Getting started with online trading can be both exciting and daunting. With so many terms and concepts to learn, it can be hard to know where to begin. That’s why we’ve put together this guide to help you get started on your trading journey.
First things first: what is online trading? Online trading refers to the buying and selling of financial instruments such as stocks, bonds, currencies, and commodities using an online platform. This means that you can trade from anywhere, at any time, as long as you have an internet connection.
Before you start trading, it’s important to have a solid understanding of some key concepts. Let’s take a look at a few of them:
Market: A market is a place where buyers and sellers come together to trade financial instruments. There are many different markets, such as the stock market, the forex market, and the commodities market.
Broker: A broker is a person or company that facilitates trades between buyers and sellers. Brokers can provide you with access to different markets and trading platforms.
Buy/Sell: When you buy an asset, you are purchasing it with the expectation that its price will rise in the future. When you sell an asset, you are selling it with the expectation that its price will fall in the future.
Order: An order is an instruction to buy or sell an asset at a certain price. There are different types of orders, such as market orders, limit orders, and stop-loss orders.
Risk: Trading involves risk, which means that you may lose money. It’s important to understand the risks involved and to have a solid risk management plan in place.
Now that you have a basic understanding of some key concepts, it’s time to choose a trading platform and start trading. When choosing a platform, consider factors such as the fees, the range of assets available, and the ease of use. Once you’ve chosen a platform, it’s important to start small and gradually build up your experience and knowledge. Don’t risk more than you can afford to lose, and always keep learning and adapting your strategies.
To help you learn more about trading terminology, we’ve compiled an extensive list of trading terms that you can reference as you continue your trading journey. Remember to stay informed, stay disciplined, and always be willing to learn. Happy trading!
Trading Terms:
Alpha: A measure of an investment’s performance relative to a benchmark. Alpha represents the difference between an investment’s actual returns and its expected returns, given its level of risk.
Arbitrage: The practice of buying and selling the same asset in different markets to take advantage of price discrepancies. Traders use arbitrage to profit from price inefficiencies and ensure that markets remain efficient.
Ask Price: The price at which a seller is willing to sell an asset. The ask price is the opposite of the bid price, which is the price at which a buyer is willing to buy an asset.
Asset: Any financial instrument that can be traded, such as a stock, bond, currency, or commodity. Assets can be bought and sold in various financial markets, including the stock market, forex market, and commodity market.
Base Currency: The first currency in a currency pair that is being traded, typically the domestic currency of the country in which the trader is located. The base currency is used to determine the exchange rate of the currency pair.
Bear Market: A market in which asset prices are falling. A bear market is typically characterized by declining investor confidence and negative economic sentiment.
Beta: A measure of an asset’s volatility relative to the market. Beta is used to assess the riskiness of an asset and is calculated by comparing its returns to the returns of a benchmark, such as the S&P 500.
Blue Chip: A company that is considered to be financially stable and has a long history of consistent growth and dividend payments. Blue chip companies are typically large, well-established companies that are leaders in their respective industries.
Bollinger Bands: A technical indicator that measures the volatility of an asset and helps traders identify potential breakouts or reversals. Bollinger Bands are typically drawn on a price chart and consist of three lines: a simple moving average, an upper band, and a lower band.
Broker: An individual or firm that executes trades on behalf of clients. Brokers can provide traders with access to various financial markets and offer a range of services, including research and analysis, trading platforms, and customer support.
Bull Market: A market in which asset prices are rising. A bull market is typically characterized by increasing investor confidence and positive economic sentiment.
Buy and Hold: A long-term investment strategy in which an investor buys an asset and holds onto it for an extended period of time. Buy and hold investors aim to profit from the long-term growth of their investments and typically do not engage in frequent trading.
Call Option: A financial contract that gives the holder the right, but not the obligation, to buy an underlying asset at a specified price and time. Call options are typically used by traders who believe that an asset’s price will rise in the future.
Candlestick Chart: A type of chart used to represent the price movement of an asset over time. Each candlestick represents a specific time period and includes information on the asset’s open, close, high, and low prices. Candlestick charts are commonly used in technical analysis to identify trends and patterns in asset prices.
Capital Gains: The profit made from the sale of an asset that has appreciated in value. Capital gains are taxed at a lower rate than ordinary income in many jurisdictions.
Carry Trade: A trading strategy that involves borrowing in a low-yielding currency and investing in a high-yielding currency. Carry trades are typically used to profit from the difference in interest rates between two currencies.
Cash Flow: The amount of cash that flows in and out of a business or investment. Cash flow is an important metric used to evaluate the financial health of a business or investment.
Central Bank: The institution responsible for overseeing a country’s monetary policy and controlling the money supply. Central banks are typically independent entities that are responsible for maintaining price stability and promoting economic growth.
Closing Price: The last price at which an asset traded during a trading session. The closing price is used to calculate daily price movements and is often used as a reference point for technical analysis.
Commodity: A raw material or primary agricultural product that can be bought and sold, such as oil, gold, or wheat. Commodities are traded on various exchanges and are typically priced based on supply and demand dynamics.
Contract for Difference (CFD): A financial contract that allows traders to speculate on the price movements of an underlying asset without owning the asset itself. CFDs are often used to trade stocks, commodities, and forex pairs.
Day Trading: A trading strategy in which a trader buys and sells assets within the same day, with the goal of profiting from small price movements. Day traders typically use leverage to amplify their returns and must be disciplined and patient to succeed.
Deflation: A decrease in the general price level of goods and services in an economy. Deflation is often caused by a decrease in consumer demand and can lead to economic downturns and recessions.
Derivative: A financial instrument that derives its value from an underlying asset, such as an option or futures contract. Derivatives are often used to hedge risk or speculate on the future price movements of an asset.
Diversification: A risk management strategy that involves spreading investments across multiple assets or asset classes to reduce overall risk. Diversification can help investors minimize the impact of any single asset’s poor performance on their overall portfolio.
Dividend: A payment made by a company to its shareholders, typically as a share of the company’s profits. Dividends are often paid out quarterly or annually and are a key source of income for many investors.
Exchange-Traded Fund (ETF): An investment fund that holds a basket of assets and trades on an exchange like a stock. ETFs are often used by investors to gain exposure to a particular market or sector.
Ex-Dividend Date: The date on which a stock begins trading without the right to the upcoming dividend payment. Investors who purchase a stock after the ex-dividend date are not entitled to receive the dividend payment.
Fibonacci Retracement: A technical analysis tool that uses horizontal lines to indicate areas of support or resistance at key Fibonacci levels before the price continues in the original direction. Fibonacci retracements are often used to identify potential price reversal points in asset prices.
Fiscal Policy: Government policy regarding taxation and spending. Fiscal policy is often used to stabilize the economy and promote economic growth.
Fixed Income: An investment that pays a fixed rate of return, such as a bond. Fixed income investments are often used to generate regular income for investors.
Forex (FX): The market in which currencies are traded. Forex is the largest financial market in the world and involves buying and selling currencies in pairs.
Futures Contract: A financial contract that obligates the buyer to purchase an asset and the seller to sell an asset at a predetermined price and time in the future. Futures contracts are often used by traders to hedge risk or speculate on future price movements of an asset.
Hedge Fund: An investment fund that uses a range of sophisticated strategies to generate returns for its investors. Hedge funds often have high minimum investment requirements and are typically only available to accredited investors.
Inflation: An increase in the general price level of goods and services in an economy. Inflation is often caused by an increase in the money supply and can lead to a decrease in the purchasing power of money.
Initial Public Offering (IPO): The first time a company’s stock is offered for sale to the public. IPOs are often used by companies to raise capital and allow investors to buy shares in the company.
Leverage: The use of borrowed funds to increase the potential return on an investment. Leverage can magnify gains, but it can also magnify losses and increase overall risk.
Limit Order: An order to buy or sell an asset at a specific price or better. Limit orders are often used by traders to control the price at which they buy or sell an asset.
Liquidation: The process of selling all of the assets held by an individual or company to pay off debts or obligations. Liquidation can occur voluntarily or involuntarily and can be initiated by the individual or company or by a court order.
Liquidity: The degree to which an asset can be bought or sold quickly and easily without affecting its price. Highly liquid assets can be bought or sold quickly and without much impact on their price, while less liquid assets may take longer to buy or sell and can have a larger impact on their price.
Long Position: A position in which an investor owns an asset with the expectation that its price will rise in the future. Long positions are typically held for an extended period of time and are often used as a part of a buy and hold investment strategy.
Margin: The amount of money that an investor must put up to enter into a leveraged trade. Margin is typically expressed as a percentage of the total value of the trade and is used to cover potential losses.
Market Order: An order to buy or sell an asset at the current market price. Market orders are often used by traders who want to enter or exit a trade quickly and do not want to wait for a specific price.
Moving Average: A technical analysis tool that calculates the average price of an asset over a specific period of time. Moving averages are often used to identify trends in asset prices and can be used to generate buy and sell signals.
Option: A financial contract that gives the holder the right, but not the obligation, to buy or sell an underlying asset at a specified price and time. Options are often used by traders to hedge risk or speculate on the future price movements of an asset.
Pip: The smallest unit of measurement in the forex market. Pips are used to measure the change in the exchange rate of a currency pair and are typically expressed to four decimal places.
Portfolio: A collection of investments held by an individual or institution. Portfolios are often diversified across multiple asset classes to minimize risk and maximize return.
Price to Earnings (P/E) Ratio: A valuation ratio used to measure a company’s current share price relative to its earnings per share. The P/E ratio is often used to assess whether a stock is undervalued or overvalued.
Put Option: A financial contract that gives the holder the right, but not the obligation, to sell an underlying asset at a given price.
Price to Earnings (P/E) Ratio: A valuation ratio used to measure a company’s current share price relative to its earnings per share. The P/E ratio is often used to assess whether a stock is undervalued or overvalued.
Put Option: A financial contract that gives the holder the right, but not the obligation, to sell an underlying asset at a specified price and time. Put options are typically used by traders who believe that an asset’s price will fall in the future.
Quantitative Easing: A monetary policy tool used by central banks to stimulate the economy by increasing the money supply. Quantitative easing involves the purchase of government bonds or other assets to inject liquidity into the financial system.
Resistance Level: A price level at which an asset has historically had difficulty rising above. Resistance levels are often used by technical analysts to identify potential areas of price resistance.
Return on Investment (ROI): A measure of the profitability of an investment relative to its cost. ROI is calculated by dividing the investment’s gains by its cost.
Risk Management: The process of identifying, assessing, and prioritizing risks and developing strategies to mitigate or avoid those risks. Risk management is a critical component of successful trading and investing.
Securities: Financial instruments that represent ownership in a company or organization, such as stocks and bonds. Securities can be bought and sold on various financial markets.
Short Position: A position in which an investor sells an asset with the expectation that its price will fall in the future. Short positions are typically held for a short period of time and are often used to profit from declining asset prices.
Spread: The difference between the bid price and the ask price of an asset. Spreads are typically expressed in pips in the forex market and are an important factor to consider when trading.
Stop Loss: An order placed by a trader to sell an asset at a specific price in order to limit potential losses. Stop losses are often used by traders to manage risk and limit potential losses.
Support Level: A price level at which an asset has historically had difficulty falling below. Support levels are often used by technical analysts to identify potential areas of price support.
Technical Analysis: A method of analyzing asset prices by studying historical price and volume data. Technical analysts use charts and other tools to identify trends and patterns in asset prices and to generate buy and sell signals.
Ticker Symbol: A unique symbol used to identify a publicly traded company or asset. Ticker symbols are often used to look up information on a particular asset or to track its price movements.
Trend: The general direction in which an asset’s price is moving over a period of time. Trends can be up, down, or sideways and are an important factor to consider when trading.
Volatility: The degree to which an asset’s price fluctuates over time. Highly volatile assets can experience large price swings in a short period of time, while less volatile assets tend to have more stable prices.
Yield: The amount of income generated by an investment, typically expressed as a percentage of the investment’s cost. Yield is an important factor to consider when investing in fixed-income securities such as bonds.
Volume: The total number of shares or contracts traded during a given time period. Volume is an important factor to consider when trading and can indicate the level of interest or activity in a particular asset.
Whipsaw: A market condition in which an asset’s price rapidly moves up and down, causing traders to be stopped out of positions. Whipsaws are often caused by market volatility and can be difficult to predict or avoid.
Xetra: A trading system used by the Frankfurt Stock Exchange to facilitate electronic trading of stocks, bonds, and other securities. Xetra is one of the largest and most advanced electronic trading systems in the world.
Year to Date (YTD): The period beginning at the start of the calendar year and ending on the current date. YTD returns are often used to assess the performance of an investment over a given period of time.
Zero-Coupon Bond: A bond that pays no interest and is sold at a discount to its face value. Zero-coupon bonds are typically purchased by investors who are looking for long-term growth and do not need regular income from their investments.
These are just a few of the many trading terms and concepts that are commonly used in the world of finance. As with any field, the language of trading and investing is constantly evolving, so it’s important to stay up-to-date on new terms and developments in the industry.
By expanding your knowledge of trading terminology and concepts, you’ll be better equipped to navigate the complex world of finance and make informed investment decisions.