Frequently Encountered Trading Term Definitions
Trading refers to the practice of buying and selling financial instruments such as stocks, bonds, and other assets to make a profit.
Day trading involves buying and selling assets within a single trading day, and often involves taking advantage of short-term price movements.
Swing trading on the other hand, involves holding positions for a few days or weeks, and involves taking advantage of short-term trends in the market.
Position trading also known as long-term trading, involves holding assets for a longer period, often several months or years.
Spot trading refers to the buying and selling of securities or other assets for immediate settlement. This means that when you engage in spot trading, the transaction is completed and the assets are delivered to the buyer or seller on the same day, or the next business day if the trade is conducted after market hours. For example, if you buy 100 shares of a company's stock through spot trading, you will receive those 100 shares in your account on the same day or the next business day, depending on the time of the trade.
Margin trading involves the use of borrowed funds from a broker to trade securities or other assets. This allows traders to potentially increase their buying power and make larger trades than they would be able to with just their funds. However, margin trading also carries a higher level of risk, as traders are responsible for any losses incurred on the borrowed funds. For example, if you have $10,000 in your account and your broker allows you to trade on margin with a 2:1 ratio, you could trade up to $20,000 worth of securities. However, if the value of those securities declines, you could lose more than your initial investment.
Futures trading involves the buying and selling of contracts for the future delivery of a particular asset. These contracts are standardized in terms of quantity, quality, and expiration date, and they are traded on futures exchanges. For example, if you believe the price of oil will rise in the future, you could buy a futures contract for the delivery of a certain amount of oil at a future date. If the price of oil does indeed rise, you could sell the contract for a profit.
Option trading is the practice of buying and selling options contracts. An option is a financial derivative that gives the holder the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date.
This means that if the price of the underlying asset moves in a way that is not favorable to you, you can choose not to exercise your option and simply let it expire. In this case, your potential loss is limited to the premium you paid for the option.
One potential risk of option trading is time decay. This refers to the fact that the value of an option tends to decrease as the expiration date approaches, assuming the underlying stock price remains the same. This means that even if an option is initially in the money (meaning it has intrinsic value), it could expire out of the money if the underlying stock price doesn't move as expected.
Another potential risk of option trading is the possibility of losing more than your initial investment. This can happen if you buy an option that is out of the money (meaning it has no intrinsic value) and the underlying stock price doesn't move as expected. In this case, the option will expire with no value and you will lose the premium you paid for it.
There are two types of options: call options and put options. A call option gives the holder the right to buy the underlying asset at a certain price, known as the strike price, on or before the expiration date of the option. A put option gives the holder the right to sell the underlying asset at a certain price on or before the expiration date.
Options can be traded on various financial markets, including exchanges and over-the-counter (OTC) markets. Options can also be traded as part of a broader strategy, such as a covered call or a straddle.
Arbitrage is the practice of buying and selling assets, such as stocks or currencies, in different markets or in different forms in order to take advantage of differing prices for the same asset. This allows an investor to profit from the difference in price by buying an asset in one market where it is undervalued and selling it in another market where it is overvalued. Arbitrage can be a risky strategy, as it involves buying and selling assets very quickly in order to take advantage of small price differences. However, it can also be a very profitable way to invest if it is done carefully and with a solid understanding of the markets.
Bid price: The highest price that a buyer is willing to pay for a security or other asset.
Ask price: The lowest price that a seller is willing to accept for a security or other asset.
Spread: The difference between the bid and ask price of a security or other asset.
Leverage: The use of borrowed funds to increase the potential return on an investment. It turns good deal into great deal. Major way how bank makes money.
Margin: The amount of money that must be deposited in a margin account in order to trade on margin.
Futures contract: A standardized contract for the future delivery of a particular asset at a specific price and date.
Option: A financial derivative that gives the holder the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date.
Strike price: The price at which an option contract can be exercised.
Expiration date: The date on which an option contract expires and can no longer be exercised.
Execution: The process of completing a trade, either by matching buy and sell orders or by buying or selling directly from a market maker.
Clearing: The process of settling a trade and transferring ownership of the underlying assets from the seller to the buyer.
Market order: An order to buy or sell a security at the best available price.
Limit order: An order to buy or sell a security at a specified price or better.
Stop order: An order to buy or sell a security once a specified price is reached, which is typically used to limit potential losses.
Take profit order: An order to automatically sell a security once it reaches a certain price, which is typically used to lock in profits.
Stop loss order: An order to automatically sell a security once it reaches a certain price, which is typically used to limit potential losses.
Volume: The number of shares or other units of a security or other asset that are traded during a given period of time.
Open Interest: The total number of outstanding contracts for a particular security or other asset that have not yet been settled or closed.
Short Selling: The practice of selling a security or other asset that the seller does not own in the hopes of buying it back at a lower price in the future and profiting from the price difference.
Volatility: A measure of the amount by which the price of a security or other asset tends to fluctuate over time.
Diversification: The practice of investing in a variety of different assets to spread out risk and potentially reduce the overall volatility of an investment portfolio.
Market maker: A firm or individual that is responsible for providing liquidity to a market by buying and selling securities or other assets.
Broker: A person or firm that acts as an intermediary between buyers and sellers of securities or other assets, executing trades on behalf of their clients.
Hedge fund: A type of investment fund that uses a variety of strategies, including leverage and short selling, to generate returns that are not correlated with the broader market.
Mutual fund: A type of investment fund that pools money from many investors and uses it to buy a diversified portfolio of securities or other assets. Example: Edge Mutual Fund etc
ETF: A type of investment fund that tracks the performance of a particular index or basket of assets and is traded on an exchange like a stock.
Index: A benchmark used to measure the performance of a particular group of securities or other assets. Examples include the S&P 500, which tracks the performance of 500 large US companies, and the NASDAQ, which tracks the performance of many technology companies.
Bull market: A market characterized by rising prices and optimism about the future.
Bear market: A market characterized by falling prices and pessimism about the future.
Technical analysis: A method of analyzing securities or other assets by looking at statistical trends and patterns in their price and volume data.
Fundamental analysis: A method of analyzing securities or other assets by looking at the underlying economic and financial factors that may affect their value.
Long position: A position in which an investor holds a security or other asset that they expect to rise in value.
Short position: A position in which an investor sells a security or other asset that they do not own, in the hopes of buying it back at a lower price in the future and profiting from the price difference.
Dividend: A payment made by a company to its shareholders out of its profits.
Yield: The annual return on an investment, expressed as a percentage of the investment's cost or market value.
Risk/return tradeoff: The idea that the potential return on an investment is directly related to the amount of risk that the investor is willing to take on.
Capital gain: The profit that an investor makes when they sell a security or other asset for more than they paid for it.
Capital loss: The loss that an investor incurs when they sell a security or other asset for less than they paid for it.
Bullish: Having a positive outlook on the market or a particular security or other asset.
Bearish: Having a negative outlook on the market or a particular security or other asset.
Arbitrage: The practice of taking advantage of price differences in different markets or between different assets in order to generate a profit.
Asset allocation: The process of dividing an investment portfolio among different asset classes, such as stocks, bonds, and cash, in order to diversify risk and optimize returns.
Risk management: The practice of identifying, analyzing, and mitigating potential risks in order to protect an investment portfolio from loss.
Portfolio rebalancing: The process of adjusting the proportions of different assets in an investment portfolio in order to maintain the desired level of risk and return.
Initial public offering (IPO): The process by which a private company becomes a public company by selling shares to the public for the first time.
Secondary Market: The market for trading securities or other assets that have already been issued.
Primary Market: The market for trading securities or other assets that are being issued for the first time.
Liquidity: The ability to buy or sell a security or other asset quickly and easily, without significantly affecting its price.
Order Book: A record of all the buy and sell orders for a particular security or other asset that have been placed but not yet executed.
Block Trade: A large trade that is executed outside of the normal order book, typically involving a significant number of shares or other units of a security or other asset.
Dark pool: A private forum for trading securities or other assets, where the details of the trades are not made public until after the trade has been executed.
Price-to-earnings ratio (P/E ratio): A measure of the price of a stock relative to the company's earnings per share. A high P/E ratio can indicate that investors are willing to pay a higher price for the stock, while a low P/E ratio can indicate that the stock is undervalued.
Earnings per share (EPS): A measure of a company's profits that is calculated by dividing the company's net income by the number of shares outstanding.
Price-to-book ratio (P/B ratio): A measure of the price of a stock relative to the company's book value (the value of its assets minus its liabilities). A high P/B ratio can indicate that the stock is overvalued, while a low P/B ratio can indicate that it is undervalued.
Market capitalization: The total market value of a company's outstanding shares. This is calculated by multiplying the number of outstanding shares by the current market price per share.
Return on equity (ROE): A measure of a company's profitability that is calculated by dividing its net income by its shareholders' equity.
Debt-to-equity ratio: A measure of a company's financial leverage that is calculated by dividing its total debt by its shareholders' equity. A high debt-to-equity ratio can indicate that a company is taking on a lot of debt relative to its equity, which can be risky.
Beta: A measure of a stock's volatility relative to the broader market. A stock with a beta of 1 is expected to move in line with the market, while a stock with a beta of less than 1 is expected to be less volatile than the market, and a stock with a beta of more than 1 is expected to be more volatile than the market.
Alpha: A measure of a stock's performance relative to the broader market. A positive alpha indicates that the stock has outperformed the market, while a negative alpha indicates that it has underperformed the market.
The put-call ratio: is a measure of the trading activity in options contracts for a particular security or market. It is calculated by dividing the number of put options traded by the number of call options traded. The put-call ratio can provide information about the sentiment of market participants and can be used as a predictor of market trends. A high put-call ratio indicates that more put options are being traded relative to call options, which suggests that market participants are bearish, or expecting the market to decline. A low put-call ratio indicates the opposite, with more call options being traded relative to put options, which suggests that market participants are bullish, or expecting the market to rise.
Option chain: is a list of all the available option contracts for a particular security or market. It typically includes the strike price, expiration date, and bid and ask prices for both call and put options. An option chain can provide important information for investors who are considering trading options. For example, an investor can use an option chain to compare the potential profit and loss for different option strategies, or to identify the options contracts with the highest liquidity and best prices. An option chain can also provide information about the current market sentiment for a particular security.
Stock Comparison: Comparing different stock.
QuickFIX / Quickfast is a financial messaging platform used in electronic trading. It provides a framework for transmitting financial information, such as trade orders and execution reports, between trading partners. QuickFIX/Quickfast is designed to be quick and easy to implement, and to be able to handle high volumes of messages with low latency. It is commonly used in the finance industry to facilitate the communication between trading systems.
Matching Engine A stock market's core matching engine is the central component of a stock exchange's trading platform. It is responsible for matching buy and sell orders for stocks and other securities. The matching engine uses complex algorithms to ensure that trades are executed quickly and efficiently.
The matching engine works by constantly monitoring the orders that are submitted to the exchange by traders. When a buy or sell order is submitted, the matching engine will search for any matching orders that have already been submitted. If a match is found, the matching engine will execute the trade and update the relevant accounts accordingly.
The matching engine is typically a highly sophisticated and complex piece of software, as it must be able to handle a large number of orders and execute trades quickly and accurately. It is designed to be able to operate 24 hours a day, seven days a week, and must be able to handle a high volume of traffic without any downtime.
In addition to matching orders, the matching engine may also be responsible for other functions, such as enforcing rules and regulations, monitoring for fraudulent activity, and providing real-time data and analytics to traders and other stakeholders.
Overall, the core matching engine is a critical component of a stock exchange's trading platform, and plays a crucial role in ensuring the efficient and fair operation of the stock market.
There are many different stock exchange matching engines in use today, and which one is considered the best may vary depending on who you ask. Some of the most popular and well-known matching engines include the NYSE's MatchPoint, the NASDAQ's OMX trading platform, and the London Stock Exchange's Millennium Exchange. These platforms are known for their high speeds, reliability, and ability to handle large volumes of trades.
What is derivative exchange?
A derivative exchange is a marketplace where derivatives are traded. Derivatives are financial instruments whose value is derived from the value of an underlying asset, such as a commodity, currency, or index. Derivatives are used to manage risk or speculate on the future price movements of the underlying asset.
Derivative exchanges offer a variety of derivative products, including futures, options, and swaps. These products can be traded by market participants, including individual investors, hedge funds, and financial institutions. Derivative exchanges are regulated by government agencies and are typically operated by exchange companies.
Derivative exchanges can be physical or electronic. Physical derivative exchanges, also known as open outcry exchanges, involve traders and brokers physically buying and selling derivatives on a trading floor. Electronic derivative exchanges, on the other hand, allow traders to buy and sell derivatives through an electronic platform.
Derivative exchanges play a key role in the financial markets by providing a central location for the buying and selling of derivatives and by setting the terms and conditions for trading these products. They also help to reduce the risk of default by requiring that traders post collateral, or margin, to cover potential losses.
What is DROP COPY in exchange
Drop copy is a term used in the context of financial exchanges to refer to the electronic transmission of trade information from one exchange to another. This information typically includes details such as the price, quantity, and time of the trade. Drop copy is used by exchanges to ensure that all relevant parties have access to accurate and up-to-date information about trades that have been executed on the exchange. It is also used as a mechanism for clearing and settling trades, as well as for regulatory reporting purposes.
What is MTA, GEM market?
MTA (Mortgage-Backed Securities Loan-Only, formerly known as the Mortgage-Backed Securities Index) and GEM (Global Equity Market) are financial indices that are used to track the performance of certain types of securities.
MTA is a market index that tracks the performance of mortgage-backed securities (MBS) that are issued by the Government National Mortgage Association (GNMA), also known as Ginnie Mae. These securities are backed by pools of mortgages that have been guaranteed by the U.S. government.
GEM is a market index that tracks the performance of publicly traded companies that are listed on major global exchanges. It is designed to provide a broad measure of the performance of the global equity market.
Both the MTA and GEM indices are used by financial professionals and market analysts to assess the performance of certain segments of the financial markets. They are also used as benchmarks for investment products such as mutual funds and exchange-traded funds (ETFs).
OTC market The over-the-counter (OTC) market is a decentralized market where securities are bought and sold directly between parties, rather than through a central exchange. It is also known as the "off-exchange" market.
In contrast to exchange-traded securities, which are traded on organized exchanges such as the New York Stock Exchange (NYSE) or the NASDAQ, OTC securities are traded directly between buyers and sellers through a network of dealers or market makers. These dealers act as intermediaries, facilitating the trade and providing liquidity to the market.
The OTC market is generally less regulated and more opaque than the exchange-traded market, as there is no central clearinghouse or exchange to provide transparency and ensure the fair and orderly settlement of trades. As a result, the OTC market is generally considered to be more risky than the exchange-traded market.
OTC securities include a wide range of financial instruments, including stocks, bonds, derivatives, and currencies. They are often issued by smaller, less well-known companies that do not meet the listing requirements of organized exchanges, or by companies that wish to avoid the costs and regulatory requirements of listing on an exchange. Examples of OTC securities include penny stocks, bonds issued by small or emerging companies, and customized derivatives.
CAGR stands for Compound Annual Growth Rate. It is a financial metric that measures the rate of return for an investment over a period of time, typically several years. CAGR is calculated by taking the nth root of the total return of an investment, where n is the number of years in the investment period. The CAGR represents the "smoothed out" annual return of an investment, which can be useful for comparing the performance of different investments. It helps to understand the growth rate of an investment over time.
Let's say you invested $10,000 in a stock 5 years ago, and today the value of your investment is $15,000. To calculate the CAGR:
Determine the total return of the investment by subtracting the initial investment from the current value of the investment: $15,000 - $10,000 = $5,000. Divide the total return by the initial investment: $5,000 / $10,000 = 0.5. Add 1 to the result: 0.5 + 1 = 1.5. Raise the result to the power of (1/5) to calculate the CAGR: 1.5^(1/5) = 1.096 or 9.6%. So in this example, the CAGR for the investment over the past 5 years is 9.6%. This means that the investment has grown at an average annual rate of 9.6% per year over the past 5 years.
P/E ratio: The Price to Earnings ratio, which is a valuation ratio calculated as the company's current stock price divided by its earnings per share (EPS). A high P/E ratio suggests that investors are paying more for each unit of earnings.
EPS: The Earnings per Share, which represents the portion of a company's profit allocated to each outstanding share of common stock. In this case, the EPS is reported as 0, which may indicate that the company is not profitable.
Price/ NAV: The Price to Net Asset Value ratio, which is a measure of how much a company's stock is trading for compared to its net asset value. A value of 0.73 suggests that the stock is trading at a discount to its net asset value.
Free Float: The Free Float represents the portion of a company's shares that are readily available for trading and not held by major shareholders or insiders. A free float of 57.53% suggests that a significant portion of the shares are available for trading.
Beta: A measure of a stock's volatility compared to the market. A beta of 1.27 suggests that the stock is more volatile than the market average, which is represented by a beta of 1.
BLOCK Market is the market for bulk selling and buying on automatic matching with equal quantity and best price (all or none condition) basis. Orders entered in this market are immediately flashed on all trading workstations. The minimum amount for a bid of bulk lot for a certain security shall be Tk. 5 Lac at market price unless otherwise fixed by the Council from time to time with the approval of the SEC.
Mortgaze bank loan with down payment with house as collateral. It connects home owners to institutional investors. Any credit card or loan is a way to generate profit. Home owners buy from broker who connects to mortgaze lenders who in turn works for investment banker. Investment banker buys uses leverage to buy lots og mortgazes to amplify output. Often no risk, down payment, proof of income which are sub prime mortgazes.
Collaterized Debt Obligation collection of mortgazes. Packed in different stages- safe, medium, risky. The safe AAA rated bucket is hedged or ensured with Credit default swap. Risky slice goes to hedge funds.
Short Selling comes with 200% reward and infinite loss. It is leveraged trading. Short squeeze happens during shorting.
Credit Default Swap is a financial derivative contract between two parties, where one party agrees to pay the other party in the event of a credit event, such as default, bankruptcy or a failure to pay by a third party.
The CDS contract works by the buyer of the contract paying a periodic premium to the seller, in exchange for a promise to be compensated in the event of a credit event. The amount of compensation is typically based on the difference between the face value of the bond and its market value after the credit event.
CDS contracts are commonly used by investors to manage credit risk in their portfolios. For example, if an investor holds a bond, they may purchase a CDS contract to hedge against the possibility of the issuer defaulting. Similarly, investors who do not hold the bond may also buy CDS contracts to speculate on the possibility of a credit event occurring.
What is index fund? How they operate?
An index fund is a type of mutual fund or exchange-traded fund (ETF) that is designed to track the performance of a specific market index, such as the S&P 500 or the Dow Jones Industrial Average. Instead of being actively managed by a fund manager, index funds use a passive investment strategy that aims to match the performance of the underlying index by holding a portfolio of securities that closely tracks the index's composition and weighting.
Sure. For example, let's say you want to invest in an index fund that tracks the performance of the S&P 500, which is an index of 500 large-cap U.S. stocks. Instead of trying to pick individual stocks and actively manage your portfolio, you can simply buy shares in the index fund, which will automatically invest in all 500 stocks in the S&P 500 in proportions that closely match the index's composition and weighting. This means that if the S&P 500 goes up or down, the value of your index fund investment will also go up or down by a similar amount.