In this section we collect the most relevant financial terms and definitions that is a must to know and understand as an investor in any asset class. Our source of information is mostly Investopedia and Wikipedia. These websites are very useful but they have tens of thousands of definitions available and it is hard to navigate among them. This selection of financial terms helps you to learn the basics quickly.
Ask is the price a seller is willing to accept for a security, which is often referred to as the offer price. Along with the price, the ask quote might also stipulate the amount of the security available to be sold at that price. Bid is the price a buyer is willing to pay for a security, and the ask will always be higher than the bid.
The terms “bid” and “ask” are used in nearly every financial market in the world, including stocks, bonds, foreign exchange and derivatives. An example of an ask in the stock market is $5.24 x 1,000 which means that someone is offering to sell 1,000 shares for $5.24 each.
The average true range (ATR) is a measure of volatility introduced by Welles Wilder in his book: New Concepts in Technical Trading Systems.
The true range indicator is the greatest of the following:
- current high less the current low.
- the absolute value of the current high less the previous close.
- the absolute value of the current low less the previous close.
The average true range is a moving average (generally 14-days) of the true ranges.
Wilder originally developed the ATR for commodities but the indicator can also be used for stocks and indexes. Simply put, a stock experiencing a high level of volatility will have a higher ATR, and a low volatility stock will have a lower ATR.
A bid price is the price a buyer is willing to pay for a security. This is one part of the bid with the other being the bid size, which details the amount of shares the investor is willing to purchase at the bid price.
A bid-ask spread is the amount by which the ask price exceeds the bid. This is essentially the difference in price between the highest price that a buyer is willing to pay for an asset and the lowest price for which a seller is willing to sell it.
For example, if the bid price is $20 and the ask price is $21 then the “bid-ask spread” is $1.
The size of the spread from one asset to another will differ mainly because of the difference in liquidity of each asset. For example, currency is considered the most liquid asset in the world and the bid-ask spread in the currency market is one of the smallest (one-hundredth of a percent). On the other hand, less liquid assets such as a small-cap stock may have spreads that are equivalent to a percent or two of the asset’s value.
A black swan is an event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult to predict. This term was popularized by Nassim Nicholas Taleb, a finance professor and former Wall Street trader. SNB decision in 2015 was a Black Swan Event.
Book value is the value at which an asset is carried on a balance sheet.
A clearing house is a financial institution that provides clearing and settlement services for financial and commodities derivatives and securities transactions. These transactions may be executed on a futures exchange or securities exchange, as well as off-exchange in the over-the-counter (OTC) market. A clearing house stands between two clearing firms (also known as member firms or clearing participants) and its purpose is to reduce the risk of one (or more) clearing firm failing to honor its trade settlement obligations. A clearing house reduces the settlement risks by netting offsetting transactions between multiple counterparties, by requiring collateral deposits (also called “margin deposits”), by providing independent valuation of trades and collateral, by monitoring the credit worthiness of the clearing firms, and in many cases, by providing a guarantee fund that can be used to cover losses that exceed a defaulting clearing firm’s collateral on deposit.
A contract for differences (CFD) is an arrangement made in a futures contract whereby differences in settlement are made through cash payments, rather than the delivery of physical goods or securities.
This is generally an easier method of settlement because losses and gains are paid in cash. CFDs provide investors with the all the benefits and risks of owning a security without actually owning it.
A derivative is a security with a price that is dependent upon or derived from one or more underlying assets. The derivative itself is a contract between two or more parties based upon the asset or assets. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes.
Derivatives either be traded over-the-counter (OTC) or on an exchange. OTC derivatives constitute the greater proportion of derivatives in existence and are unregulated, whereas derivatives traded on exchanges are standardized. OTC derivatives generally have greater risk for the counterparty than do standardized derivatives.
Direct market access (DMA) enables traders to submit buy or sell orders directly to the order book of an exchange. Traditionally, trading directly with the order book was only available to broker-dealers and market makers, but DMA enables private firms and investors to directly interact with the order book.
In the traditional method of placing a trade, your broker requests quotes from market makers and then presents the best quote, and therefore a single price, at any one time. You can then decide whether or not to accept it.
However, DMA allows you to see different prices of different orders and place your own order accordingly, bypassing intermediaries. Trading in this way creates a number of advantages.
Bypassing intermediaries can mean faster execution of transactions and lower associated costs.
DMA also gives you greater control as a trader, because instead of accepting a quote from a broker, you are now making an offer and managing the transaction yourself. This means that you place orders at the price you would like to get filled at and then wait for your order to be accepted.
Market liquidity, however, ultimately influences the price at which an order is filled, because you have to wait for a counter party to accept it.
There are a number of other advantages to using DMA, including:
- You can usually achieve a slightly better price for your order since there is no market maker involved to take a cut.
- Transaction fees are generally lower because you are only paying to use the broker’s technology rather than paying for order management services.
- Because no intermediary is involved in placing the trade, DMA also offers greater anonymity.
A dividend is a distribution of a portion of a company’s earnings, decided by the board of directors, to a class of its shareholders. Dividends can be issued as cash payments, as shares of stock, or other property.
The dividend rate may be quoted in terms of the dollar amount each share receives (dividends per share, or DPS), or It can also be quoted in terms of a percent of the current market price, which is referred to as the dividend yield.
A company’s net profits can be allocated to shareholders via a dividend, or kept within the company as retained earnings. A company may also choose to use net profits to repurchase their own shares in the open markets in a share buyback. Dividends and share buy-backs do not change the fundamental value of a company’s shares.
Exchange-traded funds (ETFs) are securities that closely resemble index funds, but can be bought and sold during the day just like common stocks. These investment vehicles allow investors a convenient way to purchase a broad basket of securities in a single transaction. Essentially, ETFs offer the convenience of a stock along with the diversification of a mutual fund.
A flash crash is a very rapid, deep, and volatile fall in security prices occurring within an extremely short time period. A flash crash frequently stems from trades executed by black-box trading, combined with high-frequency trading, whose speed and interconnectedness can result in the loss and recovery of billions of dollars in a matter of minutes and seconds.
A forward contract is a customized contract between two parties to buy or sell an asset at a specified price on a future date. A forward contract can be used for hedging or speculation, although its non-standardized nature makes it particularly apt for hedging. Unlike standard futures contracts, a forward contract can be customized to any commodity, amount and delivery date. A forward contract settlement can occur on a cash or delivery basis. Forward contracts do not trade on a centralized exchange and are therefore regarded as over-the-counter (OTC) instruments. While their OTC nature makes it easier to customize terms, the lack of a centralized clearinghouse also gives rise to a higher degree of default risk. As a result, forward contracts are not as easily available to the retail investor as futures contracts.
A futures contract is a contractual agreement, generally made on the trading floor of a futures exchange, to buy or sell a particular commodity or financial instrument at a pre-determined price in the future. Futures contracts detail the quality and quantity of the underlying asset; they are standardized to facilitate trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, while others are settled in cash.
A hedge is an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract. Hedging is analogous to taking out an insurance policy.
A perfect hedge is one that eliminates all risk in a position or portfolio. In other words, the hedge is 100% inversely correlated to the vulnerable asset.
An initial public offering (IPO) is the first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking the capital to expand, but can also be done by large privately owned companies looking to become publicly traded.
In an IPO, the issuer obtains the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), the best offering price and the time to bring it to market.
A liquidity provider connects many brokers and traders together, increasing the liquidity of the joint market. A higher liquidity is desirable for everyone, as it drives down the spread and thus the cost of trading.
Especially straight-through processing (STP) brokers will often try to connect themselves to many large liquidity providers to improve their own offered liquidity and prices.
Liquidity providers are often large banks and other financial institutions. In the currency market, the world’s largest liquidity provider is Deutsche Bank, also known as a leading retail and investment bank.
LIBOR or ICE LIBOR (previously BBA LIBOR) is a benchmark rate that some of the world’s leading banks charge each other for short-term loans. It stands for IntercontinentalExchange London Interbank Offered Rate and serves as the first step to calculating interest rates on various loans throughout the world. LIBOR is administered by the ICE Benchmark Administration (IBA), and is based on five currencies: U.S. dollar (USD), Euro (EUR), pound sterling (GBP), Japanese yen (JPY) and Swiss franc (CHF), and serves seven different maturities: overnight, one week, and 1, 2, 3, 6 and 12 months. There are a total of 35 different LIBOR rates each business day. The most commonly quoted rate is the three-month U.S. dollar rate.
piaci visszaélésekről szóló uniós irányelvek
- hogy a legsúlyosabb piaci visszaélésekre (bennfentes kereskedelem, bennfentes információk jogosulatlan közzététele, piaci manipuláció) az Unióban mindenütt álljanak rendelkezésre büntetőjogi szankciók,
- közös szabályozási keretek megteremtése a piaci visszaélésekre vonatkozóan,
- valamint intézkedéseket állapít meg a visszaélések megelőzésére.
A maintenance margin is the minimum amount of equity that must be maintained in a margin account.
A margin call is a broker’s demand on an investor using margin to deposit additional money or securities so that the margin account is brought up to the minimum maintenance margin. Margin calls occur when the account value depresses to a value calculated by the broker’s particular formula.
An investor receives a margin call from a broker if one or more of the securities he had bought with borrowed money decreases in value past a certain point. The investor must either deposit more money in the account or sell off some of his assets.
Market capitalization is the total dollar market value of all of a company’s outstanding shares. Market capitalization is calculated by multiplying a company’s shares outstanding by the current market price of one share. The investment community uses this figure to determine a company’s size.
Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset’s price.
Market liquidity refers to the extent to which a market, such as a country’s stock market or a city’s real estate market, allows assets to be bought and sold at stable prices. Cash is the most liquid asset, while real estate, fine art and collectibles are all relatively illiquid.
Cash is considered the standard for liquidity because it can most quickly and easily be converted into other assets. If a person wants a $1,000 refrigerator, cash is the asset that can most easily be used to obtain it. If that person has no cash, but a rare book collection that has been appraised at $1,000, they are unlikely to find someone willing to trade them the refrigerator for their collection. Instead, they will have to sell the collection and use the cash to purchase the refrigerator. That may be fine if the person can wait months or years to make the purchase, but it could present a problem if the person only had a few days. They may have to sell the books at a discount, instead of waiting for a buyer who was willing to pay the full value. Rare books are therefore an illiquid asset.
The stock market, on the other hand, is characterized by higher market liquidity. If an exchange has a high volume of trade that is not dominated by selling, the price a buyer offers per share (the bid price) and the price the seller is willing to accept (the ask price) will be fairly close to each other. Investors, then, will not have to give up unrealized gains for a quick sale. When the spread between the bid and ask prices grows, the market becomes more illiquid. Markets for real estate are pretty much inherently less liquid than stock markets. Even by the standard of real estate markets, however, a buyer’s market is relatively illiquid, since buyers can demand steep discounts from sellers who want to offload their properties quickly.
A market maker is a broker-dealer firm that accepts the risk of holding a certain number of shares of a particular security in order to facilitate trading in that security. Each market maker competes for customer order flow by displaying buy and sell quotations for a guaranteed number of shares. Once an order is received, the market maker immediately sells from its own inventory or seeks an offsetting order. This process takes place in mere seconds.
a pénzügyi eszközök piacaira vonatkozó uniós irányelvek
- Európai Unión belül egységessé tegye a befektetési szolgáltatás nyújtását,
- védje a befektető érdekeit a befektetési piacon
- átláthatóbbá tegye a befektetési piacok termék kínálatát
- kötelezővé teszi, hogy a befektetési szolgáltatóknak ügyfeleiket un. ügyfél kategóriákba kell sorolniuk
- kötelezővé teszi az ügyfelek piaci ismereteinek és kockázatviselő képességének felmérését
- előírja az ügyfél számára legkedvezőbb teljesítést
A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random price fluctuations. A moving average (MA) is a trend-following or lagging indicator because it is based on past prices. The two basic and commonly used MAs are the simple moving average (SMA), which is the simple average of a security over a defined number of time periods, and the exponential moving average (EMA), which gives bigger weight to more recent prices. The most common applications of MAs are to identify the trend direction and to determine support and resistance levels. While MAs are useful enough on their own, they also form the basis for other indicators such as the Moving Average Convergence Divergence (MACD).
A type of oil that is sourced from the North Sea. This type of oil is used as a benchmark to price European, African and Middle Eastern oil that is exported to the West.
North Sea Brent crude was discovered in the early 1960s. It is now sourced primarily by the United Kingdom, Norway, Denmark, the Netherlands and Germany. Brent crude oil is not as light or as sweet as its counterpart, West Texas Intermediate oil.
The significance of a benchmark in the oil market is that benchmarks serve as a reference price for buyers and sellers of crude oil. Oil benchmarks are frequently quoted in the media as the price of oil. Although there are many different varieties of crude oil, there are three primary benchmarks: WTI, North Sea Brent crude, often referred to simply as Brent crude, and Dubai crude. Brent crude and WTI crude are the most popular benchmarks, and their prices are often contrasted. The difference in price between Brent and WTI is called the Brent-WTI spread. Theoretically, WTI crude should trade at a premium to Brent crude, but this is not always the case. While the two crude oil varieties can trade at similar price points, each one has its own unique supply and demand market, and therefore its price reflects its individual market fundamentals.
A pip is the smallest price change that a given exchange rate can make. Since most major currency pairs are priced to four decimal places, the smallest change is that of the last decimal point – for most pairs this is the equivalent of 1/100 of one percent, or one basis point.
For example, the smallest move the USD/CAD currency pair can make is $0.0001, or one basis point. The smallest move in a currency does not always need to be equal to one basis point, but this is generally the case with most currency pairs.
This refers to a large financial institution that offers services to large institutional clients or hedge funds. It is possible for a firm to have more than one prime broker. Importantly, the firm is not obligated to all of its business through the prime broker. The prime broker offers a variety of services which includes but is not limited to execution of trades, settlement, financing and custody.
The relative strength index (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset. It is calculated using the following formula:
RSI = 100 – 100/(1 + RS*)
*Where RS = Average of x days’ up closes / Average of x days’ down closes.
The RSI ranges from 0 to 100. An asset is deemed to be overbought once the RSI approaches the 70 level, meaning that it may be getting overvalued and is a good candidate for a pullback. Likewise, if the RSI approaches 30, it is an indication that the asset may be getting oversold and therefore likely to become undervalued.
The difference between the expected price of a trade, and the price the trade actually executes at. Slippage often occurs during periods of higher volatility, when market orders are used, and also when large orders are executed when there may not be enough interest at the desired price level to maintain the expected price of trade.
Slippage is a term often used in both currency and stock trading, and although the definition is the same for both, slippage occurs in different situations for each of these types of trading.
Slippage often occurs when volatility, perhaps due to news events, makes an order at a specific price impossible to execute. In this situation, most foreign exchange dealers will execute the trade at the next best price.
Slippage in the trading of stocks, often occurs when there is a change in spread. In this situation, a market order placed by the trader may get executed at a worse than expected price. In the case of a long trade, the ask may have increased. In the case of a short trade, the bid may have lowered.
Light, sweet crude oil is commonly referred to as “oil” in the Western world. West Texas Intermediate (WTI) crude oil is the underlying commodity of the New York Mercantile Exchange’s oil futures contracts. WTI is considered a “sweet” crude because it is about 0.24% sulfur, which is a lower concentration than North Sea Brent crude. WTI is high quality oil that is easily refined.
WTI crude oil is produced, refined and consumed in North America. It is lighter and sweeter than the other major oil benchmarks: Brent crude and Dubai crude.