Common Trading Terms Every Trader Should Know

When you’re first starting your journey into the world of CFD trading, the number of unfamiliar concepts you confront may seem overwhelming at first. In addition to the article below, we also suggest you take a look at our Trading Glossary. In order to ease your transition into this volatile arena, we’ll go over some of the key terms that may assist you in better understanding financial markets as well as CFD market dynamics along the way, such as:

• Arbitrage
• Ask
• Averaging Down
• Beta
• Bid-Ask Spread
• Blockchain
• Blue-Chip Stocks
• Broker
• Dividend
• Dividend Yield
• Exchange
• Exchange Traded Funds (ETFs)
• Growth Stocks
• Initial Public Offering (IPO)
• Liquidity
• Mutual Funds
• OTC Stocks
• Outstanding Shares
• Sector
• Stock Portfolio
• Stock Symbol
• Volume
• Volume-Weighted Average Price (VWAP)
• Yield
• 52-week Range

Trading Terms for Beginners

Arbitrage: Arbitrage is a short-term strategy some traders make use of in order to potentially profit from the price differences of a single asset which is traded on more than one exchange. Essentially, when making use of arbitrage, the trader buys a given item on one exchange and then proceeds to sell it on a second exchange where its going price is higher, thus pocketing the difference.

Ask: In the CFD trading world, the lowest price at which the holder of a contract is willing to sell it to the trader. The ask price makes up part of the ‘bid-ask’ spread, which we will delve into further on. Essentially, when trading CFDs with Plus500, the ask price is the selling price for a given instrument.

Averaging Down: This term refers to an active trading strategy by which a trader who holds CFDs on an underlying share the price of which is on a downturn, opens more buy positions on the same share rather than joining the general market selloff. The logic behind this action is that eventually the value of the underlying share will recover, and thus the trader will have acquired share CFDs at a lower ask price than that which they would have had to pay if they had opened a buy position before the downturn.

Beta: This is a measure used to estimate the price volatility of a certain share when compared to the stock market overall. For example, if a given share has a beta over one, its value tends to fluctuate more than that of stocks in general. The opposite is true if the share’s beta is lower than one. This indicator can be useful for beginning CFD traders as they build their personal strategy, as they can get a better sense of an underlying share’s volatility over time.

Bid-Ask Spread: When it comes to CFD trading, the bid/ask spread is the differential between the bid and ask price on a given instrument. This spread, between the price at which a trading platform such as Plus500 wishes to sell an instrument and its purchase price, can be seen as the fee.

Blockchain: A blockchain is an immutable digital ledger that records transactions across a network of computers, gaining popularity for its decentralised nature, bypassing intermediaries. Each transaction is transparent and stored on every participant's computer. Coined by Satoshi Nakamoto in 2008, blockchain is a pivotal technology, offering transparency, robust security, and permanent data storage. Since its inception, blockchain has surged in global adoption, presenting vast opportunities and transforming various sectors.

Blue-Chip Stocks: This term refers to shares of companies that usually garner favourable market sentiment. These firms typically have long-standing operational track records, steady earnings, and a history of providing dividends to shareholders. With market capitalizations often reaching billions of dollars, these companies tend to be leaders within their industries.

Broker: A CFD broker is a financial intermediary that facilitates trading in Contracts for Difference. CFDs are derivative products that allow traders to speculate on the price movements of underlying assets such as commodities, shares, forex pairs, and indices without actually owning the assets. When trading CFDs, investors enter into an agreement with a CFD provider to exchange the difference in the value of the asset between the opening and closing of the contract. CFD providers provide the platform and leverage necessary for opening CFD positions, as well as risk management tools.

Dividend: Dividends are payments a company makes to its shareholders from its profits or retained earnings, typically on a per-share basis. For example, if you own 100 shares and the company declares a dividend of 1 pound per share, you would receive 100 pounds. Dividends provide passive income and are often distributed quarterly.

Dividend Yield: A dividend yield is the financial ratio that indicates the annual dividend payment relative to the stock price, expressed as a percentage reached by dividing the former by the latter. This ratio helps investors understand the return they can expect from dividends, aiding in portfolio assessment and inflation management.

Exchange: An exchange is a marketplace where participants buy and sell investment securities, acting as a bridge between investors and companies seeking funds. Exchanges have evolved throughout history from physical trading venues to mostly electronic platforms today. For CFD traders, understanding exchanges like major stock indices is crucial, as they provide the prices and liquidity for underlying assets in CFD trades.

Exchange Traded Funds (ETFs): An Exchange Traded Fund (ETF) is an investment product that holds a collection of assets like stocks, bonds, or commodities and typically tracks a specific index or sector. First appearing on the scene in the 1990s, ETFs can be traded on exchanges like individual stocks. For CFD traders, ETFs offer a way to speculate on the performance of a diversified group of assets without owning them directly, providing flexibility and cost efficiency similar to stock trading.

Growth Stocks: This term refers to shares of companies that are observed to grow at a higher rate than the overall market. These companies typically reinvest profits to fuel further growth rather than paying dividends. Investors in growth stocks seek capital appreciation stemming from the stock’s price rising over the long-term. For CFD traders, understanding growth stocks is essential, as these stocks often present opportunities for significant price movements, making them attractive for speculative trading strategies.

Initial Public Offering (IPO): An IPO is when a private firm first raises funding on the public market by listing ownership shares for sale. Market events of this type are often regarded as an investment opportunity for traders.

Liquidity: Liquidity measures the ease by which an asset can be converted into liquid cash. For example, highly liquid shares can be quickly bought or sold in the open market due to a high number of buyers and sellers. For CFD traders, understanding liquidity is crucial, as high liquidity ensures smooth and stable trading conditions, making it easier to enter and exit positions without significant price changes. This concept can also aid in understanding the market dynamics influencing the price movements of a given CFD's underlying asset.

Mutual Funds: A mutual fund is a financial vehicle managed by a fund manager that pools money from many investors to invest in assets like stocks, bonds, and short-term debt. These funds aim to achieve long-term goals for their investors. These funds are referred to as "mutual" because they are collectively owned by their investors. For CFD traders, understanding mutual funds is relevant as these funds' performance can impact market trends and provide insights into broader investment strategies.

OTC Stocks: OTC (Over-the-Counter) stocks are those traded through a network of brokers and dealers rather than on centralised exchanges, often because they don't meet listing requirements. Typically, these are shares of smaller companies. The term OTC describes the trading method itself. For CFD traders, understanding OTC stocks is important as they offer alternative investment opportunities and can diversify portfolios when weighing which share CFDs to invest in.

Outstanding Shares: Outstanding shares are those issued by a company and available for trading in the stock market, held by both retail and institutional investors. This metric is crucial as it indicates the total stock percentage owned by investors and helps calculate market capitalization. For share CFD trading, understanding outstanding shares is fundamental, as it can be closely correlated with general investor sentiment and may have implications for the stock's liquidity and price movements.

Sector: This term is used to categorise firms on the stock market that operate in similar industries. For instance, Moderna (MRNA) and Pfizer (PFE) may both be considered as operating within the medical technology, or medtech, sector. Sectors categorise businesses by field. For CFD trading, understanding sectors helps track specific stocks and diversify investments. The term ‘sector’ is also widely used in financial news and reports that may assist CFD market participants in making trading decisions, such as those featured in our News & Market Insights section.

Stock Portfolio: A traditional stock portfolio is a collection of stocks owned by an investor, aimed at generating income and building long-term wealth based on risk tolerance and goals. For CFD traders, understanding portfolio dynamics when making CFD trading choices is crucial for effective diversification and long-term wealth building. Diversified portfolios have the potential to offer higher returns, beat inflation, and avoid downturns associated with a certain sector, although the potential for significant losses is always present.

Stock Symbol: This is the symbol, usually three to four letters, by which publicly-traded companies are listed on stock exchanges and recognised by investors and traders alike. For example, AMZN is the stock symbol of tech giant Amazon.

Volume: Volume represents the total number of buy and sell orders executed on a stock on a daily basis. It serves as a crucial technical indicator for identifying significant areas in a stock's price chart. Higher volume typically indicates greater investor interest in the stock. For CFD traders, volume is essential for understanding market liquidity and identifying potential trading opportunities, especially in day trading.

Volume-Weighted Average Price (VWAP): Volume-Weighted Average Price (VWAP) is a technical indicator, often utilised by intraday traders, to assess the average price of a stock over a specified period, weighted by the total volume of trades during that period. VWAP helps traders determine the prevailing trend within a trading day. This measure of value may assist CFD traders in assessing the market dynamics of an underlying share.

Yield: Yield refers to the dividend income an investor earns from owning shares in a certain firm, calculated by dividing total dividends received by the current stock price. Yield is crucial for investors focused on dividend income, guiding their investment decisions. Understanding yield is fundamental for CFD traders as it provides insight into which underlying shares may have attractive prospects.

52-Week Range: The 52-week range represents a stock's highest and lowest prices over the past year. Investors and traders often monitor stocks nearing their 52-week highs or lows for potential breakout opportunities. For CFD traders, the 52-week range serves as a key indicator for identifying potential trading opportunities, as stocks breaking out of this range tend to exhibit significant price movements.

Conclusion

In conclusion, navigating the complexities of CFD trading requires a solid grasp of key terms and concepts. From arbitrage to sector categorization, each term plays a vital role in shaping trading strategies and understanding underlying market dynamics. With a clear understanding of these fundamentals, traders may be better able to participate in the volatile CFD arena, although positive trading outcomes are never guaranteed.

FAQs

What are some of the most used trading terms?

Some of the most used trading terms include ask, averaging down, beta, bid-ask spread, blue-chip stocks, broker, dividend, exchange traded funds (ETFs), growth stocks, initial public offering (IPO), liquidity, mutual funds, OTC stocks, stock portfolio, stock symbol, volume, yield, and many more.

Why should you know trading terms?

Knowing trading terms is essential as they provide the foundational knowledge necessary to understand market dynamics, develop trading strategies, assess risk, and make informed decisions when trading shares or other financial instruments.

Is trading terminology required for a beginner to trade share CFDs?

Understanding trading terminology greatly enhances the ability to trade share CFDs effectively, enabling them to navigate the market with confidence and make informed decisions.

Where can I learn more about trading terms?

You can learn more about trading terms through various resources such as our dedicated Plus500 Trading Academy, which features articles for those new to CFD trading, webinars, a comprehensive ebook for your perusal, and more.