Financial Glossary

A

Appreciation

An increase in the value of an asset over time. The increase can occur for a number of reasons including increased demand or weakening supply, or as a result of changes in inflation or interest rates. This is the opposite of depreciation, which is a decrease over time.

Arbitrage

The simultaneous purchase and sale of an asset in order to profit from a difference in the price. This usually takes place on different exchanges or marketplaces.

Ask

The price a seller is willing to accept for a security, also known as the offer price. Along with the price, the ask quote will generally also stipulate the amount of the security willing to be sold at that price.

At best

An instruction given to a dealer to buy or sell at the best rate that can be obtained.

B

Bar

A graphical representation of a stock's movement that usually contains the open, high, low and closing prices for a set period of time.

Base Currency

The first currency quoted in a currency pair on forex. It is also typically considered the domestic currency or accounting currency. For accounting purposes, a firm may use the base currency to represent all profits and losses. 
It is sometimes referred to as the "primary currency".

Bear Market

A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment to be self-sustaining. As investors anticipate losses in a bear market and selling continues, which contributes to further pessimism. Although figures can vary, for many, a downturn of 20% or more in multiple broad market indexes, such as the Dow Jones Industrial Average (DJIA) or Standard & Poor's 500 Index (S&P 500), over at least a two-month period, is considered an entry into a bear market.

Bid

1. An offer made by an investor, a trader or a dealer to buy a security. The bid will stipulate both the price at which the buyer is willing to purchase the security and the quantity to be purchased.

2. The price at which a market maker is willing to buy a security. The market maker will also display an ask price, or the amount and price at which it is willing to sell.

Broker

1. An individual or firm that charges a fee or commission for executing buy and sell orders submitted by an investor.

2. The role of a firm when it acts as an agent for a customer and charges the customer a commission for its services.

3. A licensed real estate professional who typically represents the seller of a property. A broker's duties may include: determining market values, advertising properties for sale, showing properties to prospective buyers, and advising clients with regard to offers and related matters.

Bull Market

A financial market of a group of securities in which prices are rising or are expected to rise. The term "bull market" is most often used to refer to the stock market, but can be applied to anything that is traded, such as bonds, currencies and commodities.

Buy

1. A recommendation to purchase a specific security.
2. To acquire an asset in exchange for currency.

C

Cable

Slang used among forex traders referring to the exchange rate between the U.S. dollar and the British pound sterling. Because it is the norm in forex for most major currencies to be quoted against the U.S. dollar on a regular basis, "cable" is a commonly used term.
"Cable" can also be used to refer simply to the British pound sterling. 

Candlestick

A price chart that displays the high, low, open, and close for a security each day over a specified period of time.

Close Position

The act of taking the opposite position of the current position thereby getting out of a position in a particular stock or security.

Closing Price

The final price at which a security is traded on a given trading day. The closing price represents the most up-to-date valuation of a security until trading commences again on the next trading day.

Commission

A service charge assessed by a broker or investment advisor in return for providing investment advice and/or handling the purchase or sale of a security. Most major, full-service brokerages derive most of their profits from charging commissions on client transactions. Commissions vary widely from brokerage to brokerage.

Crawling Peg

A system of exchange rate adjustment in which a currency with a fixed exchange rate is allowed to fluctuate within a band of rates. The par value of the stated currency is also adjusted frequently due to market factors such as inflation. This gradual shift of the currency's par value is done as an alternative to a sudden and significant devaluation of the currency.

Cross Trade

A practice where buy and sell orders for the same stock are offset without recording the trade on the exchange, which is outlawed on most major stock exchanges. This also occurs when a broker executes both a buy and a sell for the same security from one client account to another where both accounts are managed by the same portfolio manager.

Cross Rate

The currency exchange rate between two currencies, both of which are not the official currencies of the country in which the exchange rate quote is given in. This phrase is also sometimes used to refer to currency quotes which do not involve the U.S. dollar, regardless of which country the quote is provided in.

Currency

A generally accepted form of money, including coins and paper notes, which is issued by a government and circulated within an economy. Used as a medium of exchange for goods and services, currency is the basis for trade.

Currency Risk

The probability of an adverse change in exchange rates.

D

Day Order

Any order to buy or sell a security that automatically expires if not executed on the day the order is placed.

Deal Ticket

A ticket that records all the terms, conditions and basic information of a trade agreement. A deal ticket is created after the transaction of shares, futures contracts or other derivatives. 

Dealer

1. An individual or firm willing to buy or sell securities for their own account.
2. One who purchases goods or services for resale to consumers.

Dealing Desk (Trading desk)

A desk where transactions for buying and selling securities occur. Trading desks can be found in most organizations (banks, finance companies, etc.) involved in trading investment instruments such as equities, fixed-income securities, futures, commodities and foreign exchange. A trading desk provides traders with access to instantaneous trade executions. Also known as "dealing desk".

Depreciation

1. In accounting, an expense recorded to allocate a tangible asset's cost over its useful life. Because depreciation is a non-cash expense, it increases free cash flow while decreasing reported earnings.
2. A decrease in the value of a particular currency relative to other currencies.

Double Leverage

When a bank holding company conducts a debt offering to acquire a large equity stake in a subsidiary bank. Ideally, dividends earned on the subsidiary company's stock are used to finance the holding company's interest payments.

Direct Quote

A foreign exchange rate quoted as the domestic currency per unit of the foreign currency. In other words, it involves quoting in fixed units of foreign currency against variable amounts of the domestic currency.

E

Economic Indicator

A piece of economic data, usually of macroeconomic scale, that is used by investors to interpret current or future investment possibilities and judge the overall health of an economy.  Economic indicators can potentially be anything the investor chooses, but specific pieces of data released by government and non-profit organizations have become widely followed - these include:

- The Consumer Price Index (CPI)
- Gross Domestic Product (GDP)
- Unemployment figures
- The price of crude oil

EMS

A 1979 arrangement between several European countries to link their currencies in an attempt to stabilize the exchange rate. This system was succeeded by the European Monetary Union (EMU), an institution of the European Union (EU), which established a common currency called the euro.

Exchange Rate

The price of one country's currency expressed in another country's currency. In other words, the rate at which one currency can be exchanged for another. For example, the higher the exchange rate for one euro in terms of one yen, the lower the relative value of the yen.

Exotic Currency

A foreign exchange term for a thinly traded currency. Exotic currencies are illiquid, lack market depth and trade at low volumes. Trading an exotic currency can be expensive, as the bid-ask spread is usually large.

Exposure

In foreign exchange, a potential for gain or loss because of movement in foreign exchange rate. There are three primary types of exposure:
1.    Economic: The change in future earning power and cash flow arising from a change in exchange rates. In effect, it represents a change in the value of a company holding foreign currency.
2.    Transaction: A potential gain or loss arising from transactions that will definitely occur in the future, are currently in progress, or could have already been completed. A signed but not shipped sales contract, a receivable or foreign currency payment collected but not converted to local currency would all be examples of transaction exposure.
3.    Translation: The potential for change in reported earnings and/or the book value of the consolidated company equity accounts, as the result of a change in foreign exchange rates used to translate the foreign currency statements of subsidiaries and affiliates known as accounting exposure.

F

Forex

The market in which participants are able to buy, sell, exchange and speculate on currencies. The forex markets is made up of banks, commercial companies, central banks, investment management firms, hedge funds, and retail forex brokers and investors. The currency market is considered to be the largest financial market in the world, processing trillions of dollars worth of transactions each day.

Fill or Kill Order

An order to fill a transaction immediately and completely or not at all.

Fisher Effect

A theory describing the long-run relationship between inflation and interest rates.

Forex Signal System

A set of analyses that a forex trader uses to determine whether to buy or sell a currency pair at any given time. Forex signal systems could be based on technical analysis charting tools or news-based events. The day trader's currency trading system is usually made up of a multitude of signals that work together to create a buy or sell decision. Forex trading signals are available for free, for a fee or are developed by the traders themselves.

FRS

The central bank of the United States. The Fed, as it is commonly called, regulates the U.S. monetary and financial system. The Federal Reserve System is composed of a central governmental agency in Washington, D.C. (the Board of Governors) and twelve regional Federal Reserve Banks in major cities throughout the United States.

Fundamental Analysis

A method of evaluating a security by attempting to measure its intrinsic value by examining related economic, financial and other qualitative and quantitative factors. Fundamental analysts attempt to study everything that can affect the security's value, including macroeconomic factors (like the overall economy and industry conditions) and individually specific factors (like the financial condition and management of companies). 

The end goal of performing fundamental analysis is to produce a value that an investor can compare with the security's current price in hopes of figuring out what sort of position to take with that security (underpriced = buy, overpriced = sell or short).

This method of security analysis is considered to be the opposite of technical analysis. 

G

Gold Standard

A monetary system in which a country's government allows its currency unit to be freely converted into fixed amounts of gold and vice versa. The exchange rate under the gold standard monetary system is determined by the economic difference for an ounce of gold between two currencies. The gold standard was mainly used from 1875 to 1914 and also during the interwar years. 

Good till Cancelled

An order to buy or sell a security at a set price that is active until the investor decides to cancel it or the trade is executed. If an order does not have a good-'til-canceled instruction then the order will expire at the end of the trading day the order was placed.

Grid

Fixed margin within which exchange rates are allowed to fluctuate.

H

Hard Currency

A currency, usually from a highly industrialized country, that is widely accepted around the world as a form of payment for goods and services. A hard currency is expected to remain relatively stable through a short period of time, and to be highly liquid in the forex market.

Hedge

Making an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract.

Hit the Bid

A buzzword used to describe an event where a broker agrees to sell at a bid price quoted by another broker. The broker is ultimately agreeing to sell a given stock at the highest price that another broker is willing to buy at.

I

Index

A statistical measure of change in an economy or a securities market. In the case of financial markets, an index is an imaginary portfolio of securities representing a particular market or a portion of it. Each index has its own calculation methodology and is usually expressed in terms of a change from a base value. Thus, the percentage change is more important than the actual numeric value.

Stock and bond market indexes are used to construct index mutual funds and exchange-traded funds (ETFs) whose portfolios mirror the components of the index.

Indicative Quote

In forex trading, a currency quote that is provided by a market maker to a trading party but that is not firm. In other words, when a market maker provides an indicative quote to a trader, the market maker is not obligated to trade the given currency pair at the price or the quantity stated in the quote. Contrast this to a firm quote, in which a market maker guarantees a specified bid or ask price to a trader up to the maximum quantity specified in the quote.

Initial Margin

The percentage of the purchase price of securities (that can be purchased on margin) that the investor must pay for with his or her own cash or marginable securities.
Also called the "initial margin requirement".

International Monetary Fund (IMF)

An international organization created for the purpose of:
1. Promoting global monetary and exchange stability.
2. Facilitating the expansion and balanced growth of international trade.
3. Assisting in the establishment of a multilateral system of payments for current transactions.

Intervention

Action by a central bank to effect the value of its currency by entering the market. Concerted intervention refers to action by a number of central banks to control exchange rates.

Instrument

1) A tradable asset or negotiable item such as a security, commodity, derivative or index, or any item that underlies a derivative. An instrument is a means by which something of value is transferred, held or accomplished.
2) An economic variable that can be controlled or altered by government policymakers in to cause a desired effect in other economic indicators.
3) A legal document such as a contract, will or deed.

J

K

Kiwi

A slang term for the New Zealand dollar (NZD). It derives its name from New Zealand's national icon - a flightless bird called a kiwi - which is pictured on one side of the country's $1 coin.

Kurtosis

A statistical measure used to describe the distribution of observed data around the mean.
It is sometimes referred to as the "volatility of volatility."

L

Leverage

1. The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment.

2. The amount of debt used to finance a firm's assets. A firm with significantly more debt than equity is considered to be highly leveraged.

Limit Order

An order placed with a brokerage to buy or sell a set number of shares at a specified price or better. Limit orders also allow an investor to limit the length of time an order can be outstanding before being canceled.

Liquidity

1. The degree to which an asset or security can be bought or sold in the market without affecting the asset's price. Liquidity is characterized by a high level of trading activity.
2. The ability to convert an asset to cash quickly. Also known as "marketability".

Long Position

1. The buying of a security such as a stock, commodity or currency, with the expectation that the asset will rise in value.
2. In the context of options, the buying of an options contract.
Opposite of short position.

Lot

In general, any group of goods or services making up a transaction. In the financial markets, a lot represents the standardized quantity of a financial instrument as set out by an exchange or similar regulatory body. For exchange-traded securities, a lot may represent the minimum quantity of that security that may be traded.

M

Margin

1. Borrowed money that is used to purchase securities. This practice is referred to as "buying on margin".
2. The amount of equity contributed by a customer as a percentage of the current market value of the securities held in a margin account.
3. In a general business context, the difference between a product's (or service's) selling price and the cost of production.
4. The portion of the interest rate on an adjustable-rate mortgage that is over and above the adjustment-index rate. This portion is retained as profit by the lender.

Margin Call

A broker's demand on an investor using margin to deposit additional money or securities so that the margin account is brought up to the minimum maintenance margin.
This is sometimes called a "fed call" or "maintenance call".

Market Maker -

A dealer or financial institution who trades securities for their own account and maintains consistent firm bid and offer prices for these securities by buying or selling them continuously on the market at publicly quoted prices.

Market Order

A buy or sell order to a broker in which a price is not specified.
This order is to be executed at the best possible price immediately following the time it is received on the trading floor.

Mine and Yours

Terms used by floor traders to signify buying and selling. Mainly used in forex transactions.

N

Netting

1. Settling mutual obligations at the net value of a contract as opposed to its gross dollar value.
2. Reducing the transfer of funds between subsidiaries to a net amount.

O

Offer Price

1. When one party expresses interest to buy or sell an asset from another party. The offering price is often the highest the buyer will pay to purchase an asset, and the lowest that the seller will accept.
2. The act of making an asset available for sale.

One Cancels Other Order

An order stipulating that if one part of the order is executed, then the other part is automatically canceled.

Open Position

An active trade with corresponding unrealized P&L, which has not been offset by an equal and opposite deal.

Over the Counter (OTC)

A security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase "over-the-counter" can be used to refer to stocks that trade via a dealer network as opposed to on a centralized exchange. It also refers to debt securities and other financial instruments such as derivatives, which are traded through a dealer network.

Overnight Rate (O/N)

The interest rate at which a depository institution lends immediately available funds (balances within the central bank) to another depository institution overnight.

P

Parity

1. In general, a situation of equality. Parity can occur in many different contexts, but it always means that two things are equal.
2. The official value.
3. In an exchange market, when all brokers bidding for the same security have equal standing due to identical bids.

Pip

The smallest price change that a given exchange rate can make. Since most major currency pairs are priced to four decimal places, the smallest change is that of the last decimal point - for most pairs this is the equivalent of 1/100^th of one percent, or one basis point.

Position

The amount of a security either owned (which constitutes a long position) or borrowed (which constitutes a short position) by an individual or by a dealer. In other words, it's a trade an investor currently holds open.

Profit Taking

The action of selling stock to cash in on a sharp rise. This action pushes prices down temporarily. When traders are profit taking, the implication is that there is an upward trend in the security.

Q

Quote

1. The last price at which a security or commodity traded, meaning the most recent price on which a buyer and seller agreed and at which some amount of the asset was transacted.
2. The bid or ask quotes are the most current prices and quantities at which the shares can be bought or sold. The bid quote shows the price and quantity at which a current buyer is willing to purchase the shares, while the ask shows what a current participant is willing to sell the shares for.
This is also known as an asset's "quoted price".

Quoted Currency

The second currency quoted in a currency pair in forex. In a direct quote, the quote currency is the foreign currency. In an indirect quote, the quote currency is the domestic currency.
Also known as the "secondary currency" or "counter currency".

R

Resistance Level

The price at which a stock or market can trade, but not  exceed, for a certain period of time.

Risk Management

The employment of financial analysis and trading techniques to reduce and/or control exposure to various types of risk.

Rollover

A rollover is when you do the following: