If you’re new to trading, you may be a little overwhelmed by the sheer magnitude of the financial trading world. One of the best ways to make sense of it all is to understand and master trading language, which will not only help you speak the technical language of the financial markets, but help you develop a deeper understanding of the world of investing. In the following article we introduce new traders to 20 terms that may sound like jargon right now, but are actually critical to your success in the financial markets.
Buy/sell order: An order is an instruction to buy or sell a security on the open market. There are many types of orders that investors can give (see below for examples).
Market order: A market order is a simple instruction to buy or sell a security immediately at current market prices.
Limit order: A limit order is an instruction issued by the investor to buy or sell a security when it reaches a specific price. A limit order sets the maximum and minimum at which you are willing to buy or sell a security.
Stop loss order: A stop loss is an order to sell a security when it reaches a specific price. It is designed to limit an investor’s loss on a position.
Take-profit (T/P) order: A T/P order allows investors to specify the exact rate from the current price at which they are willing to close their position for profit. Think of it as a way to lock-in profits in the event a security price moves in a favourable direction.
Margin: In forex trading, margin is the required amount of funds traders need to have in order to purchase a security using credit (i.e. leverage). Buying on margin allows traders to assume a position that is larger than the amount of money they put down. Margin requirements vary greatly in the financial industry.
Leverage: In the world of trading, leverage is a byproduct of margin that simply refers to the use of debt to acquire additional securities or assume a larger position in a trade. Leverage is often expressed as a ratio (i.e. 100:1), especially in the world of forex, and is based on the broker’s specific margin requirements.
Pip: In forex trading, a pip is the smallest unit of price change on a given exchange rate (i.e. EURUSD). For most pairs, this is expressed as one basis point.
Exchange rate: In forex trading, an exchange rate is simply the value of one currency in terms of another currency. For example, the EURUSD exchange rate refers to the amount of US dollars that are needed to buy one euro.
Spread: This concept refers to the difference between the bid price and the ask price of a financial security. The ‘bid’ and the ‘ask’ can be thought of as a two-way price quote that indicates the best price at which a security can be sold and bought at a certain time.
Arbitrage: Arbitrage refers to buying and selling a security at the same time in order to profit from its price difference.
Dollar-cost averaging: This describes an investment strategy that consists of gradually buying more securities in order to reduce the impact of price volatility. Investors who use this technique usually buy securities at a fixed dollar amount on a regular schedule. This means they buy more units of the security when prices are low and less when prices are high.
Bull: In the world of trading, a bull is an investor who believes that a certain security or market is headed upward. These traders are generally optimistic about the market and attempt to profit by purchasing securities.
Bear: In the world of trading, a bear is an investor who believes that a certain security or market is headed downward. These traders are usually pessimistic about the market and attempt to profit from declining prices.
Hawk: In finance, a monetary hawk is someone who believes low inflation should be the top priority in monetary policy. These individuals typically favour higher interest rates to keep inflation in line.
Dove: In contrast to the hawk, a monetary dove is someone who believes other issues such as low unemployment are more important than inflation in monetary policy. These individuals generally understate the impact of inflation on society.
Blue chip: In stock trading, a blue chip is a well-established company with a solid record of earnings and dividends. As a result, blue chips usually make good investment choices and are therefore included in major stock market indices.
Stock index: A stock index is a measurement of the value of a section of the stock market that gives investors information about the performance of the broader market. Each stock index contains a certain number of selected stocks. For example, the Dow Jones Industrial Average contains 30 of the largest companies listed on the New York Stock Exchange.
Correction: A market correction describes a scenario where the price of a particular security or index declines at least 10%. They are usually classified as temporary price declines that interrupt a general uptrend in the value of a security or market.
Recession: A recession is a temporary decline in economic activity, usually as a result of weaker trade, industrial activity or some other slowdown in activity. In economics, a recession is identified when gross domestic product (GDP) declines for at least two consecutive quarters.