The financial markets are where the trading of assets occurs, including stock, bonds and forex. But as a new trader, these markets aren’t always straightforward, and can be quite complex to understand. So before considering any form of trading, it is worth knowing the common terms and vocabulary used in this world of trading and investment. Not only can this help you become a more experienced trader, but also help towards understanding and creating your own trading strategy.
So, we’ve put together some of the basic terms that you should know before you begin trading on the financial markets:
- Ask – The ask is the amount the market maker or broker is willing to sell the asset for.
- Base – This is a term used in forex trading, and refers to the first currency in a currency pair. Other terms for this currency include the nominator or the top number. This the currency in which you buy the asset in, and you would sell in the quote currency.
- Bid – This is the price that a trader or broker is willing to pay to buy an asset.
- Bear Market – This term refers to when a market is on the decline, and is on a continuing downward trajectory. Traders will expect prices to continue to fall, and so are likely to go short. If prices of a particular asset fall significantly, it is known as being bearish. A person who believes that the market will decline can also be known as bearish, or as a bear.
- Bull Market – A bull market is when the market is rising, and the prices of the assets are on an upward trend. Like the term bear (or bearish), a single asset or person can be known as a bull or bullish. In a bullish market, traders will want to increase their long trading activity, known as going long.
- CFD Trading – This term stands for contract for difference, and is when the trade is based on the opening and closing of a contract between an investor and a broker. The investor can take a position on both a rising or falling market, predicting the price movement of the asset, and closing the contract accordingly. In this type of trading, there is no ownership of the asset involved.
- Forex Trading – Forex (FX) trading is the exchange of currencies, converting one currency to another. The terms forex or FX are actually short for foreign exchange.
- Foreign Exchange Volatility – This measures the level of price movement of a currency pair on the forex market. It shows how risky the trade could be, or how dramatic the fluctuation in the price will be. A high volatile currency pair can see extreme price movements daily, hence are a riskier trade, and are not recommended as an investment for less experienced traders.
- Leverage – Leverage means gaining a larger amount of exposure to the market, without having to pay the full cost of the trade upfront, like you would in a traditional exchange. It allows investors to trade with a small amount of capital compared to the actual market value. This is commonly used in CFD trading, and allows for a more efficient use of capital. However, using leverage to trade means that both profits and losses are magnified, as it is still based on the full size of the position in the market.
- Spread – The spread is the difference between the bid and ask prices of an asset, offered to traders on a trading platform. In terms of CFD trading, the prices, and therefore spread offered to traders can be slightly lower than the market value of the underlying asset.
- Quote – When forex trading, the quote refers to second currency in a currency pair. Also known as the denominator, or bottom number, this is the currency in which you sell the assets in.
These are just some of the terms you need to know when beginning trading, but there are a huge number in the vocabulary list, with some language more relevant to your particular trading strategy. Understanding the terms in this guide though, will help you to become a more knowledgeable trader.
Founder Dinis Guarda
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