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30 Financial Terms Every Trader Should Know

Trading markets in all their diversity and complexity can be difficult to navigate at first, with a plethora of new and unfamiliar terms seemingly meeting you at every turn. Below, you’ll find an overview of thirty of the most common terms used by financial market participants, as well as suggestions for further reading. Along our way, you’ll learn about:

  • CBDC (Central Bank Digital Currency)
  • Central Banks
  • CCI (Consumer Confidence Index)
  • CPI (Consumer Price Index)
  • EBITA (Earnings Before Interest, Taxes, and Amortisation)
  • Earnings Season
  • ECB (European Central Bank)
  • EIA (Energy Information Administration)
  • ESG (Environmental, Social, and Governance)
  • Eurozone
  • FOMC (Federal Open Market Committee)
  • FIE (Foreign Invested Enterprise)
  • Fiscal Policy
  • GDP (Gross Domestic Product)
  • Gearing Ratio
  • Hawkish vs Dovish
  • Inflation
  • Interest Coverage Ratio
  • Interest Rates
  • Monetary Policy
  • NFPS (Non-Farm Payrolls)
  • NFTs (Non-Fungible Tokens)
  • OPEC (Organization of Petroleum Exporting Countries)
  • PCE (Personal Consumption Expenditures)
  • PMI (Purchasing Managers Index)
  • Recession
  • Safe Haven Assets
  • Santa Rally
  • JOLTS (US Job Openings and Labor Turnover Survey)
  • Wall Street
An illustration of a person learning about financial terms.

Financial Terms for Beginners

So let’s go ahead and dive in:

  • CBDC (Central Bank Digital Currency): This term denotes digital versions of traditional currencies issued by central banks, like the U.S. dollar or Euro. Unlike volatile, decentralised cryptocurrencies, CBDCs are regulated by government bodies. They aim to enhance financial inclusion, reduce transaction costs, and improve payment efficiency while facing concerns over security, privacy, and implementation costs.
  • Central Banks: Central banks are pivotal financial institutions that formulate monetary policies, set interest rates, and oversee member banks. Key examples include the US Federal Reserve, under which the FOMC determines monetary policy for the country, European Central Bank, and the Bank of Japan. They differ from commercial banks in their regulatory authority and impact on economic policy. Central banks have as their aim ensuring financial stability, influencing inflation, and managing national currency reserves.
  • CCI (Consumer Confidence Index): This economic indicator can help traders, investors, and analysts understand household spending and saving patterns. Similar to GDP and CPI, it indicates economic conditions. High CCI suggests optimism and potential increased spending, while a low reading tends to indicate pessimism and possible increased saving rates among ordinary citizens. CCI data influences market decisions, including forex trading, by reflecting consumer confidence and economic expectations.
  • CPI (Consumer Price Index): The Consumer Price Index (CPI) is the preferred economic reading used by American fiscal policymakers for measuring inflation and deflation by tracking price changes of over 90,000 goods. It helps estimate the greenback's purchasing power. Despite criticisms surrounding the possibility that CPI may not fully reflect diverse consumption patterns, it remains a key measure for economists and policymakers.
  • EBITA (Earnings Before Interest, Taxes, and Amortisation): EBITA, or Earnings Before Interest, Taxes, and Amortisation, is a key metric for assessing a company's profitability and operational efficiency by excluding taxes, interest, and amortisation expenses. It helps investors compare companies within the same industry. However, while providing valuable insights, EBITA may overlook certain expenses, making it less comprehensive as a sole valuation method. Despite its limitations, EBITA remains crucial for evaluating a company's financial health and making more informed investment decisions.
  • Earnings Season: This term refers to a critical period, for investors and traders alike, when many publicly traded companies release their quarterly earnings reports, offering valuable insights into their financial performance. These reports reveal key metrics such as revenue, profit margins, net income, and earnings per share, impacting market volatility and influencing trading and monetary policies. For traders and investors, understanding earnings reports and their implications is essential for making informed decisions. Despite the potential for significant market shifts, reports released during earnings season can provide a comprehensive view of a company's health, guiding investment strategies and helping stakeholders assess future prospects and risks.
  • EIA (Energy Information Administration): The Energy Information Administration (EIA), established by the U.S. Congress in 1977, monitors and disseminates information on American commodities, especially energy supplies. Founded in the aftermath of the 1973 oil embargo crisis, the EIA provides crucial statistics and projections on energy sources like oil (CL) and natural gas (NG). Its data supports government policy-making and informs millions of market watchers on a weekly basis via reports such as "This Week in Petroleum".
  • ESG (Environmental, Social, and Governance): This acronym stands for Environmental, Social, and Governance, a set of criteria used by many to evaluate a given firm's sustainability and ethics-related practices. Popular in investing, ESG factors include environmental policies, social responsibility towards employees, and governance standards like financial transparency and diversity. Investors use ESG scores to assess the responsibility of their investments. Similar to choosing ethical products, ESG investing involves evaluating a company's ecological, social, and economic impacts before trading.
  • Eurozone: The Eurozone, which encompasses several of the world's largest economies, uses the euro, a highly liquid currency in the forex market. Understanding its structure and history is key to grasping global economic dynamics, both within Europe and globally.

    The Eurozone is a subset of the European Union (EU), comprising 20 countries that have adopted the euro. Unlike the EU's 27-member political and economic union, the Eurozone focuses on economic integration. This region's formation began with the Maastricht Treaty in 1993, which aimed to establish a central banking system and a common currency. The euro was officially introduced in 2002, solidifying the Eurozone's economic framework.
  • FOMC (Federal Open Market Committee): The Federal Open Market Committee (FOMC), a twelve-member body within the U.S. Federal Reserve, sets the course of the world's largest economy's monetary policy, including the federal funds rate. The FOMC uses open market operations to manage the money supply and influence interest rates. These connote the buying or selling government-backed securities to adjust the federal funds rate, which impacts loans and interest rates nationwide. Decisions made by the FOMC tend to be based on economic indicators like inflation and unemployment, and the outcomes significantly influence the U.S. economy and financial markets.
  • FIE (Foreign Invested Enterprise): In today's global business environment, understanding Foreign Invested Enterprises (FIEs) is essential for international entities, especially in China. FIEs, including Equity Joint Ventures (EJVs), Cooperative Joint Ventures (CJVs), and Wholly-Owned Foreign Enterprises (WOFEs), facilitate foreign investments with varying degrees of control. Notably, in 2020 the Chinese government revised its Foreign Investment Law (FIL) in order to emphasise transparency and protection for foreign investors. Navigating these regulations requires a strategic approach to maximise investment benefits and ensure compliance with China's complex legal landscape.
  • Fiscal Policy: Fiscal policy is considered to be crucial for economic stability and growth. It influences economic growth and inflation through government adjustments in tax levels, spending, and borrowing. These fiscal measures significantly impact aggregate demand, resource allocation, income distribution, and overall economic activity. By altering tax rates and spending patterns, fiscal policy can stimulate or restrain economic growth and manage inflation. Higher inflation can initially boost government revenues, but the overall impact depends on the nature of the fiscal response and other economic factors. Adjusting taxes influences both government revenue and consumer spending, with tax reductions increasing disposable income for households. Government spending directs funds to sectors needing economic stimulus, boosting overall economic activity as these funds are used for various goods and services.
  • GDP (Gross Domestic Product): Gross Domestic Product (GDP) is the total market value of goods and services produced within a country's borders over a specific period. It serves as a key indicator of a country's economic health, measuring its growth or decline. Economists generally consider an ideal GDP growth rate to be between 2% and 3%. The concept of GDP emerged in the aftermath of the Great Depression and World War II, and became used as an international standard for economic measurements after the 1944 Bretton Woods Conference.

    GDP is measured using three main methods: income, output, and spending. Income measures all factors contributing to national income, while output sums up the values of goods and services across sectors. Spending calculates money spent by governments, businesses, and consumers. A rise in GDP generally creates more job opportunities and signifies economic health and prosperity. However, lower GDP can indicate economic challenges like job cuts, as seen during the tech industry layoffs in recent times due to factors like inflation, the war in Ukraine, and the COVID-19 pandemic.

    GDP data can be presented in three distinct fashions: Nominal GDP, which includes current prices and inflation; Real GDP, adjusted for inflation and seen as a more accurate measure of economic health; and GDP per capita, which assesses economic output per person to gauge living standards and quality of life. As of 2023, the United States leads globally in GDP at $26,954 billion, followed by China at $17,786 billion and Japan at $4,231 billion.
  • Gearing Ratio: A gearing ratio measures the relationship between a company's debt and its equity, showing how much of its funding comes from borrowing compared to shareholder investment.

    Debt represents the money a company borrows and must repay, while equity, or shareholder equity, refers to the funds that would remain for shareholders if all debts were settled and assets liquidated. A high gearing ratio suggests greater reliance on debt financing, which can increase financial risk, particularly during economic downturns. Conversely, a low ratio indicates a stronger financial position and greater resilience.

    Traders and investors use gearing ratios like the Debt-to-Equity (D/E) Ratio, Debt Ratio, and Equity Ratio to assess a company's financial risk and investment potential. While these metrics are valuable for financial analysis and risk assessment, they can sometimes give misleading signals, underscoring the importance of considering other factors in comprehensive financial evaluations.
  • Hawkish vs Dovish: The distinction between hawkish and dovish approaches to policy making are central to monetary decisions, especially in addressing inflation concerns. Hawks advocate for higher interest rates to combat inflation, while doves prefer lower rates to stimulate economic activity. Notable examples include the Fed's hawkish stance in 2022, tightening rates aggressively to curb inflation. Conversely, the Bank of Japan maintained a dovish approach with ultra-low rates. Each policy has pros and cons: hawkish policies may stabilise prices but can hinder economic growth, while dovish policies may boost employment but risk inflation. Currently, many central banks, including the Fed, lean hawkish to address inflation concerns, though shifts in stance are possible. Fed members can transition between hawkish and dovish positions over time.
  • Inflation: Inflation can be understood simply as the rate at which the general level of prices for goods and services rises, leading to a decrease in the purchasing power of money. Generally speaking, economists consider an ideal inflation rate to be around 2% per year, meaning the price paid by consumers for a range of goods will increase by about 2% annually in times of healthy economic growth. However, inflation can exceed this rate due to factors on both the production and supply sides of the economy. Rising production costs, supply chain issues, and increased demand can all drive prices up. As prices increase, the value of a nation's currency decreases, meaning each unit of currency buys fewer goods. Central banks, like the Federal Reserve or Bank of England, have as their mission to manage monetary policy to address these inflationary pressures.
  • Interest Coverage Ratio: The Interest Coverage Ratio (ICR), also known as the times interest earned (TIE) ratio, is a crucial financial metric used to assess a company's ability to meet its interest obligations relative to its earnings. By comparing a company's Earnings Before Interest and Taxes (EBIT) to its interest expenses, the ICR provides insights into its financial health and stability. A higher ICR generally indicates stronger financial health, although the ideal ratio varies by industry. Maintaining sufficient earnings to cover interest payments is critical for solvency and shareholder returns.

    Analysing ICR trends over time can provide valuable insights into a company's financial trajectory and short-term health, making it an essential tool for investors and stakeholders. However, interpreting the ICR requires consideration of industry-specific factors, as norms and expectations differ widely.
  • Interest Rates: An interest rate is the percentage charged on a loan or earned on savings. When you borrow money from a bank, the interest rate is the cost you pay for the loan. Conversely, when you save money in a bank account, the interest rate is the return you earn. Banks use interest rates to encourage savings by offering a return on deposited funds. Higher rates mean more earnings on savings and higher costs for loans. Interest rates come in various types, such as fixed rates, which are stable and predetermined, and variable rates, which fluctuate based on an underlying index. The Annual Percentage Rate (APR) includes both interest and fees charged with a loan on a yearly basis.

    Interest rates are crucial because they impact inflation, borrowing costs, and economic decisions, influencing industry growth and resource allocation. Central banks adjust rates to manage inflation and ensure economic stability. For instance, in times of high inflation, central banks may raise interest rates to curb spending and reduce inflationary pressure. Thus, interest rates play a significant role in shaping economic conditions and financial planning.
  • Monetary Policy: Understanding monetary policy is crucial for comprehending the role of central banks, such as the US Federal Reserve or the European Central Bank (ECB). Monetary policy encompasses the strategies and actions implemented by these institutions to regulate and influence the money supply, interest rates, and the broader financial landscape within a nation's economy. Its primary goals include ensuring price stability, fostering economic growth, and safeguarding financial stability. By adjusting interest rates, monetary policy directly impacts inflation and economic activity. Higher rates typically lead investors to seek safe-haven assets, increasing borrowing costs, while lower rates reduce borrowing costs, stimulating economic activity.
  • NFPS (Non-Farm Payrolls): The Nonfarm Payroll (NFP) report, released monthly by the Bureau of Labor Statistics, measures the number of people employed in the United States, excluding those in farming, private households, proprietorships, non-profits, and the military. This report encompasses important trends affecting about four out of five American businesses included in the country's GDP, so the NFP is a critical economic indicator for traders and investors. It influences market trends and central bank decisions, such as interest rates, by reflecting employment rates and economic health.
  • NFTs (Non-Fungible Tokens): Non-Fungible Tokens (NFTs), which have made headlines across the globe in recent years, are cryptographic assets that digitise real-world objects like art, music, collectibles, and tweets. These digital assets, albeit often bought and sold with cryptocurrencies, are nonetheless unique and cannot be exchanged one-for-one like cryptocurrencies. NFTs mainly run on the Ethereum (ETHUSD) blockchain and have personalised digital signatures that ensure authenticity and prevent duplication. Their uniqueness and exclusivity, akin to owning an original artwork, give them value in the eyes of NFT market actors.
  • OPEC (Organization of Petroleum Exporting Countries): The Organization of Petroleum Exporting Countries (OPEC) was formed in 1960 to coordinate global oil production and prevent price crashes. Originally comprising 13 member nations, OPEC expanded in 2016 to include 10 allied countries, becoming OPEC+. This group, which now includes Russia and Saudi Arabia, collectively produces the majority of the world's oil and holds 90% of proven reserves. OPEC+ decisions significantly influence the global economy by balancing oil production to maintain stable prices and support member nations' economies.
  • PCE (Personal Consumption Expenditures): Personal Consumption Expenditures (PCE) measure American consumer spending and are a key inflation gauge used by policymakers the Federal Reserve in their decision-making process. Published by the Bureau of Economic Analysis (BEA), the PCE reflects the total U.S. dollar value of goods and services consumed, including durable goods, nondurable goods, and services. This metric is crucial for analysing economic health, as it comprises about two-thirds of domestic spending and drives GDP. The PCE Price Index (PCEPI), derived from PCE data, tracks inflation trends and helps the Federal Reserve make informed interest rate decisions. PCE data offers insights into consumer behaviour and economic performance but, at times, doubts have been cast on its level of accuracy.
  • PMI (Purchasing Managers Index): The Purchasing Managers Index (PMI) gauges the economic trajectory of the manufacturing sector through a survey-based diffusion index. This index indicates changes or stability in market conditions, providing decision-makers, analysts, and investors with insights into current and future business conditions. The PMI is derived from monthly surveys of supply chain managers in over 40 countries, representing about 90% of global GDP.

    Three key institutions that contribute PMI data are the Institute of Supply Management (ISM) in the US, the Singapore Institute of Purchasing and Materials Management (SIPMM), and S&P Global. These organisations conduct monthly surveys to gather data that helps assess the growth, stability, or decline in the manufacturing sector. PMI levels above 50 suggest sector growth, while levels at 50 indicate a balance between performing and underperforming businesses.

    The PMI is crucial for traders and investors as it reflects economic health, affects commodity prices, and can signal inflation trends that influence central bank decisions. However, it primarily focuses on the manufacturing sector, which may not fully represent the broader economy's performance.
  • Recession: A recession is generally defined as a period of significant economic decline lasting at least six months, characterised by a minimum of two consecutive quarters of negative GDP growth. While this definition is widely accepted, the National Bureau of Economic Research (NBER) in the United States uses a broader set of criteria. They consider various economic indicators such as employment and industrial production to determine the onset and end of a recession, tracking from the peak to the trough of economic activity.

    During a recession, economic output, employment, and consumer spending decline. Central banks typically lower interest rates to stimulate economic activity, leading to wider government deficits as tax revenues decrease and spending on social programs rises. Recessions are also marked by falling stock markets, rising unemployment rates, and decreasing housing prices.

    Various factors can trigger a recession, including structural shifts in industries, financial risks accumulated during economic expansions, and psychological factors such as excessive optimism followed by pessimism. Early indicators of an approaching recession may include high interest rates, increased bankruptcies, weakening stock markets, and an inverted yield curve, where short-term interest rates exceed long-term rates. Other signs include decreased manufacturing orders, sluggish housing markets, and reduced consumer confidence and spending.
  • Safe Haven Assets: This term is often used by investors to refer to assets that are expected to maintain or increase in value during periods of market volatility or economic fluctuations.

    One prominent category of safe havens includes precious metals, with gold being a classic example. Defensive stocks in sectors such as biotechnology, utilities, and food are also considered safe havens. These sectors tend to provide stability during economic volatility because they offer essential goods and services that are consistently in demand.

    Currencies are another major category of safe haven assets, where stability is closely tied to the political and economic stability of the issuing country. The Swiss franc is traditionally considered a safe haven due to Switzerland's political neutrality and stable economy, while the US dollar remains a preferred reserve currency globally. In times of uncertainty, these currencies often strengthen against others.
  • Santa Rally: A Santa Claus Rally refers to the tendency of markets to rise in the last couple of weeks of the year, leading up to Christmas. There's some debate on the exact timeframe, whether it includes the week before Christmas, the week after, or the first two days of the new year.

    During this time, markets are typically quiet with low trading volume, as many traders take holidays and institutional investors are away, leaving the market to retail traders who are often more bullish. Other factors contributing to the rally include year-end tax considerations and portfolio managers adjusting their holdings to enhance their year-end performance.

    The term "Santa Claus Rally" was coined by Yale Hirsch in 1972, based on his observations that stocks tend to surge during the last few trading days of one year and the first few days of the next, known as the "January Effect." Hirsch found that this rally occurred frequently, with the S&P 500 showing an average growth of 1.3% during these periods from 1950 to 2020.
  • JOLTS (US Job Openings and Labor Turnover Survey): JOLTS, short for Job Openings and Labor Turnover Survey, is a monthly survey carried out by the American Bureau of Labor Statistics (BLS). It examines job openings, hires, separations, quits, and layoffs. Job openings indicate the number of available positions, providing insight into the strength of the labour market. Hires track the number of new employees, indicating growth and market sentiment. Layoffs reflect involuntary job losses, typically signalling economic weakness, while quits measure voluntary resignations, often indicating a stronger economy.

    The JOLTS report is often viewed as an essential tool for analysts, policymakers, traders, and employees, influencing economic policies and market strategies. However, critics argue that it has limitations and may not fully capture the complexities of the economy. JOLTS data is collected through Computer-Assisted Telephone Interviewing (CATI) and web-based surveys, published monthly by the BLS.
  • Wall Street: Wall Street, located in Manhattan, NYC, is not just a physical street, but stands for many as a symbol of global finance and investment. It houses the New York Stock Exchange (NYSE), one of the largest stock exchanges globally. While figuratively used to represent the financial markets, investments, and publicly traded companies, it has become synonymous in the minds of many all over the globe with the entire U.S. financial system.

    First laid out by Dutch colonists in the 1600's, over time, Wall Street became a centre for financial activities, culminating in the signing of the Buttonwood Agreement in 1792 under a buttonwood tree on Wall Street. This agreement laid the foundation for the New York Stock Exchange, formally established in 1903.

    Wall Street is culturally significant, appearing in movies and shaping societal perceptions of finance and wealth. It also plays a crucial economic role, providing loans and financial services to businesses both domestically and globally.
  • Conclusion

    The terms we’ve explored above encompass various arenas of market activity and economic measurement tools. Now that you’ve gained a deeper understanding of many of the mechanisms that lie behind key market trends, you may be better placed to put your personal trading strategy into practice as you make your way into CFD trading.


    What are some of the most used financial terms?

    Some of the financial terms you may encounter on your trading journey include GDP, interest rates, inflation, central banks, OPEC, earnings season, and Wall Street, among others.

    Why should I know financial terms?

    Learning financial terms and their definitions will assist you in understanding underlying market dynamics and thus being better placed to put your personal trading strategy into practice.

    Is financial terminology required in order to trade online?

    Having a basic understanding of certain financial concepts is needed in order to engage in CFD trading with Plus500.

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