Terminology – What is what?!?!

Published by Daniel on


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Markets

The FX market is the global currency market for trading currencies. The FX market is the biggest market in the world in terms of total cash value traded where daily transactions reach approximately 5 Trillion USD.

Fixed income are investments where the borrower is obliged to make payments of a fixed amount on a fixed schedule. There are various fixed income products such as government bonds, corporate bonds, junk bonds etc.

Commodities markets consist of soft (wheat, sugar etc) and hard (gold, oil etc) commodities. Futures and other derivatives are used to trade commodities. Commodity ETFs have gained popularity over the past years and provide easy access for traders wishing to trade commodities.

Two concepts specific for commodities markets are contango and backwardation. Contango is a where futures price of a commodity is higher than the anticipated spot price at maturity of the futures contract. Backwardation is where the price of a commodities’ futures contract is trading below the expected spot price at contract maturity.

An ”index” measures the values of a section of the stock market and is often calculated as a weighted average. It is used by investors to compare returns and describe the market.

, CBOE Volatility Index, is the most popular and widespread measure of stock market’s expectations of volatility. The VIX index is calculated by using implied volatilities of a wide range of S&P 500 index options. In media it is often referred to as the fear index. VIX is a mean reversion index since volatility is an asset that over time revert to the mean.

Tthe 5 year chart of VIX index. Note the spikes in volatility and how over time this index reverts to some kind of mean value.

Ass is an order placed with your broker to execute a trade at a predetermined price in order to minimise the loss. If you are long the stop loss order needs to be a sale of your shares. If you are short the stop loss order will be a buy order.

Aofit order is an order where the trader is willing to take profit by closing out the existing position.

Atrong> is the trader buying a security such as a stock, FX etc with the expectation that the asset will rise in value.

Astrong> is a trade where the investor sells shares of borrowed (from the broker) stock in the open market, ie you need to borrow the share prior to shorting it. Your broker will provide you with a short list which shows what stocks are available for shorting and at what cost. There is a stock borrow market that handles all stock borrows. Normal stock lending is not expensive, but at times specific stock names can get rather expensive to borrow.

Tt stock position expects that the price of the stock will decrease over time. At some point the investor will purchase the shares in the marketplace and return the borrowed shares to the broker. A short stock position benefits from declining prices.

Dn be long/short options and other instruments where the effect on that instrument might be affected by other aspects than only the underlying stock.

 is an investment strategy based on technical analysis where the belief is an asset moves up or down over time. One of trend following indicators is the MACD. The inverse to trend following investment is the contrarian approach.

 investing is a strategy defined by the investor buying and selling in opposite direction to the prevailing trend. A contrarian investing strategy is partly based on the view there is a mean reversion of asset prices. Mean reversion is the assumption that a stock’s price tends to move to the average price over a time period.

< ntp;is an independent national authority that regulates banks, provides financial services and operates monetary policies. The aim of a central bank is to prevent inflation, keep unemployment low and stabilize the nation’s currency. Central banks are also involved in stabilizing markets and some of the central banks like the BoJ and the SNB buy equities and ETFs outright. You might read about the central bank put. This is a term referred to as the protection of the markets with the central banks intervening in order to not let the equities fall sharply. The first central bank was formed in Sweden in 1668.

denbsp;(Fed), founded in 1913, is the central bank of the US and arguably the most powerful financial institution in the world.

B<998, is the central bank for the countries of the European union that share the euro currency.

anng>BoJ), founded in 1882, is the central bank of Japan.

ows. Note how the balance sheet started expanding as Fed started intervening back in 2008 in order to stimulate the economy.