7 Common Trading Terms that Even Non-Traders Should Understand
The financial world can appear really complicated to some. And, the complex trading terminologies that traders seem to use can complicate things further for outsiders, even if the concept behind such terms is relatively simple. And, that’s the primary reason why people who aren’t from a financial background don’t quite back themselves with simple investing. However, we don’t think you need to know as much about the financial world as a full-time trader needs to know. We believe you shouldn’t hold yourself back from the exciting world of investments because of this perceived ignorance on your part. So, to that end, we’d like to share common trading terms that everybody should know, really, even if you merely have a passing interest in the world of investments. After all, life is a pursuit of knowledge.
Spread is a highly common trading terminology that is used to establish the difference between the buying and the selling prices of any given asset. You would be charged with a ‘spread’ if you’re buying or selling stock from a broker. The term is commonly used if you’re trading Forex or foreign exchange. For instance, let’s assume you’re paying 1.2856 US Dollars for every 1 British Pound that you’re selling or you’re paying 1.2860 US Dollars for every 1 British Pound that you’re buying. The difference between these two terms is known as the ‘spread’. But, always remember that you always pay a higher amount for every Dollar you’re buying and a lesser amount for every Dollar you’re selling.
2. Over the Counter Markets
An over the counter or an OTC market is a market where two parties can directly trade financial assets. This treading is generally executed through a dealer network, outside of a formal exchange. Traders can opt to purchase their exchange through an ‘over the counter’ market instead of relying on a centralised exchange such as the Singapore Exchange, and they could conduct their trade without the necessity to own any actual assets on the exchange. However, the counterparty (the party you’re dealing with) must be reliable enough for you to consider trading with them. To reduce this counterparty risk, you must enlist the help of a reliable broker.
This is quite comprehensively the most misunderstood trading terminology out there. And, most people haven’t even heard the term in a purely financial context. However, the meaning of the term is actually quite straightforward. The term simply refers to two parties betting on two entirely different outcomes altogether. To use a basic example, let’s say party ‘A’ believes the price of a stock would ascend from its current position by a given period of time, while party ‘B’ believes that the price of a stock would fall from its current rate by that period of time. In this case, the ‘Call’ option is applicable to party ‘A’, while the term ‘Put’ is applicable to ‘Party B’. So, in essence, this is a betting game, but we would urge you to go through a more elaborate explanation if the term interests you.
It’s possible that you’re unfamiliar with the term ‘Candlesticks’ if you’ve never invested in any kind of stocks, bonds, etc. but, you should certainly learn more about the term if you plan to invest in them any time soon. The two main types of candlesticks are green (or white) and red (or black) candlesticks. A white or green candlestick simply indicates that an asset’s closing price for today is higher than that of its closing price yesterday. Conversely, a black (or red) candlestick simply indicates that an asset’s closing price for today is lower than that of its closing price yesterday. If you’re curious how this works, then you should certainly consider learning more about how a candlestick chart works.
5. Basis Point
Now here’s a trading terminology you should understand even if you don’t want to trade per se. Basis point is a term that has a lot to do with interest rates and it is very relevant for long-term investors. And, interest rates have a thing to do with all asset classes. A basis point is simply an alternative unit of measurement for interest rates. So, 65/100 basis points simply refer to 65% or 0.65 just like 75/100 basis points refers to 75% or 0.75. You can’t believe how simple this was? We can’t, either.
‘Future’ refers to a futures contract, where two parties agree to prepare a contract where one party would buy specific assets from another at a pre-set price at a fixed date in the future. It is worthwhile to note that companies typically enter into a futures contract, and not investors. Companies do this because they’re aware that a futures contract is simply a means to hedge. These companies tend to deal in commodities more often than not.
7. Day Traders
If you’re thinking a day trader completes their transaction within the span of the same trading day, you’re thinking right! A day trader buys and sells a financial asset within one trading day, and thereby, avoids overnight positions. Options, futures, and currencies are the common types of instruments that a day trader trades in. Day traders are methodical in their approach to trading as they rely on technical analysis of trends as opposed to fundamental analyses and have their own ways to cut down on loss when they realise the tide is against them.
And, thus, concludes this brief list of trading terms that we believe even non-traders ought to know. As a final thought, we’d like to say that it’s always best to conduct elaborate research, read important notes before diving into the deep blue waters of trading or playing the market. The market can be dark and full of terrors!
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