Trading Glossary

This glossary shows terms directly related to trading and execution of trades.

For options and volatility terms see Options Trading Glossary.

For more financial terms see the main Financial Terms Glossary.

Trading Terms

Arbitrage = Trading strategy that tries to profit from mispricing of two or more related securities by buying the undervalued ones and selling the overvalued ones.

Ask Price = Also aksing price or offer price. The best price at which a trader can immediately buy a certain quantity (ask size).

Ask Size = Quantity that a trader can immediately buy (that someone else is willing to sell) at a given ask price.

Asset Class = Group of assets with similar characteristics, particularly in terms of risk, return, liquidity, and regulations. Three basic asset classes are equities (stocks), fixed income (bonds) and cash, but there are more.

Basis Point = Unit often used in finance for interest rates and other small percentages. One basis point (or 1 bp) equals 1/100 of a percent = 0.01% = 0.0001. 25 basis points (or 25 bps) = 0.25%.

Bell Curve = Popular name for the shape of normal distribution.

Bid Price = Also bidding price. The best price at which a trader can immediately sell a certain quantity (bid size).

Bid Size = Quantity that a trader can immediately sell (that someone else is willing to buy) at a given bid price.

Bid-Ask Spread = Difference between bid and ask price.

Black Swan = Event that is extremely unlikely, unpredictable, and has very high impact.

Contract Size = Quantity of underlying asset (for instance, number of shares if underlying is a stock) represented by one derivative (options or futures) contract.

Cubes = Nickname for the QQQ (NASDAQ 100) ETF.

Day Trading = Trading where positions are opened and closed on the same day and not held overnight. See also swing trading (positions typically held for several days) and position trading (positions held even longer).

Derivative = Also derivative security or derivative instrument. Security which is derived from some other asset (its underlying asset). Examples of derivatives include futures, forwards, swaps, options, or warrants.

Emerging Markets = Countries which can be attractive for potential investments, but lack some standards of developed markets (for example, liquidity, political risk, macroeconomic stability).

Equities = One of traditional asset classes. Fancy name for stocks, or generally assets which represent share in company ownership.

Equity (in a Trading Account) = Account balance in a margin account, which equals the value of all securities held minus any margin loans.

Expiration = Also expiry or maturity. The moment when an option becomes void and ceases to exist. The moment when the right to buy or sell (which the option represents) ceases to apply.

Expiration Date = The date of an option's expiration. One of main parameters defining an option contract.

Expiry = See expiration.

FOMC = Federal Open Market Committee (FOMC), part of the Federal Reserve System (US central bank), deciding US monetary policy. Option implied volatility often surges prior to FOMC interest rate announcements, which sometimes cause big market moves.

Forward Contract = Derivative contract whose buyer and seller agree to exchange the underlying asset for an agreed price (forward price or rate) at a specific time in the future. Unlike futures contracts, forwards are not standardized and trade over the counter (OTC) rather than at regulated exchanges.

Forward Exchange Rate = Rate applying to currency exchange agreed at present but settled at an agreed time in the future.

Forward Price = In a forward contract, a price which is agreed now, but settled at a certain time in the future. In forex, it is forward exchange rate.

Futures = Derivative contract whose buyer and seller agree to exchange the underlying asset for an agreed price (futures price) at a specific time in the future.

Futures Exchange = Regulated exchange (marketplace) where futures are traded.

Futures Price = Price of a futures contract, as opposed to spot price.

Historical Volatility = Also realized volatility, or HV. Statistic measuring volatility of an asset's price in a past period (as opposed to future volatility, which is forward looking, and implied volatility, which is the volatility implied in option prices). See explanation of HV calculation, how to calculate HV in Excel, and Historical Volatility Calculator.

Holder = The owner of a security. The trader who is long.

IB = IB usually means either investment bank or Interactive Brokers (one of the largest brokers).

Kurtosis = Statistic measuring probability or relative frequency of extreme values in a distribution. In finance, higher kurtosis indicates that extreme moves (to either side) are more likely, justifying higher prices of out-of-the-money options.

Lot Size = See contract size.

Maturity = See expiration.

Monte Carlo = Statistical method used to estimate probability of outcomes or price assets, typically when high degree of uncertainty and nature of variables make the problem too complex to model with simpler methods.

NDX = NASDAQ 100 index symbol.

Non-Normal = Statistical distribution (for example, distribution of returns) other than normal distribution.

Normal Distribution = Statistical distribution which is symmetric around the mean. Defined by mean and standard deviation only. Often used in financial models, although most assets have return distributions which deviate from normal to some extent.

Option = Derivative security that gives its holder a right, but not obligation to buy (call option) or sell (put option) the underlying asset at a specific price (strike price) before or at a specific time (expiration).

Optionable (Stock) = Stock with options on it available for trading. Not all stocks are optionable, but typically all of the most popular ones are.

Options Exchange = Regulated market where standardized option contracts are traded. Like a stock exchange, but for options. Examples of option exchanges are CBOE (Chicago Board Options Exchange) or ISE (International Securities Exchange) in the US, Eurex in Europe, or Osaka Exchange in Japan.

Over-the-Counter (OTC) = A financial instrument is traded "over-the-counter" (OTC) when buyer and seller deal directly, outside a regulated exchange. For instance, most trading in currencies and bonds (and options on them) takes place over-the-counter, while stocks and futures typically trade at exchanges.

Pattern Day Trader = Regulation defined in FINRA Rule 4210, which requires those day trading US stocks or options to maintain account balance of at least $25,000.

Position Size = The quantity a trader is holding (e.g. number of shares or contracts).

Position Trading = Trading where positions are held for an extended period: at least overnight, but often for several weeks, months, or longer.

Quantity = Size of a position or trade. Units depend on instrument: typically number of shares (for stocks) or contracts (for futures, options).

R/R = See risk/reward ratio.

Risk / Reward Ratio = Also reward-to-risk ratio or R/R. Ratio of maximum possible profit and maximum possible loss (risk) of a trading strategy or position.

Skewness = Statistic measuring symmetry of a distribution. Positive skewness indicates that extremely high values are relatively more common (right tail is fat), negative skewness the opposite.

Slippage = Small losses from executing trades at prices worse than the mid price (buying at ask, selling at bid).

Spiders = Nickname for the SPY (S&P 500) ETF.

Spot Exchange Rate = Rate applying to currency exchange with immediate settlement (in practice it means the cash changes hands usually within 1-3 business days).

Spot Price = Price applying to purchase or sale of an asset with immediate (spot) settlement. This is in contrast to forward price or futures price, which applies to settlement at a certain time in the future.

Swap = Derivative whose buyer and seller agree to exchange assets, payments or cashflows, for a certain period of time. The most common types are interest rate swaps and currency swaps, but generally any asset or cashflow can be a swap underlying. Most swaps are traded over the counter (OTC) between big institutions.

Swing Trading = Trading where positions are held overnight (unlike day trading), but for only a few days (unlike position trading).

VIX = Symbol for CBOE Volatility Index. The best known volatility index, which measures the level of volatility that the options market expects over the next 30 days for the S&P500 stock index. Popularly often referred to as the "fear index", as it often increases when stock market falls.

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