A
Aim
The simultaneous sale (or purchase) of a financial instrument and the taking of an equal and opposite position in a similar instrument to provide a profit. That is, exploiting pricing differences (anomalies) across markets. True arbitrage is risk free.
Arbitrage
Basically this is the art of buying something cheap in one place and selling it at a profit somewhere else. The rise of global electronic trading has made this process much faster and easier, enabling arbitrageurs - as they're called - to switch huge sums of money across continents in seconds in an attempt to exploit small differences in the quoted prices of investments in different markets - foreign currency, for example.
In share trading, so-called risk arbitrageurs attempt to make profits from the usual share price movements of companies that are in takeover situations. These investors will simultaneously buy stock in the target company, whose share price normally rises, while selling that of the bidder, whose share price normally falls. They will also invest in the target company if they think there's a chance the bidder will have to raise the offer price.
Averaging
Averaging the price you have paid for a currency pair is achieved by buying more on a fall or selling some on a rise in value.
Ask
The lowest price at which someone will sell an investment at a given moment.
B
Balance of Payments
A measure of transactions resulting in payments from one country to all other countries during a specified period of time. If more money flows in than out, the balance of payments is positive. These transactions take place in either the Current Account, the Financial Account or the Capital Account. Balance of payments serves as another economic indicator of a country’s relative value, and includes the trade balance, foreign investments and investments by foreigners.
Bargain
Stockbroker jargon for a share transaction.
Base Currency
The foreign exchange deal currency against which another currency is measured. Currency pairs are usually identified by a six letter grouping. The first three letters identify the BASE currency.
Basis Point (bp)
A measure which is mainly used in the statement of interest rates. One hundredth of 1% – 25 basis points is equal to 0.25%.
Bear, Bearish, Bear Market
A bear is a person who believes that the prices in the market will decline. This person would be considered bearish. A bear market is a market that is declining (e.g., if the pound versus the US dollar rate is falling). If the decline were expected to continue, the market would be bearish.
Bid Price
The highest price a prospective buyer is willing to pay at a particular time for securities, futures contracts or foreign currencies.
Bid/Offer Spread
The standard differential between the price of buying and selling securities. It is usually quoted as a monetary amount for shares, a percentage term for unit trusts.
Blue Chip
The term used to define a company regarded as being a solid, and consequently safe, investment. The company will almost certainly be large, well established and profitable, but be conservatively managed.
Bollinger Band
A Bollinger Band is plotted two standard deviations away from the FX pair’s simple moving average.
When the FX pair exchange rate increases in volatility, its Bollinger Bands widen away from each other. The bands converge during times of lower volatility. An unusually long period during which the bands are tight often portends a looming spike in volatility. FX pair exchange rates hugging the upper band may indicate overbought conditions, while FX pairs trading at the lower band may be oversold.
Bretton Woods
The place in New Hampshire, where the post-war system of foreign exchange was agreed upon in 1944.
Bull, Bullish, Bull Market
A bull is a person who believes that prices in the market will rise. This person would be considered bullish. A bull market is a market that is rising (e.g., if the pound versus the US dollar rate moves higher). If the advance were expected to continue, the market would be bullish.
Bullion
Gold, silver, platinum, or palladium, in the form of bars or ingots.
C
Cable
Foreign exchange jargon for the British pound versus the US dollar exchange rate. It alludes to the cable laid under the Atlantic, which linked the tickertape machines used by trading houses in New York and London during the 1970s and early 1980s.
CAC 40
An index of the largest 40 companies listed on the French CAC market. The CAC index is published by the Societe des Bourse Francaises.
Cash Market
The market for the purchase and sale of physical currencies. Settlement is two business days from transaction date.
Central Bank
The bank that provides financial and banking services to the government of a country and its commercial banking system and which implements the government’s monetary policy.
Closed Position
An equal and opposite transaction, i.e. buying 1000 BT shares then selling 1000 BT shares, the position will be automatically closed.
Closing Price
The closing price is the last price for a tradable instrument at the time the market closes.
Commodity
A physical substance, such as food, grains, and metals, which is interchangeable with another product of the same type, and which investors buy or sell, usually through futures contracts.
Contingent Order
An order which is to be executed only if another order is executed first. An example of a contingent order would be to sell one specific security if another specific security has been bought.
Contracts for Difference (CFDs)
CFD means Contract for Difference. They were developed to allow clients to receive all the benefits of owning a stock without having to physically own the stock. In other words you cannot take delivery of a CFD so you have to settle the difference between where you bought the contract and where you sold it. The difference is either profit or loss.
Controlled Risk Bet (CRB)
A Controlled Risk Bet (CRB) is sometimes known as a guaranteed Stop loss order and can be placed on a range of instruments that we offer. A CRB allows you to open a specific bet and attach to it a guaranteed Stop loss order at a price you are prepared to be stopped out. Therefore you have a known ‘worse case scenario' should the market move against you, and you have a defined loss you are prepared to accept on that trade.
Corporate Action
Any event initiated by a corporation which impacts its shareholders. For some such events, shareholders may or must respond to the corporate action or select from a list of possible actions. Examples of corporate actions include dividend payments, mergers, rights issues and stock splits.(See: Dividend, Stock Split, Rights Issue and Consolidation)
Cost of Carry
How much it costs to finance a position.
Cross Rate
An exchange rate between two currencies, usually constructed from the individual exchange rates of the two currencies, measured against the US dollar, except for the British pound, where the US dollar is measured against sterling.
Currency Hedging
Trying to reduce or eliminate exchange rate risks by buying forward, using financial futures or borrowing in the exposed currency.
Currency Swap
Contract which commits two counter-parties to exchange streams of interest payments in different currencies for an agreed period of time and to exchange principal amounts in different currencies at a pre-agreed exchange rate at maturity.
Currency Warrant
OTC option; long-dated (more than one year) currency option.
D
DAX 30 Index
The index of the biggest 30 companies listed on the Frankfurt Stock Exchange in Germany. The DAX is a 'total return' index in that it measures the returns from dividends as well as share price performance.
Day Order
The order placed will be active, i.e. pending, until the end of the day, or until it has been executed.
Day Trading
Refers to opening and closing the same position, or positions, within a single day’s trading and before the value date changes.
Devaluation
The formal reduction in the value of a currency against other currencies.
Dividends
That part of a company's profit after tax which is distributed to shareholders.
Dow Jones Industrial Average
'The Dow' is the oldest stock market index in the US, measuring the performance of a representative selection of 30 blue-chip companies. The 30 companies are selected by Dow Jones & Co and the Wall Street Journal.
E
ECB - European Central Bank
which manages the euro currency and European interest rates/monetary policy.
EMU
From 1/1/02 European Union countries which participate in the union will use a common currency (euro) that will replace the domestic currencies.
European Monetary System
The exchange rate regulation system used between European Community member countries, begun in 1978.
Exchange Rate
The rate at which one currency is traded against another.
Exchange Rate Mechanism
The system by which European Community countries give a central exchange rate against which their currencies fluctuations are regulated.
Exchange Rate Risk
The potential loss that could be incurred from a movement in exchange rates.
Execution Only Stockbrokers
Those stockbrokers who offer clients, usually, an inexpensive trading facility with no advice, research or recommendations as to investment style or policy.
F
Federal Reserve (Fed)
The Federal Reserve System is comprised of 12 district banks throughout the US, the Federal Reserve Board (FRB) and the Federal Open Market Committee (FOMC). The FOMC, typically headed by the chairman of the FRB, meets eight times each year to set US monetary policy, including key interest rates.
Fibonacci Lines
Fibonacci lines are based on ratios that exist naturally. The ratios are based on the "Fibonacci numbers," in which each successive number is the sum of the two previous numbers.
e.g. 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc.
A number of relationships exist between these numbers, such as the fact that any given number (after 3) is roughly 1.618 times the previous number. Changes in trends tend to take place near the lines created by Fibonacci studies such as arcs, fans, retracements, and time zones.
Financing Costs
CFD Share positions carried overnight will incur financing costs for the full consideration of the position. If a client opens a position with a 5% margin, finance overnight will be on the 100% balance. Clients who are long a CFD will pay interest to CMC Markets, clients who are short may receive interest from CMC Markets.
Fixed Exchange Rate
Official rate set by monetary authorities for one or more currencies. In practice, even fixed exchange rates are allowed to fluctuate between definite upper and lower bands, leading to intervention.
Floating Exchange Rate
A scheme whereby a country’s currency exchange rate against others is determined by market forces with no intervention from government.
Forex
An abbreviation of foreign exchange.
Forward Exchange Contract
An agreement to buy an amount of a currency at an agreed exchange rate on a fixed date.
Forward Points
The interest rate differential between two currencies expressed in exchange rate points. The forward points are added to or subtracted from the spot rate to give the forward or outright rate.
FSA - The Financial Services Authority
The regulatory authority responsible for the conduct of brokers and dealers in securities, options share CFDs and futures.
Fundamental Analysis
The economic/financial and political analysis of a country that does not involve interpreting charting patterns or price movements.
Future
A standardized, exchange-traded contract that requires delivery of a commodity, bond, currency, or stock index, at a specified price, on a specified future date. Unlike options, futures convey an obligation to buy.
FTSE Index
Three indices comprise the FTSE All Share index - FTSE100, FTSE Mid 250 & FTSE Small Cap.
FX Forward Rate
The rate at which a foreign exchange contract is struck today for settlement at a specified future date.
FX Swap
A transaction which involves the actual exchange of two currencies (principal amount only) on a specific date, at a rate agreed at the time of the conclusion of the contract (short leg), at a date further in the future at a rate agreed at the time of the contract (the long leg).
G
Good for the Day (GTD)
A limit order, which expires at the end of the day, if it has not been executed.
GTC - Good Till Cancelled
An instruction to a broker that unlike normal practice the order does not expire at the end of the trading day. The order placed will remain active until it is either executed or cancelled.
H
Handle
The primary digits within a FX price quote that are assumed to be known. For instance, a EUR/USD quote of 1.2800 would have a handle of 128. FX dealers/traders do not generally quote the handle.
Hedge Fund
A type of unregulated investment fund often used by corporate institutions or high-net-worth individuals and private partnerships that use derivatives for directional investing and/or are allowed to go short and/or use significant leverage through borrowing. Depending on the jurisdiction, these techniques may not be allowed in a typical mutual investment fund.
Hedging
Use of investments to manage commercial risk or to minimize a potential loss to an existing position or known commitment. It is also defined as 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.
I
If Done Order
An “If Done” order is a combination of two orders and should be ideal if you are unable to watch the market all the time but want to participate in a market move in your favour and/or exit a move against you.
Illiquidity
The difficulty of changing your assets in cash because of a lack of demand for whatever it is you're trying to sell. See Liquidity. As a market maker CMC Markets provide liquidity by constantly quoting a bid and offer spread.
IMF - International Monetary Fund
An organization set up by Bretton Woods to overlook the fixed exchange rate regime (now ceased) and to provide borrowing facilities to allow corrective action to be taken, alleviating exchange rate pressure in deficit countries. Now also used as an arbiter of world economic affairs.
Index
A statistical indicator providing a representation of the value of the securities which constitute it. Indices often serve as barometers for a given market or industry and benchmarks against which financial or economic performance is measured.
Inflation
A steady rise in the general prices of consumer goods and services, resulting in a decrease in a currency’s purchasing power. Inflation rises with increases in money supply and credit, and is widely gauged through the Consumer Price Index (CPI) and Producer Price Index (PPI). Most central banks strive to maintain inflation in the 2-3% range.
Initial Margin
A deposit required by a broker before clients can transact margin deposit trading.
Interbank Rates
FX rates quoted by large international banks to transact with other large international banks.
Interest Rate
The interest paid on borrowed funds (or received on funds loaned), expressed as an annualized percentage. There are many different interest rates quoted for each country, but the rate most relevant to FX traders is the overnight borrowing rate as determined by each country’s central bank. In the US, the Federal Reserve committee meets every few months to set the Federal Funds rate. The overnight lending rates not only determine how much interest is earned or owed on currency positions held overnight, but also impact currency valuations, as higher yielding currencies (all else held constant) attract more capital.
J
Jawboning
A country’s Central Bank periodically comments publicly on monetary policy and on its outlook towards its own currency, in an attempt to influence market sentiment and by extension, its currency exchange rates.
L
Leveraging
Borrowing funds in order to increase the potential return on investment. FX trading providers typically allow 1:100 leverage.
LIBOR
The London Interbank Offered Rate, the rate charged by one bank to another for lending money.
Limit Order
An order to buy or sell a share at a specific price. The order will only be carried out by the broker at that price, or a better one. If the broker can't fulfil the limit order, it lapses.
Liquid Market
A liquid market is one where there is a high number of bids and offers, resulting in a tight bid-ask spread. Within liquid markets, buyers and sellers can easily trade in and out of positions, without worrying about not finding a counterparty to their intended transaction. The FX market is the world’s most liquid financial market.
Liquidity
The level of continual buy and sell activity making up the market demand for the shares and indicating the ease with which investors can undertake transactions.
Long
Buying an investment with a view of the investment going up (opposite of short)
M
MACD - Moving Average Convergence/Divergence
is a technical indicator that measures a FX pair’s exchange rate swings. The MACD uses (in its calculation) two exponentially smoothed moving averages of the FX pair’s historical price, and usually spans over a period of time. The MACD is often compared to its own moving average, providing traders signals on when the FX pair might rise or fall.
Margin in the context of FX & CFDs
A cash deposit provided by clients as collateral to cover losses (if any) that may result from the client’s trading activities.
Margin Call
Demand that a customer deposit additional money or securities to bring a margin account back up to the initial margin or minimum maintenance requirements. If a customer fails to respond, securities in the account may be liquidated.
Margin Requirements
Investors are asked to deposit a small percentage of the overall cost that would be required if they were to purchase the equivalent shares in the physical market. Even though the CFD investor's outlay is small in comparison to the equivalent physical trade, the investor will still be exposed to the same potential profit and loss. This means that your potential Return on Investment is magnified.
Mark-to-market
The daily adjustment of an account to reflect accrued profits and losses often required to calculate variations of margins.
Market Capitalisation / Mkt Cap
Market capitalisation is the number of shares in issue multiplied by the share price at the time the market capitalisation was calculated.
Market Order
A market order is an order to buy or sell at the current market price. A trader specifies the currency pair and the deal size and is given a two-way price (bid and ask price) on which to deal.
Marketmaker
A firm or individual whose main responsibility is to create a market in a currency pair by providing firm two-way quotes (bid and ask). Marketmakers compete with each other for order flow by reducing the spread between their quotes.
Mid Price
The mid point of the bid / offer spread quoted by the market makers. The price shown in the share price pages and market reports within the financial media, but not the price at which you could necessarily expect to conclude a deal to buy or sell. The price at which you buy will be higher and the price at which you sell will be lower than the mid price in almost all circumstances.
N
NASDAQ - National Association of Securities Dealers Automated Quotations System
The second largest stock exchange in the US, specialising in high-tech and internet-related companies, such as Microsoft. The movements of the NASDAQ can have a significant effect on the UK markets, particularly the recently-launched techMARK index of technology, media and telephony companies.
New Issue
A company that is floated on the stock market for the first time. Offering shares to the investment public is a way of raising capital for further expansion. Also known as the Initial Public Offering (IPO).
NYSE - New York Stock Exchange
The largest and oldest US stock exchange
O
OCO - One Cancels the Other
If you place a sell limit and a sell stop order in the same stock at the same time. When either order is executed the other will automatically be cancelled. Also applies to a buy limit and buy stop order.
Option
The right, but not the obligation, to buy (call option) or sell (put option ) a specific amount of a given stock, commodity , currency, index, or debt, at a specified price (the strike price) during a specified period of time.
For the holder, the potential loss is limited to the price paid to acquire the option. When an option is not exercised, it expires. No shares change hands and the money spent to purchase the option is lost. For the buyer, the upside is unlimited. For the writer, the potential loss is unlimited unless the contract is covered, meaning that the writer already owns the security underlying the option.
There are two types of options: American style and European style. American options can be exercised at any time between the purchase date and the expiry date and European options can only exercised on a single day, usually its expiry date.
Out of Hours Trading
CMC Markets will allow clients to trade selected major stocks and indices outside the normal trading hours.
Order Book
Introduced on 20 October 1997. FTSE 100 stocks are traded on an electronic order book (inside the SEAQ quote system). When bid and offer prices match, new incoming orders are automatically against orders on the book.
Open Position
A long or short position which has not been closed out by an equal and opposite position.
Overbought
Market prices that have risen too steeply and too quickly.
Oversold
Market prices that have declined too steeply and too quickly.
OTC - Over The Counter
A market conducted directly between dealers and principals via a telephone and computer network rather than a regulated exchange trading floor.
P
“Pegged” Currency
A currency is pegged or fixed when its country’s Central Bank decides to tie its value to a stronger currency, in an effort to stabilize its own currency. Currencies such as the Hong Kong Dollar have historically pegged to the US Dollar.
Plaza Agreement
Agreement made between the US, France, Germany, Japan and the UK in 1985, to work together on influencing exchange rates.
Point
Depending on the context, normally one basis point, i.e., 0.0001.
Portfolio
A collection of securities owned by an investor.
Position
The value (quantity) of a tradable item held by a trader.
Pricemaker
An individual or a firm that quotes prices on which it is prepared to trade a currency pair.
Pricetaker
A market participant looking to enter a trade, who has no ability to make the market. Pricetakers can only trade at prices offered by pricemakers. For instance, a pricetaker hoping to sell immediately would have to submit a sell order at the market (the current bid). The majority of retail partcipants in the FX market are pricetakers.
Pullbacks
A retreat of a FX pair’s exchange rate from a recent top. A pullback may be a brief reversal of the current upward trend, signaling a pause in upward momentum. After major upward moves, pullbacks can provide buying opportunities. Pullbacks though, may also represent trend reversals.
PPP - Purchasing Power Parity
The theory that identical tradable goods and services ought to be priced the same across two different countries, otherwise arbitrage opportunities would arise. PPP states that over the long term, the exchange rate between two currencies adjusts to eliminate these arbitrage opportunities. PPP theory ignores transportation costs, tariffs and transaction costs. It also assumes competitive markets in both countries.
Q
Quoted Currency
The currency in a foreign exchange deal; the amount of which is equated to one unit of the base currency.
R
Range Trading
A trading strategy in which the trader identifies a FX pair currently trading in a range. The trader buys when the pair finds major support (at the bottom of the range) and sells at major resistance (at the top of the range). Trading is typically repeated at support and resistance until the FX pair breaks out of the range.
Reserve Currency
The currency which is most used by governments and institutions for holding cash reserves. Currently, it is the US dollar.
Resistance
A price level at which you would expect selling to take place.
Rights Issue
An additional issue of shares by the company to existing share holders and at an advantageous, discounted, price. A means for the company to raise new funds for further development or to finance a new acquisition for cash. A two for five rights at 145p means that the existing share holder has the right to acquire a further two shares for every five currently held at a new cost of 145p per share acquired.
RSI
A technical momentum indicator comparing the magnitude of recent gains to recent losses, helping determine overbought and oversold conditions of a FX pair.
It is calculated using the following formula:
| RSI = 100 - |
100 |
RS = Average of x days' up closes / Average of x days' down closes |
| 1+RS |
RSI ranges from 0 to 100. RSI readings above the 70 level indicate that the FX pair may be overbought, while readings below 30 likely point to an oversold FX pair.
S
Sector
A distinct subset of a market whose components share similar characteristics. Stocks are often grouped into different sectors depending upon the company's business. For example the FTSE 100 has banking, oil and gas and pharmaceutical sectors.
Selling Short
This is practice of selling shares that you do not own in the hope that the share price falls before you have to settle the contract. If the price does fall you can then buy the shares at the lower price and pocket the difference.
Short
A market position where the client has sold a currency or security he or she does not already own, in anticipation that it will decrease (depreciate) in value. For example, a trader who has sold 100,000 EUR against the USD is short the EUR versus the USD. The euro is expected to decline in value in relation to the USD in this scenario.
Simple Moving Average
A simple, or arithmetic, moving average can be calculated by adding the FX pair’s closing exchange rate for a number of time periods and then dividing this sum by the number of periods. The SMA is essentially the average FX pair exchange rate over a time period. Equal weighting is applied to each exchange rate used in the calculation.
Speculator
A sophisticated individual who trades with significant leverage, taking on above average risk in hopes of above average returns.
Speculative Attack
Currencies that are identified by sophisticated speculators as trading within an artificially high or low range are prone to be attacked. Speculative attacks may succeed in bringing the currency value back in line with intrinsic value (as determined by fundamental and/or technical analyses) should sufficient numbers of influential market participants decide to overwhelm current government-supported positions.
Spot
The FX contract is based on an instantaneous price and the settlement date is two business days forward.
Spread
The difference between the marketmaker’s bid and offer price for a currency.
Spread Betting
A type of bet that gives investors the chance of making unlimited winnings (and losses), in contrast to the conventional fixed-odds type of bet, where the potential winnings and losses are known before the event. They generally quote spreads wider than the market. Share CFDs are a more sophisticated way of trading.
S & P - Standard and Poor's Stock Index
US performance index of the country's top 500 companies.
Square
Where a client has not traded in that currency or where an earlier deal is reversed, thereby creating a neutral (flat, square) position. For example: bought $100,000 then sold $100,000 = SQUARE. Also known as flat.
Stockbroker
An exchange member firm which provides advice and dealing services to the public as well as trading on its own account.
Stop loss Order
Stop orders can be used to enter or exit the market. Stop loss orders are used to close out existing open positions. Stop loss orders can be used to limit your trading risk and are an essential part of disciplined trading. Stops are used so that should the market move against you, you are automatically taken out of a position, effectively limiting your loss. Stop losses can also be used to lock in profit. As the market moves in your favour you can move your stop order up with the prevailing price, locking in profit or minimizing losses, if the market suddenly moves against you. This is known as a trailing stop.
Support Level
A price level at which you would expect buying to take place.
T
techMARK
This market groups together technology companies from across the market. It has its own indices, the FTSE techMARK 100 and the FTSE techMARK All Share.
Technical Analysis
Analysis of market movements based chart study, moving averages, volume, open interest, formations, and other technical indicators.
Tom Next
A transaction with value dates for tomorrow against the next day.
Transparent
A description of a market where traders have full immediate knowledge of the details of trades taking place.
Treasury
A bond issued by Government. Bonds issued by the UK government are called gilt edged stock , commonly referred to as gilts.
Trend Lines
These lines are drawn to illustrate the broader direction of the FX pair. Trend lines can vary in length, applying to either the short, intermediate or long term. Trend lines are used by trend traders to help identify support and resistance, and to caution against taking any countertrend positions.
Trend Trading
A trend trader strives to profit by taking a position in a FX pair in the direction of the pair’s momentum. A long position is entered when a FX pair is trending upward (higher highs and higher lows), while a short position is taken when the stock is trending down (lower highs and lower lows). Trend traders stay in their position until the trend breaks.
U
Underlying
Is the security or commodity that is delivered or being traded when dealing in futures or options.
Underlying Currency
Currency which forms the basis of a contract and, hence, is bought or sold when the contract is exercised.
V
Variation Margin
In margin deposit trading: funds required to be deposited by a client when a price movement has caused funds to fall below the margin requirement. Conversely funds may be withdrawn by a client when a price movement has caused funds to rise above the margin requirement.
Value Date
Settlement date of a spot or forward deal.
Value Spot
The settlement value upon two business days. This settlement date is always used in the interbank cash market, unless otherwise requested by the client.
Volatility
How quickly the price of a security rises and falls over time. A highly volatile share can be risky for short-term investors who stand a greater chance of buying at a peak and selling in a trough at a loss.
Y
Yield
The return earned on an investment taking into account the annual income and its present value. There are a number of different types of yield, and in some cases different methods of calculating each type.
Yield Curve
A series of interest rates plotted against the time to maturity, to which they apply.
