CFD Terminology04 March 2010, 16:42 BST
Below is a glossary of commonly used terminology in CFD trading. Please feel free to add any you believe may be missing or incorrect.
- The simultaneous purchase and sale of an instrument in two different markets to profit from a temporary price disparity.
- The Australian Securities Exchange - The primary stock exchange in Australia
- When the bid price exceeds the offer price for a stock. This is a market distortion when usually stock is suspended.
- The opposite of Bull. A "bear market" is a term used to describe a falling market, or one that is expected to fall.
- Blue chip stock
- A company that is regarded as traditional and not technical. Large, profitable and conservatively managed organizations. Well established company.
- The opposite of "bear". Refers to a market trend, market has risen or is expected to rise.
- A market term used for the British Pound Sterling.
- Call Rate
- The overnight Interbank interest rate.
- Capital Gains Tax
- Spread betting exempts clients from paying any capital gains tax under current laws.
- The action of overpaying for the hedging a portfolio, to stay market netural.
- A raw material or metal traded on the commodities market.
- Contract for difference (CFD)
- Contract for difference. A contract between two parties, buyer and seller, stipulating that the seller will pay to the buyer the difference between the current value of an asset and its value at contract time. An over the counter derivative similar to a future, in that CFDs are liquid derivative instruments that mirror the underlying assets in all aspects, and can therefore be traded by closing out and re-opening at any time before the expiry date, at the prevailing market rate. CFDs reduce traders capital investment amount required, while increasing profit potential. See CFD Overview for a detailed description.
- CFD Trade Position Opening
- A position is opened by buying or selling a CFD. When a customer buys the Index, he buys the CFD. To make a profit, the index should rise. When a customer sells the Index, he sells the CFD. To make a profit, the index should fall.
- CFD Position Closing
- A position is closed by buying / selling the same amount of CFD(s) that was bought / sold earlier, in the same instrument. Closing a CFD position will result in a profit or loss being realized on customer's account.
- Delta (letter), the letter Δ or δ in the Greek alphabet, used as a mathematical symbol where it often represents a difference between quantities. When referring to derivatives (including CFDs) the delta of a CFD describes its sensitivity to changes in the price of the underlying instrument; ie, the difference in price between the CFD and the underlying asset.
- Direct Dealing
- An approach whereby dealers contact each other to transact without a broker.
- An alternative name for stocks and shares
- Expiry date
- The date at which a contract can no longer be traded.
- Equity Balances
- The equity (or balance) on customer's account will fluctuate according to the money he has deposited in his account, according to the trading conducted on his account and positions held. Therefore customer's equity balance is constantly calculated in-line with market movements.
- Forex is short for foreign exchange. When one speaks of a forex profit or loss, he is talking about the increased or decreased value of an investment caused solely by currency movements. Today, the FX market is one of the largest and most liquid financial markets in the world, and includes trading between large banks, central banks, currency speculators, corporations, governments, and other institutions. The average daily volume in the global foreign exchange and related markets is continuously growing.
- Financial Times Stock Exchange. These firms are jointly responsible for the compilation and maintenance of the main stock indices reflecting the performance of the UK's top shares.
- The index is maintained by the FTSE Group, a now independent company which originated as a joint venture between the Financial Times and the London Stock Exchange.
- FTSE 100
- The FTSE 100 Index (or just the FTSE, pronounced footsie) is a share index of the 100 most highly capitalised companies listed on the London Stock Exchange. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999.
- FTSE 100 companies represent about 80% of the market capitalization of the whole London Stock Exchange. Even though the FTSE All-Share Index is more comprehensive, the FTSE 100 is by far the most widely used UK stock market indicator. Other related indices are the FTSE 250 Index (which lists the next largest 250 companies after the FTSE 100), the FTSE 350 Index (which is the aggregation of the FTSE 100 and 250), FTSE SmallCap Index and FTSE Fledgling. The FTSE All-Share aggregates the FTSE 100, FTSE 250 and FTSE SmallCap.
- Also known as leverage. The ratio of a company's long-term funds with fixed interest to its total capital. A high gearing is *generally considered very speculative.
- Grey (Gray) Market
- A grey market is a market where there is trading of a stock that is about to be issued for the first time, before it's issued. Grey market trading is risky because sellers' don't know how many shares they have - ie they're selling shares they don't own yet - and buyers don't know what the final issue price is going to be when the allocation is complete. It can also refer to the pre market session when orders are being matched before the opening of the market.
- Guaranteed Stop loss
- An order that protects one's stop order in the scenario the markets gap below your stop order.
- The practice of undertaking one investment activity in order to protect against loss in another, e.g. selling short to nullify a previous purchase, or buying long to offset a previous short sale. While hedges reduce potential losses, they also tend to reduce potential profits.
- Initial Margin
- The margin paid initially to trade currency futures. A trader's loss may not exceed this margin per contract/lot. Libor London Interbank Offered Rate. This is the rate at which banks will lend to each other, set at 11:00 a.m. London time.
- Limit orders
- Instructions do deal that stipulate the minimum or maximum price at which you want to buy or sell your shares.
- Refers to how easy it is to trade in a stock. Liquid markets are those where there are a large number of people holding equities and a high volume of shares in the public domain.
- 'Long', a 'long position' or 'going long' refers to the 'buying' of a CFD to hold and sell for a profit. This is the opposite to a 'short position' or 'short selling'.
- Margin is a cash deposit provided by clients as collateral to cover losses (if any) that may result from their trades. Margin comes in a number of different forms. With CFD trading it applies to all the CFD products offered, and is calculated as Initial Margin and Variation Margin.
- Margin Call
- A demand for additional funds. A requirement by a clearing house that a clearing member (or by a brokerage firm that a client) brings margin deposits up to a required minimum level to cover an adverse movement in price in the market. This is the first trigger level for margin trade.
- Market Maker
- A market maker is a person or a firm who quotes both a buy and a sell price in a financial instrument or commodity, hoping to make a profit on the turn or the bid/offer spread.
- Minimum Trade Size
- Minimum trade size is the value of one Index point. For example $1 per point in the USA or $10 per point on the ASX.
- Offer Price
- Also referred to as the ask price, the price at which an investor can buy from the marketOptionsFinancial derivative instrument that allow investors to speculate on the future movements of the underlying stocks.
- Over the Counter
- Over the Counter (OTC) represents a market in which security transactions are conducted through a telephone and computer network-connecting dealers in stocks and bonds, rather than on the floor of an Exchange.
- Partial Closing of Positions
- A closing of an open position might be partial - by executing an opposite trade of a lesser amount than the previously open trade.
- A transaction designed for spot deals whereby the delivery is extended and "exchanged" from the old spot delivery date to the current spot delivery date. Swap points are either subtracted or added reflecting either a positive cost of carry of negative.
- S&P 500
- Broader Index showing the performance of the US top 500 shares (also known as the Fortune 500).
- Shares are also known as equities, stocks, holdings or securities. Indicates ownership of part of a company.
- 'Short selling' or a 'short position' is placing a trade if a trader thinks the market price will fall. Originally from thee act of selling a security that is not owned and hence, creating a short position. An investor who goes short borrows the security from their broker to sell and then rebuys the security at a later date and a lower price. The difference is the investor's profit.
- Computer programs used for online deal execution CFD trading software.
- The difference between the buy (bid) and the sell price (offer or ask).
- Shortage in Equity
- A shortage in equity occurs when the Equity balance falls below the required Initial margin. Accounts with shortage in equity will only be allowed to reduce open positions, until the equity balance is in excess of the required deposit.
- Stop Out Level
- A Stop loss order for customer's open positions is placed at a level where the total Equity balance falls to 10% of the required Initial margin. This level is referred to as the Stop Out level, which is the second trigger level for Margin. Below this level all of customer's open positions will be automatically closed out. Once the stop-out level has been triggered, the customer will not be allowed to trade on his account until the equity balance is restored to the required Initial margin level.
- Synthetic Market
- A Synthetic Market is a market created by your CFD Broker. Prices are guided by the underlying assets but the spread can be slightly different (as per the pricing policies of your broker). In a Synthetic market, all transactions happen between the CFD broker and the Trader.
- Trading Profits / Losses
- Profits made on customer's trading activities increase and losses decrease the Equity Balance on his account, and therefore the available margin trading or holding positions.
- Underlying, The
- The underlying relates to the underlying price of the asset the CFD is derived from. eg, the share price.
- Variation Margin
- Variation Margin is the difference in margin required if the initial margin in customer's account has fallen below the 2% requirement for Index trading to hold his position. It provides for trading profits and losses. Once a CFD trade is opened, variation margin requirement must always be maintained for the open position(s). It is customer's responsibility to ensure that his account is sufficiently margined at all times, especially during volatile trading periods.
- A statistical measure of a market or a security's price movements over time and is calculated by using standard deviation. Associated with high volatility is a high degree of risk.
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