Electronic Trading Online - Jargon Buster
The world of electronic trading is filled with complex terms and definitions that can be extremely confusing and frustrating to the novice online trader. Listed is an A to L explanation of the most commonly used financial terms. For the M to Z financial jargon buster, see online share trading.
American style option: an option where the holder has the right to exercise up to and including the expiry date.
Bear: a person expecting a share price to fall; described as being bearish.
Beta rel (beta relative): measures volatility of shares relative to that of the market. The volatility of a market is one; therefore shares with a Beta that is greater than one tend to move more violently than those with a Beta of less than one.
Bid/offer spread: the difference between the amounts paid for shares and the amounts they are sold for.
Bull: someone who is expecting a share price to rise; described as bullish.
Commodity: a stock that can be traded on the various electronic trading exchanges. Gold, rice, livestock, oil and gas are all examples of commodities that can be traded.
CR (current ratio): the figure obtained when the current assets of a business are divided by its current liabilities. If the CR is more than 1.5, it is usually an indication that a company is financially in a reasonable position.
Discretionary management: the service whereby a broker takes over the full control and management of a client's portfolio.
Dividend: earnings paid as income from a share.
Div est (dividend estimate): a knowledgeable estimation of dividends for the next year or two. A div est will be made by two or more brokers who are familiar with the history and future profit and expansion aims of a company. An unexpected revision of a dividend estimate can mean either that the company's position is set to dramatically improve or crash severely.
EPS (earnings per share): an extremely important electronic trading financial statistic. The formula to work out the EPS is usually the total earnings of a company divided by the number of shares that are in circulation. A rising EPS index is usually an indication that the company is in a good position.
Equity: the overall net worth of a company. Also referred to as the shareholder's funds.
European option: an option where the holder has the right to exercise the option only on its expiry date.
Execution dealing: the service where a broker is responsible for the execution of trades but not for providing any kind of trading advice.
Exercise: the process by which an option holder takes up his right to sell (put) or buy (call) the asset underlying the option contract. A futures holder must exercise upon expiry of a future whereas an option holder has the choice not to.
GR (growth rate): measures how quickly a company is expanding. This calculation can be determined by working out the EPS for a specific period. Then, take the EPS from the period prior to the one in question and subtract it from the EPS of the period in question. Multiply this figure by 100. This is the growth rate of the period in question in percentage form.
IND (index): is an indication of what 'division' a particular share is in. The most powerful companies make up the FTSE-100, while the least powerful fall under the FTSE Fledgling index. Between these two extremes are the FTSE Mid-250 index and the FTSE-Smallcap index. Shares move between indexes as a group rather than individually.
Future: a legal agreement to buy or sell a standard quantity of a specified asset for delivery at a fixed future date at a price specified today.
Hedger: an investor who uses the markets to reduce the risk of the position of the asset underlying his futures or options contract.
Int cover (interest cover): is an indication of the ability of a company is to pay off its debts. It is worked out by dividing a company's profits by their gross annual interest change. Low or reducing values are usually an indication of impending disaster for the company.
Limit: the maximum price decline or advance from the previous day's closing price that is permitted by electronic trading exchange rules. Types of limits include price limits, price change limits and position limits.
Liquidity: how easy it is to buy or sell a specific share.
Long position: the term used to describe any position that has been purchased. Once a future or an option has been purchased it can then be exercised.