrency. To do a complete fundamental analysis the investor needs to take into consideration several important factors such as demand, supply, financial statements, industry trends, and overall global trends.

Futures

Futures are a certain kind of financial derivatives contract where a buy and a seller agree on a specific price to buy or sell in the future. Futures are traded on big stock exchanges but can also be seen on smaller platforms. The characteristics of futures contracts are that the transaction between a buyer and a seller will happen in a pre-set time in the future.

G

Government bond

A government bond is a financial security issued by the government to finance debt. When a government issues a bond, it sells a financial asset to an investor or a financial institution and promises to pay back the money plus interest sometime in the future. Government bonds are loans to the government and are considered one of the safest investments that exist. When the government pays back the money at loan maturity it always comes with added interest.

Gross Income

Gross income refers to the income of all sources for an individual or company before deducting taxes. Gross income is calculated by adding all income such as salary, investments, profits, dividends, and interest payments for a duration without removing taxation. The gross income is used to see the full taxable income for the individual or institution to see credit worth.

H

Hedge

Hedge, or hedging, refers to protecting a position against the market moving against you. For example, if you buy Apple for $10,000 and there is bad news coming out in the third quarter and you think that Apple might take a fall you can hedge the position by selling the equal amount of $10,000 of Apple stocks. When you sell the same amount that you have bought you are in a 100% hedge. When the market falls, you can collect a profit on the short position and buy it back for a profit. Future contracts are very often used to hedge positions as they give the investor the option to short-sell financial assets.

Hedge fund

A hedge fund is a type of financial institution that manages money by buying and selling financial securities. A hedge fund is different from other financial institutions as they only take investments from professional investors. Hedge funds often have a more aggressive approach and also take a higher management fee and a cut of the profits each year. Hedge funds also can market themselves to potential investors.

Hyperinflation

Hyperinflation is used to describe inflation that has gotten out of control and is increasing very rapidly. During hyperinflation, prices of goods and services rise uncontrollably over a period causing the currency of a country to completely lose its value. Hyperinflation was seen in Germany during 1923 when a loaf of bread was priced at several million Marks that had previously been priced at only 1 Mark the years before.

I

Index fund

An index fund is a fund that tracks a certain index, most often a stock index such as Nasdaq or Dow Jones. Index funds invest solely in stock indexes and other types of indexes that follow a bigger market. When you invest in an index fund you are essentially betting on a basket of indexes. Index funds are typically seen as a low-risk investment and are usually have very low management fees

IPO

IPI in investing stands for Initial Public Offering and it is the event when a company goes public and gets listed on the stock market. When a company makes an IPO it gives a part of its shares to the public to buy and sell. After an IPO, both professional and retail investors are welcome to buy and sell the stock on the open market at the stock exchange.

Inflation

Inflation is the process of price increase of goods and services in a country. When prices rise in a country, the local fiat currency loses value, and things, in general, become more expensive for the everyday person. Mild inflation is usually a good thing as it keeps the economy in balance but too much inflation can cause serious problems down the line. The central bank of each economy is responsible for controlling inflation.

Insider trading

Insider trading refers to when an individual or institution uses information that is not publicly known to invest in financial securities. This breaks the insider trading law that says that individuals on the inside of a company cannot invest in its financial assets as they have more information than the public. Insider trading is not fair and therefore it’s illegal.

Interest rate

Interest rate is the rate at which lenders lend money to borrowers at a certain percentage. For example, when a borrower goes to a bank for a loan to buy a house or a car the bank will lend its money with an added interest rate to be paid back every month until the loan has been paid back in full. Interest rate is charged by lenders to profit from lending out money to borrowers.

Intrinsic value

Intrinsic value means real value or true value. When speculating in the stock market, for example, investors always try to seek the intrinsic value of a company to see if the price of the stock is currently overvalued, overvalued, or at its intrinsic value. There are several ways of establishing intrinsic value but it is very difficult to know for sure the true value of a company.

L

Large-cap stock

A large-cap stock is a stock with high capitalization which means that the stock is valued very high. Some examples of large-cap stocks are Facebook, Apple, Microsoft, Coca-Cola, and Cisco. Many large-cap stocks are often called blue-chip stocks due to the quality of the business. Large-cap stocks are bought and sold on stock exchanges such as NYSE (New York Stock Exchange)

Leverage

Leverage is borrowed money that you receive from your broker when trading on margin. Leverage increases your buying power and is seen as a risky investment. If you invest with 10 times leverage it means that you are borrowing 10 times more money than you deposited in your account. For example, if you have $200 in your account and add a leverage ratio of 1:10 your maximum position size will now be $2000.

Liquidation

Liquidation in trading refers to when your losses surpass the amount of capital you have in your investment account. When liquidated, all your funds are lost due to losses and your position is closed out. Liquidation is seen as the most negative event for any trader and should be avoided at all costs. Liquidation only happens after a margin call is not met and the market keeps moving against the position.

Long position

A long position simply refers to a buy position. When you go long it means that you are buying a financial asset. The opposite of a long position is a short position. All buyers in a marketplace have long positions in their portfolios. On average there are more long positions than short positions in the stock market and therefore, the market keeps ticking up year after year.

M

Margin

Margin refers to the collateral capital used when borrowing money. In trading and investment, margin capital is often used when trading with leverage where the broker often asks for an initial deposit of capital, the margin capital. Without margin, an investor or trader cannot accessed borrowed funds. Margin is also seen as your risk capital.

Margin call

A margin call refers to the notification of low margin levels in your account when a position moves against you. When you open a margin-based position your capital is always put as risk capital and when a position moves against you it can only stay open as long as have the capital to cover the losses. Once the losses become close to greater than your margin capital, you will receive a margin call.

Market Capitalization

Market capitalization refers to the total value of a financial asset such as a stock. Market capitalization is calculated by adding the total amount of stocks in circulation times the current price of a stock. For example, if stock A is priced at $25 and there are 1,250,000 stocks in circulation, the total market capitalization of that stock is 25 x 1,250,000 = $31,250,00.

Market share

Market share is the total share for a financial asset of the market it is traded on. For example, the market share of the B stock could be 1.25% of the total stock market where it is traded. Market share can be calculated in different definitions as well. A company might have a certain percentage of an industry market share such as the auto industry or the technology industry.

Market order

A market order is an order type that allows an investor or trader to buy or sell the first bid or ask price in the order book. The market order is the fastest way to enter or exit the market. The market order will always buy or sell the first order in the order book. On some special occasions when the market is moving quickly, it can be difficult for you to exit with a limit order, and is better off using a market order to get instant access to the order book.

Market maker

A market maker is someone who “makes” a market by adding liquidity to buyers and sellers. Market makers can be an individual or an institution of different sizes. Market makers are usually compensated for adding liquidity to a market with reduced trading fees and can sometimes even get paid for adding liquidity. Market makers don’t normally hold a position in the market, instead, they buy and trade on the spread to earn a rebate on each trade.

Metatrader

Metatrader is a free forex trading platform that offers great technical tools and advanced algorithmic trading for both retail and professional traders. Metatrader is one of the most popular trading platforms today and was developed by Metaquotes back in 2005. The platform is licensed to forex brokers who provide this trading tool to their customers.

Mid-cap stock

A mid-cap stock is a stock trading with an average market capitalization. It is not a big stock and it is not a small stock, it’s right in the middle. An example of a mid-cap stock is Avis Budget Group, Dunkin’ Brands Group, and First Solar. These companies and stocks are usually valued at between $2 billion and $10 billion and are traded on certain stock exchanges.

Mortgage

The definition of a mortgage is an agreement between you (the borrower) and the lender where you give the lender the right to take your house shall you not be able to pay back the borrowed amount plus the added interest. A mortgage is a way to give security to the lender and leverage to the borrower for a house loan where the house is used as an asset.

Moving Average

A moving average is a chart-based technical tool for analyzing financial assets. The moving average, or MA, smoothes out the price development by calculating the latest closes based on the number of days. The moving average is used to see the average price changes in a financial asset. Moving averages are very popular among investors and traders who base the decisions on technical indicators.

Mutual fund

A mutual fund is a professional investment vehicle that collects money from investors and uses this money to allocate it to different financial assets by investing in stocks, bonds, commodities, real estate, and currency. Mutual funds are managed by professional investors who purchase securities with the money invested in the fund. When the mutual fund makes a profit, it is spread among all the investors who have added money to the fund.

N

Nasdaq

Nasdaq is a USA-based stock exchange founded back in 1971 and is ranked second in size when compared to other stock exchanges. All stock trading on Nasdaq is done electronically and some of the biggest names on the market are traded here such as Facebook, Apple, Microsoft, and Google. The current market cap of all traded stocks on Nasdaq is $19.4 trillion.

Negative Balance Protection

Negative balance protection is a risk management tool that protects a margin account from going into negative numbers. Some brokers and stock exchanges that offer margin trading will let losers run until a trader has a negative balance in his or her account. Negative balance protection stops this from happening and is one of the best risk management tools for margin traders and investors.

Net Asset Value (NAV)

Net asset value refers to the total asset value of an individual or financial institution after deducting the liabilities. The net asset value is used to calculate the total value of assets in mutual funds and exchange-traded funds. The NAV is always calculated at the end of the trading day when the market has closed for the day.

Net worth

Net worth refers to the total value of all assets of an individual or an institution. When calculating the net worth of a company you first add all the assets and then deduct all the liabilities to get the total net worth. You can see the net worth as a calculation of what a person or an institution owns minus what it is owed to other companies or entities.

New york stock exchange (NYSE)

The new york stock exchange, or NYSE, is the largest stock exchange in the world with a total market capitalization of $26,2 trillion as of 2021. NYSE was founded back in 1792 on Wall Street in New York. The daily volume traded on the new york stock exchange reaches up to $25 trillion per day. The NYSE is owned by Intercontinental Exchange.

Noise

Noise in trading and investment refers to something that is not important. It can be any kind of data or statistic that is added to an analysis that is not important. News, price movement, traders’ recommendations, rumors, and published non-professional analyses are often seen as noise. Noise is usually hard to see as it is everywhere and investors should do whatever they can to filter out the noise and focus on the important factors.

O

Options

Options trading is a financial instrument with a value that is based on an underlying asset such as stock, commodity, forex, or cryptocurrency. Options give the trader or investor the possibility to buy or sell a financial asset at a specific strike price in the future or at a certain date. Options are used to bet on positive and negative price movements by paying a premium that is predetermined by the option seller. The different types of options are called puts and calls. Puts are bets for a negative price movement and calls are bets for a positive price movement.

Overbought / Oversold

Overbought and oversold refers to the state of the price of a financial asset or security. If a financial asset is overbought it is considered to be priced too high and if an asset is oversold it is considered to be priced too low. Overbought and oversold prices can be determined by using technical indicators such as RSI (relative strength index) and Stochastic.

Over the counter (OTC)

In investing or trading, over the counter (otc) is a special market where financial assets and securities are traded directly through the broker or stock exchange instead of being traded in the open market peer-to-peer. Over-the-counter markets are often used for larger transactions or when the underlying asset is considered a risky investment. Bitcoin is very often traded otc due to the price volatility. Investors who want to buy Bitcoin in bulk need to turn to over-the-counter desks to reduce the market risks when investing.

P

Penny stock

A penny stock is a stock that is valued at less than $2-$5 and is typically a small-cap stock. Penny stocks have been recognized for out-sized gains and equally large downturns on the stock market and they are often traded by active day traders. Penny stocks exist on most stock exchanges and are considered a high-risk investment.

Pip

A pip is the smallest unit of change in the forex market. A pip is the fourth decimal of the quote. For example, if the price of EUR/USD is priced at 1.1943, then 3 would be the pip. Pip is often used to describe the spread commission on forex brokers when the fee schedule is explained. Pip stands for percentage in points and is one-hundredth of a percent.

Pre-market

The pre-market in investing and trading is a market that takes place before the regular market opens. It usually opens an hour to a couple of hours before the standard session and it is used to gauge the opening of the regular market. If the pre-market is selling of it is most likely that the standard session will have a negative start.

Profit

Profit in the simplest term means financial gain. Whenever you close out an investment of a financial asset or security in profit it is classified as monetary gain. Profit can be made by both buying and selling financial instruments and it is the common goal of all companies, individuals, and institutions who are operating in the financial markets.

Portfolio

A portfolio in finance is considered the basket of financial assets owned by the investor or institution. The portfolio is the selection of securities that an investor or institution has chosen to invest in to make a financial gain. Portfolios can be structured very differently depending on the goal of the management. Most retail portfolios are made up of stocks and ETFs while professionals use more complex financial instruments.

Portfolio turnover

The total portfolio turnover is the amount of capital transacted when buying and selling financial instruments combined. To calculate the portfolio turnover you multiply all the securities bought and all the securities sold. Portfolio turnover is an important measurement for investors looking at investing in funds for example due to the fees associated. A fund with a higher portfolio turnover has higher fees in general.

Position

A position in investing and trading is the active investment in a financial asset or security. A position can be seen as an investment in a stock, a currency pair, a commodity, an ETF, a precious metal, or a fund. A position is an investment that is tracked in the investment portfolio or in the trading account. To enter a position you either need to buy or short-sell a financial asset.

Premium

A premium in finance terms refers to an increase in price due to higher demand than usual. Premium can be seen in several parts of the financial world as different securities attract a different amount of investors. A popular premium has been scouted in Bitcoin and is called the Kimchi Premium. This premium is found in Korea as the demand for Bitcoin in this region was much higher than in the western world. This caused Bitcoin to have a much higher price in Korea than in the rest of the world, therefore adding a premium to the price.

Pullback

A pullback in trading or investing refers to when price retreats or falls back after a longer period of increasing prices. A pullback is often seen as a resting period where demand for the underlying asset is temporarily reduced and the price falls to a lower level. Trends usually have several periods of pullbacks along the way and these pullbacks are often seen as a good moment to increase the position size if already invested or a good opportunity to enter the market if you are kept on the sidelines.

Q

Quantitative easing

Quantitative easing, or QE, is a type of monetary policy and refers to the process when a central bank of a nation prints more of the local currency to support the economy by adding more liquidity to the system. This liquidity is added by buying long-term dated securities which directly inject money into the economy. These securities are generally government bonds.

Quarterly earnings

Quarterly earnings are earnings releases for companies and individuals which are made public each quarter. These financial reports are used to gauge the financial activity and health of an individual or institution. Quarterly earnings are public information and are required by several stock exchanges all over the world to provide information to investors about the health of a certain company.

Quote

A quote is the same thing as price when seen in financial markets. When the price of a stock is displayed it is generally called the quote of the stock. Quotes can be seen on all stock exchanges that have publicly traded companies. If you wish to see the price of a stock, simply put the name of the stock + the word quote after to get the latest price updated on Google.

R

Regulation

A regulation in finance refers to a set of rules created by a government. Most legitimate businesses that operate in the financial markets are regulated by a government to assure that only the best practices are exercised. Regulations exist for the government to control the financial activity of individuals and institutions to make sure that fair activities are used in the financial markets.

Return on investment

Return on investment refers to the financial gain in percentage for each investment made. When committing capital as an investment to a financial asset or security, the investor expects to make a return on investment that offsets the risk. Return on investment is usually in percentage. For example, if you purchase a stock and sell it at a 20% gain at the end of the year, your total return on investment is 20%.

Risk

Risk in investing and trading is the capital invested in each position and investment. The level of risk in financial markets depends on several factors such as the market, volatility, and total capital invested. No investor can avoid risk and it is an essential part of playing the financial markets. Risk can hurt you if you ignore it completely but it is necessary to take on risk to be able to earn a return on investment.

S

SEC

SEC stands for Securities and Exchange Commission and is one of the biggest regulatory bodies in the United States. SEC was created after the crash of 1929 and the main purpose of the agency is to control and prevent market manipulation. SEC is meant to protect investors by providing information about professionals and companies and monitoring transactions.

Security

A security is a financial asset such as a stock, ETF, or government bond. All securities have some kind of underlying value and they all represent some kind of financial asset. Most securities are traded on a stock exchange and can be accessed by both retail and professional investors. There are different laws and regulations on security trading depending on the jurisdiction you are in.

Shareholder

A shareholder is an owner of a stock of a company. When a stock goes public on the stock market it first creates an IPO (initial public offering) where investors can invest in stocks of the company. When you buy a stock of a company you become a shareholder of that company which makes you an owner of a small portion of the company.

Short selling

Short selling in investing and trading refers to the process of betting on a negative price movement. Shorting a stock or another security means that you borrow a financial asset, sell it to another counterpart, and bet on a negative price movement of a security. Short selling is considered a risky endeavor and should only be attempted by professionals.

Short squeeze

A short squeeze is an attempt to make short sellers of a stock close out their positions by driving up the price. When short sellers short a stock or another financial asset they are essentially betting on declining prices. When prices rise, short sellers lose money on their positions, and if prices keep rising they get “squeezed” out of their positions and are forced to buy back the stock.

Slippage

Slippage refers to when a buy or sell order doesn’t get executed at the right price. For example, if you wish to buy a stock at $13,30 and you get filled at $13,40 there is a slippage of $0,10. Slippage occurs when there is high market volatility and the price is moving fast up or down. This causes matching engines to make errors which result in trades getting filled at wrong prices.

Small-cap stock

A small-cap stock is a stock with a low market capitalization. Usually, small-cap stocks have a lower market capitalization than $2 billion. Small-cap stocks are traditionally seen as a risky investment and are often owned by new companies trying to compete for market share. Small-cap stocks are traded on most stock exchanges across the globe.

Spot market

The spot market is where financial instruments such as stocks, commodities, and currencies are traded for direct delivery. Another word for the spot market is cash market. On the spot market, you buy and sell securities at spot prices. The spot market delivers the financial asset immediately compared to the futures market that will deliver on a set date in the future.

Spread

The spread in trading and investing is the price difference between the highest buy price and the lowest sell price. The spread is generally seen as the fee or commission you pay to purchase a financial asset or security. The forex market is known for having very low spreads which means that the difference between the buy and sell price is very small.

Stock

A stock is a financial instrument that gives the investor partial ownership of a company. Stocks are traded on the open market at stock exchanges across the world. Stocks have different market capitalizations. The different types of stocks are small-cap stocks, mid-cap stocks, and large-cap stocks. Stocks are seen as a financial instrument with a medium risk profile.

Stop loss

A stop loss is a risk management tool that protects the investor by limiting the potential losses with a protective stop. Stop losses are mostly used by short-term traders and swing traders that try to capitalize on short-term movements in price and at the same time protect their downside. Stop losses are automatic orders that are used at the time of the purchase but can be added afterward as well.

T

Technical analysis

Technical analysis is a type of analysis using charts and statistical trends. Technical analysts are using charts and graphs to determine trends and opportunities in financial instruments such as stocks, currencies, and commodities. Technical analysis by retail traders and investors is often done with technical indicators such as RSI, Stochastic, Bollinger Band, Volume, and MACD.

Trading plan

A trading plan tells how an investor or trader fins and executes trades in the financial markets. A trading plan consists of the analysis, preparation, execution, management, and closing of a trade. Without a trading plan, most traders and investors are blindly investing and trading in the financial markets. Trading plans help investors stay structured and organized.

Trading range

A trading range in financial terms refers to a price range of an underlying asset. For example, if a stock has been trading in a range between $10 and $12 for a couple of weeks, this range is called a trading range. Trading ranges can be both narrow with just a few cents in change and also wider with several dollars difference between the highest price and the lowest price.

Trailing stop loss

Similar to the standard stop loss, a trailing stop loss is a risk management tool that adds a protective stop to prevent unexpected losses to occur when investing in stocks or trading other financial assets. A regular stop loss is a static stop order while a trailing stop loss order follows the price up or down with a preset distance in price. For example, you can set a trailing stop loss to always follow the price up or down at a $5 distance. This can help the investor lock in profits while the market keeps moving in his or her favor.

Trend

A trend is the overall direction of a market or a financial asset. For example, if a stock has been moving higher each month during a year the trend for this stock is positive. Trends are used to describe both the short-term and long-term direction of a security. A trend can give conviction o investors and traders to buy or stay with a trade. When a trend changes, the overall direction of the market changes.

Turnover

The turnover for stock or financial assets is the traded volume or the total liquidity. It is calculated by adding all the sold shares together with all the bought shares during a trading day.

Underlying asset

An underlying asset is a financial asset from which a value is derived. For example, you can invest in a Bitcoin ETF where the underlying asset is Bitcoin but you are indirectly investing in the underlying asset by purchasing the ETF. Many derivatives mirror the price of their underlying assets. When you buy the underlying asset of some kind of financial security you are buying the real asset.

Uptick

Un uptick refers to when price increases at the smallest increments. For example, if a currency pair increases with a 1 pip, you would say that there is an uptick of 1 pip. An uptick is a widely used term in the financial markets when talking about smaller positive price movements. The opposite of an uptick is a downtick which is the downward movement in price.

Valuation

A valuation is given to all financial assets and securities such as stocks, commodities, ETFs, and currencies. The current valuation of a stock is the price. Valuations are also used by investors to gauge whether there is an opportunity to invest in financial assets. Securities can be undervalued or overvalued depending on demand and supply.

Volatility

Volatility is the measure of the rate of price for a tradable asset. If a stock is increasing and decreasing in price at a fast rate you say that the volatility is high. Low volatility happens when there is a low rate of price changes in a security. Most intraday traders depend on high volatility to execute trades to make a profit.

Volume

Volume is the combined amount of buy and sell orders for a specific security. The total volume for a stock is calculated by adding all the transactions, both buy and sell orders, that are executed in a single day of trading. High volume means more trading activity and low volume means lower activity. Most stock exchanges will display the volume profile for each tradable instrument on the exchange.

Wall Street

Walls Street is the financial district in New York and also a combined name for all the financial markets traded on the New York Stock Exchange (NYSE). Wall Street is roughly 800m long and runs in the lower Manhattan of New York City. Wall Street has gotten a reputation for being the center of financial activity in the USA and this is where many banks, hedge funds, and investment banking companies are located.

Yield

Yield is a measure of the return of a financial asset. For example, if you invest in a long-term bond with a yield of 1,50% per year you say that your yield is 1,50%. Different tradable instruments have different yields and the higher the yield the riskier the investment. Yields are measured over a specific period from 1 month to several years.