I’ve listed a glossary of popular spread trading and general financial terms on this page with a brief description of each.
If you spot any terms missing that you’d like to see listed use the Contact Us page to send me an email.
A
After Hours Trading - The practice of buying and selling shares during a period of time (usually 30 mins) after the major markets are officially closed. Generally reserved to institutional investors. During results season after hours trading can see large rises or falls in the share price of a company who has just announced quarterly results.
Arbitrage - Sometimes a security can trade at two different prices on two different exchanges. In these scenarios the security can be bought on one exchange and sold on the other. When the prices come back into line both positions can be closed out for a risk free profit.
Ask - The price at which you can buy a share.
Average Down - The practice of opening a new position at a lower price with the view of bringing the average price of your holding down.
B
Backwardation - The spot price of a commodity (price for immediate delivery) is higher than the future price (price for delivery at a future date). Often associated with the current and future price of Crude Oil. The opposite of Backwardation is Contango.
Balance Sheet - A summary of a company’s assets and liabilities.
Bear - Someone who believes that share prices in the market are going to go down. When we are in a bear market that means that the Bears are in control which in turn leads to prices falling. The opposite of a Bear is a Bull.
Bid - The price at which you can sell a share
Blue Chip - Blue Chips are considered to be the most highly valued, largest and safest companies. Examples would include Coca Cola, McDonalds, Microsoft, IBM to name a few. Most pension funds will invest a significant proportion of their fund in Blue Chips as they are believed to be less risky than other shares and offer good growth rates. The term comes from poker where blue chips are the most highly valued chips in the game.
Bollinger Bands – Bollinger Bands are a technical analysis tool invented by John Bollinger in the 1980s. They are used to measure the highness or lowness of a share’s price relative to previous trades. They work off the standard deviation from a simple moving average, with an upper and lower bollinger band depicting how far from the simple moving average selected the current share price is trading at.
Bond - A certificate of debt issued by a company or government. The price a bond trades at will vary based on the yield it offers and the credit rating of the issuing company or government.
BRIC - BRIC stands for the following emerging economies – Brazil Russia India China
Bull - Someone who believes that share prices in the market are going to rise. When we are in a bull market that means that the Bulls are in control which in turn leads to prices rising. The opposite of a Bull is a Bear.
Buy - When you Buy (or go Long) this means you are buying a security (or taking a long position) with the expectation that it is going to rise in price. You can also Buy at the lower of the two spread prices when you want to close out an exisiting short position.
C
Cable - Cable refers to the British Pound / US Dollar currency pair on the foreign exchange market.
Call Option - The option, but not the obligation, to buy a security at a fixed price on or before a predetermined date.
Capital Gains Tax - Capital Gains Tax (CGT) is a tax required to be paid to the Irish Revenue Commissioners on the profits made on the sale of an asset. You are required to pay CGT on the profits made on the sale of any shares you own. CGT was recently raised to 25% in the recent Supplementry Budget in April 2009. One of the advantages of spread trading is that currently there is no CGT liability on profits made because you as an individual never take ownership of the shares or other securities that you spread trade.
Cashflow - Cashflow is one of the measures of a companies financial health often used by those who trade based on fundamental analysis. It is a company’s cash receipts minus it’s cash payments over a period of time.
CFD - CFD stands for Contract For Difference. It is a financial instrument that is very similar to a spread bet.
Closing Price - The price of the last transaction that a share was traded at on a given trading day. Most financial websites will post the closing price of all shares listed. In a spread trading context the closing price is the price at which you closed out an existing position.
Collateral - Assets pledged by an investor or borrower to cover the payment of a loan in the event of default.
Commodity - Commodities are any physical substance which investors can buy or sell. Examples include Gold, Silver, Oil, Natural Gas, Grain, Soybeans, etc..
Contango - The spot price of a commodity (price for immediate delivery) is lower than the future price (price for delivery at a future date). Often associated with the current and future price of Crude Oil. The opposite of Contango is Backwardation.
Contract Expiry Date - The date on which a futures contract (or spread bet) expires
Contract Month - The month during which a futures contract (or spread bet) expires
Credit Rating - The evaluation given by a credit to a company or country based on it’s overall ability to pay it’s debts.
D
Day Trading - A approach to trading where positions are short-term, typically opened and closed in the same day.
Dealer - A person, or institution, through which shares or securities can be bought or sold.
Debt - Money a company owes to banks, financial institutions, other companies or individuals.
Depreciation - The reduction in the value of an asset (e.g. Vehicles, machinery, computers) over time.
Dividend - The proportion of a company’s earnings distributed back to it’s shareholders in cash on an annual basis.
Dividend Return - The dividend return is calculated as the dividend paid out by a company as a percentage of the current share price.
Double Bottom - A technical analysis term where a share’s price has made two almost equal bottoms (price lows) over a relatively short period of time. Traders often try to buy the 2nd bottom with the view that the share’s price will rise forming a “W” shape on the share’s chart. The opposite of a double bottom is a double top.
Double Top - A technical analysis term where a share’s price has made two almost equal tops (price highs) over a relatively short period of time. Traders ofter try to short the share at the 2nd top with the view that the share’s price willf all forming a “M” shape on the share’s chart. The opposite of a double top is a double bottom.
E
Earnings Per Share - A popular financial ratio used to value companies, Earnings Per Share (EPS) is calculated by dividing the company’s annual profit by the total number of shares outstanding.
Emerging Markets - Countries with developing economies who often experience rapid growth and offer good investment opportunities. Emerging Markets are also often considered to be very instable and high risk.
Equity - Securities issued as shares in a company.
Ex-Dividend Date - The date on which any share purchases after this date no longer qualify for the company’s most recent dividend payment.
Exchange Traded Fund - Exchange Traded Funds (or ETFs) allow you to trade baskets of shares from a particular market, e.g. You could trade an Irish ETF, a China ETF, etc…ETF’s are considered a good way to get exposure to a particular sector without having to buy multiple securities from that market.
F
Falling Knife - A technical analysis term given to a share whose price is falling rapidly. It is not considered a good idea to buy a share whose current price could be considered a falling knife. See “Golden Rules – Part 2” for more details.
Fibonacci - A technical analysis term which focuses on share price retracement levels and the resistance that may be met at these levels. The important Fibonacci retracement levels are 23.6%, 38.2%, 61.8%, 78.6% and 100%.
Fifty-two Week High - The highest share price a share closed at during the last year (52 weeks)
Fifty-two Week Low - The lowest share price a share closed at during the last year (52 weeks)
Foreign Exchange - Also known as FX or Forex, Foreign Exchange is the name given to the worlds currency markets. It lists the current exchange rates between all the worlds major currencies.
Forward P/E - The expected Price Earnings (PE) Ratio that a company will have next year assuming it delivers on it’s earnings estimates. When compared with the current PE it can help identify rapidly growing companies.
Fund – Cash or assets invested according to the fund’s specified criteria on behalf of clients by a fund manager(s).
Fundamental Analysis - Fundamental analysis is the practice of studying the fundamentals of a business (revenues, profit margin, cashflow, etc) to determine if it is a good investment. Check out “Different Approaches” under “What is Spread Trading?” for more details.
Futures - Futures markets list the price at which you can by a security today for delivery at some agreed date in the future.
G
Gap Down - When a share’s price opens much lower than it’s previous closing price when the market opens it is said to have Gapped Down.
Gap Up - When a share’s price opens much higher than it’s previous closing price when the market opens it is said to have Gapped Up.
H
Hedge Fund – A fund which uses aggressive investment strategies to increase the funds value including shorting, leveraged investments and derivatives.
Hedging - Opening up another trade(s) to offset the risk of an existing trade going against you.
I
Illiquidity - Illiquidity is the phrase used to describe a stock or security whose shares trade very rarely or in very low volume. The opposite of illiquidity is Liquidity.
IMR - Initial Margin Requirement (IMR) is the amount of funds you need to have in your spread trading account to open up a €1 stake on a particular security.
Index – A statistical indicator which measures the performance or provides the value of the securities which make up the index in question.
Interest Rates – The cost or charge for the use of money over a period of time.
Interim Dividend - The dividend payment made by a company on a quarterly or half yearly basis is referred to as it’s Interim Dividend
IPO - An Initial Public Offering (IPO) is when a company offers a proportion of it’s shareholding for sale on the open market for the first time.
L
Leverage - Leverage (or Gearing) is when an investor only needs to put up a small proportion of the value of an asset in order to buy the asset in question. Spread Trading is a leveraged product. Leveraged investments are riskier than other types of investment.
Limit Order - A limit order is an automatic order set to close out a current open position should that limit price set be reached. When spread trading limit orders allow you to book profits at a certain price. The opposite of a Limit Order is a Stop Loss.
Liquidity - Liquidity is the phrase used to describe a stock or security whose shares trade in very large volumes and are therefore easy to buy at the current price. The opposite of liquidity is Illiquidity.
Listing - When a company’s shares are listed on a stock exchange it is referred to as a listing.
Long - When you go Long (or Buy) this means you are buying a security (or taking a long position) with the expectation that it is going to rise in price.
M
Market Cap - The market cap (market capitalisation) of a company is the current market value of that company. It is calculated by multiplying the current share price by the total number of shares issued.
Merger – The combining of two or more companies into one through share acquisition or other agreed pooling of resources.
Moving Average - The average price a share has traded at over the last x number of days. Common moving averages that technical anaysts watch are 5, 20, 50 and 200 day moving averages.
N
Noise – Price and volume fluctuations outside the norm which do not provide meaningful or useful information on a market’s direction.
O
Opening Price - The price of the first transaction that a share was traded at on a given trading day. Most financial websites will post the opening price of all shares listed.
Option - The option, but not the obligation, to buy a security at a fixed price on or before a predetermined date.
Ordinary Share –A regular share issued by a company and held (purchased) by a shareholder. It gives the shareholder the right to vote at the company’s AGM and receive a dividend.
P
PIGS - PIGS refers to the following countries whose economies have being falling in recent years – Portugal Ireland Greece Spain
Pip - A pip (also known as a tick or a point) is the smallest unit of movement in a spread bet. Typically a when spread trading shares a pip is the equivalent of 1 cent (however it for very cheap shares it can be pips can be measured in parts of a cent). Each 1 pip movement will result in either an increase or decrease on your open profit or loss on the trade depending on the direction of the movement.
Pit - The pit is the name used to refer to the trading floor of any of the major exchanges (e.g. NYSE, NASDAQ). It is where traders make prices and buy and sell shares on the market. During times of extreme volatility trading can be frantic amoung the traders as they try to make deals as fast as possible at the best prices available and hence the pit gets its name.
Point - A point (also known as a tick or a pip) is the smallest unit of movement in a spread bet. Typically a when spread trading shares a pip is the equivalent of 1 cent (however it for very cheap shares it can be pips can be measured in parts of a cent). Each 1 pip movement will result in either an increase or decrease on your open profit or loss on the trade depending on the direction of the movement.
Portfolio - A collection of investments (equities, bonds, commodities, property) grouped together are referred to as a portfolio.
Position - An open spread trade (either long or short) is referred to as a position.
Preference Share - A perference share in a company pays a higher dividend than an ordinary share. Also, in the case of liquidation preference shares are redeemed before all other loans and shares. Preference shares trade at a premium to ordindary shares.
Price Earnings Ratio - A popular financial ratio used to value companies, the Price Earnings (PE) Ratio is calculated by diving a company’s current share price by it’s Earnings Per Share (EPS). See Earnings Per Share.
Profit & Loss Account – Part of a companies annual financial filings, a Profit and Loss (P&L) Account is a summary of earnings, expenses and calculated net profit.
Q
Quarterly Results - Financial results for US listed companies are annouced to the market on a quarterly basis.
R
Refinancing – Paying off an existing loan with another loan or equity issue.
Relative Strength Index – The Relative Strength Index or RSI is a technical analysis indicator which measures the magnitude of recent gains of a stock or index over a given time period against the magnitude of losses over that period. The RSI ranges from 0 to 100 and is usually calcuated using over the last 14 periods. Technical Analysts believe an RSI value of 30 or below indicates a market is oversold and a value of 70 or above indicates a market is overbought.
Resistance - When a company’s share price fails to get above a certain price level this level is deemed to be resistance. Resistance occurs when there are lots of sellers at a particular price level, so each time the share price reaches this level the price typically falls back due to increased selling pressure. Technical analysts believe share prices can go much higher once they eventually clear an area of strong price resistance. The opposite of Resistance is Support.
Return On Equity – Return on Equity (ROE) is a measure of how well a company used reinvested earnings to generate additional earnings.
Return On Investment – Return on Investment (ROI) is a measure of the profit from your investment divided by the investment itself (usually expressed as a percentage).
Rollover - On the contract expiry date you have the option of rolling over an open trade to the next contract expiry month. Typically this involves closing out your current position (at either a profit or loss based on the close-out price) and opening up a new position.
S
Sell - When you Sell (or go Short) this means you are selling a security (or taking a short position) with the expectation that it is going to fall in price. You can also Sell at the lower of the two spread prices when you want to close out an exisiting long position.
Short - When you go Short (or Sell) this means you are selling a security (or taking a short position) with the expectation that it is going to fall in price.
Spot Price – The current delivery price of a given commodity being traded on the spot market.
Spread - The Spread is the difference between the Buy and the Sell price for a particular security that you may want to spread trade. This spread is effectively the cost for you to open the trade. It is also where the spread trading companies make their profit.
Stake - The Stake is the number of Euro per 1 tick movement that you are betting when you open a spread trade. If for example your stake on a trade is €5 per tick, then for each one tick movement in a particular direction you will either make or lose €5 depending on whether you are Long or Short on the security in question.
Stop - A Stop (or Stop Loss) is an automatic order set to close out a current open position should the stop loss price set be reached. When spread trading stop loss orders allow you to limit your losses to a certain amount. The opposite of a Stop Loss is a Limit Order.
Support - When a company’s share price fails to fall below a certain price level this level is deemed to be support. Support occurs when there are lots of buyers at a particular price level, so each time the share price reaches this level the price typically rises due to the increased buying pressure. Technical analysts believe share prices can go much lower once they eventually break through an area of strong price support. The opposite of Support is Resistance.
T
T-Bill – A T-Bill (or Treasury Bill) is a non-interest paying security, issued by goverenments (particularly the US) to finance national debt. The return to the investor is the difference between the price paid and the price at maturity.
Takeover - When one company makes a successful bid to purchase all of the outstanding shares of another company this is termed a Takeover.
Technical Analysis - Technical analysis attempts to predict the future movement or direction of a share’s price based on it’s past performance. Technical analysts are sometimes referred to as chartists.
Three Black Crows – A bearish technical analysis pattern identified when a share’s chart has 3 red candlesticks in a row, each with a lower close then the previous.
Three White Soldiers – A bullish technical analysis pattern identified when a share’s chart has 3 green candlesticks in a row, each with a higher close than the previous.
Tick - A tick (also known as a pip or a point) is the smallest unit of movement in a spread bet. Typically a when spread trading shares a pip is the equivalent of 1 cent (however it for very cheap shares it can be pips can be measured in parts of a cent). Each 1 pip movement will result in either an increase or decrease on your open profit or loss on the trade depending on the direction of the movement.
Trend Line - A technical analysis term used to descibe whose share price is either rising or falling on a clearly defined trend line. Typically if a straight line can be drawn which intersects at least 3 points on a share’s chart then this can be called a trend line. When a share’s price breaks a trend line this can be a sign that it is about to reverse or break out of it’s current trend.
Triple Bottom - A technical analysis term where a share’s price has made three almost equal bottoms (price lows) over a relatively short period of time. Traders often try to buy the 3rd bottom with the view that the share’s price will rise. The opposite of a triple bottom is a triple top. A triple bottom is similar to a double bottom but is considered an even stronger sign that the share’s price will rise from this bottom as it failed at this support level 3 times in a row.
Triple Top - A technical analysis term where a share’s price has made three almost equal bottoms (price lows) over a relatively short period of time. Traders often try to buy the 3rd bottom with the view that the share’s price will rise. The opposite of a triple bottom is a triple top. A triple bottom is similar to a double bottom but is considered an even stronger sign that the share’s price will rise from this bottom as it failed at this support level 3 times in a row.
U
Underwriter - An entity (financial institution, company, government, individual) who agrees to take up any unsold shares in a rights issue. They are said to “underwrite the share issue”.
V
Volatility – The relative rate at which the price of a security moves up or down. If the price of a security moves up and down rapidly over a short period of time it has high volatility. If the price of a security rarely changes it has low volatility.
Volatility Index – The Market Volatility Index (VIX) is designed to track market volatility as an independent entity and is used as a way to measure investor sentiment. A high VIX rating is considered a sign of negative market sentiment whereas a low VIX rating is considered a sign of positive market sentiment.
Volume - The number of shares traded in a particular security or index on any given day.
VWAP – Volume Weighted Average Price (VWAP) is the average price paid for a particular security or index over a period of time.
W
White Knight – A third party bidder for a company who the target company prefers over the hostile bidder.
Working Capital – Working capital is the cash available to a company to cover it’s day to day running costs. It is calculated by subtracting total current liabilities from total current assets.
Y
Year End - The date on which a company’s financial year ends. It reports it’s financial results up to that date.
Yield - The percentage return offered by a particular security, e.g. Dividend Yield is the % return a particular share’s dividend offers.
