BUSINESS NEWS - If you’re a beginner that has just started trading in the financial markets, or plans to do so in the near future; then you should know some basic trading terms. These terms are often used in the trading industry, and you need to be familiar with them.
In this guide, we’ll cover some of the most commonly used and essential terms.
1. Day Trading
Day trading or intraday trading refers to trades that are entered into and exited from in a single trading day. Most of the trading activity in the markets is intraday. This is because broker’s charge an overnight commission if you carry an open trade to the next trading day.
Day trading is very different from investing. Investing relies on the long-term potential of a security whereas day trading speculates on the daily volatility of a security. Day trading relies on technical analysis and technical indicators whereas long-term investing relies on fundamental analysis.
2. Exchange
An exchange is a centralized body through which security trades can take place. For example, the New York Stock Exchange is an “exchange” similar to the Johannesburg Stock Exchange. The JSE is the largest stock and derivatives exchange in South Africa in terms of volume of trades. Other South African exchanges include ZARX exchange, 4AX exchange (Cape Town Stock Exchange), and A2X exchange.
The exchange is a meeting place for buyers and sellers. The price of a security is decided by the exchange based on an intrinsic formula that depends on the demand and supply of the security.
3. Broker
A broker is the company which facilitates trades. The broker will buy and sell securities on your behalf. The broker charges a fee for providing trading services. There are different kinds of brokers such as discount brokers, full-service brokers, and so on.
A broker operating in South Africa needs to be licensed by the financial regulator of the country which is the Financial Sector Conduct Authority (or the FSCA) and the exchange on which securities are being traded.
The license requirements depend on the securities market or instruments being offered by the broker. For example: A Stock broker in South Africa must be licensed by both JSE and FSCA, while forex brokers in South Africa must be licensed with FSCA.
You should only register an account with a broker/dealer that is licensed by the FSCA by verifying their FSP number on FSCA’s website. This is because being licensed by the FSCA means that the broker can be trusted.
4. Regulator
The term regulator means the financial sector governmental regulator of a country. In South Africa, these regulators are the FSCA or the Financial Sector Conduct Authority and the SARB or the South African Reserve Bank’s Prudential Authority.
The job of the regulator is to make rules according to which the financial sector of a country will operate. The regulator ensures that the interests of investors and traders are protected in the market and that brokers and capital markets/exchanges operate according to the rules.
The regulator licenses brokers and financial service providers that meets certain criteria and ensures that these brokers are accountable to it.
5. Ask/Offer
The Ask or Offer price is the price at which you can purchase a security from the seller (a brokerage depending on current market price plus broker fee). The Ask price is usually lower than the Bid price (discussed in the next section). The Ask quote may also tell you about the number of securities that are available for the Ask price.
The Ask price refers to the price of a single security, and if you want to purchase multiple units, then you need to multiply the Ask price with the quantity you want to buy.
The term Ask price is used across financial markets including forex, commodities, derivatives, and stocks.
6. Bid Price
The Bid price is the opposite of the Ask price. The price denotes the price at which you can sell a security. This is the price at which a buyer/broker is willing to purchase the security from you. The Bid price is always lower than the ask price (based on broker fee/commission).
The Bid price is the price of a single security. If you want to sell multiple units of a security, then you need to multiply the bid price with the quantity.
The Bid price is also used across financial markets, similar to the Ask price.
7. Spread
The spread is the difference between the Ask price and Bid price. This difference is the cost of trading. The spread is the trading fee charged by the broker offering trading services. The brokers take their cut from every trade made by traders through the spread.
The tighter or the lesser the spread, the less fee you are being charged by the broker. The spread can vary according to factors such as type of account being used, type of security being traded, and the timing of the trade.
In addition to the spread, the broker may also charge other types of fees such as commission, etc. You should be aware of all the fees charged by a broker before making a trade.
8. Long/Short
In intraday trading, long means purchasing a security in the hopes of selling it at a higher price. Similarly, Short means selling a security in the hope of buying it at a lower price.
In intraday trading, you can “go short” or “go long” on a security, depending on your trading strategy. If you believe that the price of a security is going to go up, then you “go long” whereas if you think the price is going down, then you “go short”.
9. Bull Market/Bear Market
A bull market means that the prices of securities are rising and they are expected to rise further in the future. A bear market means that prices of securities are falling and they are expected to fall further in the future.
A bull market is favourable to “long” trades whereas a bear market is favourable to “short” trades. Every financial market goes through cyclical bullishness and bearishness depending on investor confidence and market factors.
10. Trading Account
Before you can start trading, you will need to open a trading account with a licensed broker. A trading account is held by a broker in your name. This account will keep the money that you deposit in it and your profits from your trades.
Every broker offers different types of trading accounts. For example, some accounts can be favourable for scalpers whereas some can be favourable for beginner traders.
Before opening a trading account with a broker, make sure that you do proper research into the services offered by the broker, their safety, their customer support, and their fee structure.
11. Volatility
Volatility refers to the speed of change in the price of a security. A highly volatile security will experience large changes in its price in a relatively short period of time while a stable security or less volatile security will experience less change in its price.
Some financial markets are more volatile than others. For example, the forex market is a highly volatile market whereas the money market is less volatile.
Similarly, some securities are more volatile than others. Usually, penny stocks are more volatile than blue-chip stocks.
12. Yield
Yield refers to the income from an investment in a security. The yield can be in the form of interest (expressed as an annual percentage like in case of bonds/ETFs) or dividend (also called the dividend yield).
Yield is more relevant to investors rather than intraday traders. Intraday trades are too short to generate any yield.
Remember that the profit or loss from capital appreciation or depreciation you make from opening and closing a trade or investment is not called the yield.
13. Limit Orders/ Stop Orders
There are different types of orders in trading. A limit order is an order to purchase or sell a security when the least acceptable price has been reached. A limit order can be seen by the market. A limit order is visible to the market.
A stop order is the least acceptable price at which a purchase or selling order can be triggered. A stop order is not visible to the market.
Further, you can have a stop-limit order as well in which both the stop price and limit price need to be met.
14. Slippage
Slippage is a price difference between the expected price of a trade at which order is placed with the broker and the price at which the trade is actually executed by the broker. Slippage can occur because of periods of high volatility at the time during which the market order is placed. It can also happen if the order is too large to be filled at the same price.
Slippage occurs in all financial markets including forex, stocks, commodities, and cryptocurrencies.
Slippage is a fact of the market and most trades experience a small amount of slippage. To reduce slippage, you should trade with a broker that offers fast execution speeds.
Article supplied by Safe Forex Brokers SA
