TRADING TERMS & DEFINITIONS
WHY SHOULD YOU KNOW THE DIFFERENT TRADING DEFINITIONS?
See the reasons below...
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The stop order is used for minimizing of losses if the financial instrument price has started to move in an unprofitable direction. If the price reaches this level, the whole position will be closed automatically. Such orders are connected to an open position or a pending order.
STOP LOSS
SPREAD
Spread in online trading is the difference between the bid price and ask price of an underlying asset in the same time. Generally, the bid–ask spread is the difference between the prices quoted in the market.
LEVERAGE
Leverage, or more precisely a financial leverage in trading, is a tool to multiply profits, though the risk of the corresponding multiplication of loss emerges at the same time. The leverage allows for the replenishment of equity by often much higher volume of external capital.
In a simplified way, the size of the leverage is directly proportional to the size of a profit or a loss. For example, if a trading transaction would close at a profit of USD 100, using leverage 1:5 the profit reaches USD 500 and leverage 1:100 would mean a profit of USD 10,000. Generating a loss of USD 100, however, would mean in case of leverage loss of the same volume as is the profit above.
MARGIN
Margin in trading usually means the necessary guarantee funds so as to open or maintain open positions in a transaction. Open position is either a long position or a short position, in other words, the process of buying or selling an asset, which has not been completed yet.
LOT
A lot is a fixed quantity of units and depends on the instrument traded. When traders purchase and sell financial instruments in the capital markets, they do so with lots. For example, when trading forex, there are micro, mini, and standard lots. A micro lot is 1,000 of the base currency, a mini lot is 10,000, and a standard lot is 100,000. While it is possible to exchange currencies at a bank or currency exchange in amounts less than 1,000, when trading through a forex broker, typically the smallest trade size is 1,000 unless stated otherwise.
PIP
Used in forex, a pip is one-hundredth of one percent, or the fourth decimal place (0.0001). A pip is the smallest price move that an exchange rate can make based on the forex market convention. Most currency pairs are priced out to four decimal places and the pip change is the last (fourth) decimal point. Currency base pairs are typically quoted where the bid-ask spread is measured in pips. For example, the smallest move the USD/EUR currency pair can make is $0.0001 or one basis point.
Margin call in trading usually refers to a situation when a broker informs their client, a trader, to deposit additional funds when the trader does not have enough margin to open or maintain an open position.
MARGIN CALL
SWAP
A swap in online trading means an interest added or withdrawn for holding open position overnight.
Generally, a swap is a type of a financial derivative that is usually used to hedge a certain financial risk (change in interest rates, exchange rates) or to speculate. This is an agreement of two parties on future payments from the underlying asset. A swap is an entity's obligation to a client to buy or sell at a specified time, under specified conditions.
SHORT POSITION
Definition of short selling (shorting)
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Short selling refers to any investment or trading strategy, which speculates on the decline in a stock or other securities price. Investors appreciate their investment when prices fall.
When investors short sell securities
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Investors short sell when they believe that securities price is about to drop. They use shorting either for speculation or hedging. Speculation is used for investment appreciation from potential decline of a concrete security. Another option is hedging employed to offset losses in securities or portfolios.
How short selling works
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When the investor decides to short sell, he offers his position through financial instrument, which is expected to be declining. The investor offers these borrowed financial instruments to a buyer willing to pay the market price. The seller must commit that the price will further decline and its purchase is possible before return of the financial instruments.
LONG POSITION
With online trading a long position means a buy position that appreciates in value if the underlying market price increases. For example, of currency pairs: buying the base currency against the quote currency.
The quote currency is the second currency in the currency pair which can be bought or sold for the base currency.
Long position is the opposite of a short position.
CFD
CFDs are financial derivatives that are used to speculate on price movements. When using the CFD of stocks, the trader does not become the owner of the physical stocks. Thus, he is not entitled to a share in profits of the company or to any decision-making powers. On the other hand, stock exchange fees do not apply and CFD trading is faster and easier than traditional assets.
Unlike equities or currencies, CFDs began to be used relatively recently - in the 1990s. They were initially used by investment institutions to hedge against movements in share prices. Later, they have become a product on the market for small investors and traders.
Simply, a CFD is created by opening a position and ends by closing it. It is possible to speculate on a fall or rise in prices. When the position is closed, the trader's speculation is equal to the actual course of the price. There is a realization of profit or loss.
This is further multiplied by the use of financial leverage, which allows replenishment of the volume of equity by often a significantly higher volume of external capital. Trading with a higher "amount" thus leads to an increased profit or loss.
A higher volatility means that a security’s value can potentially be spread out over a larger range of values.
A lower volatility means that a security’s value does not fluctuate dramatically, and tends to be more steady.
