Below is a glossary of terms that are used in the online trading industry. Select the first letter of the word you are seeking from the list above to jump to the appropriate section of the glossary.
The central banking system for the United States. Considered the largest monetary authority in the world.
What is fiat money?
How does one use fiat money?
The very basis of online trading, specifically forex trading, whether major currency pairs, minor pairs or exotics, is centered around the strength of fiat currencies to one another. Each currency’s value can be affected by a plethora of external factors, but the most consistent factor may be the faith that the general public has in the strength of that particular currency. For example, if the various economic realities in the United Kingdom make investors question the strength of the British pound, then the GBP value against other currencies – specifically the euro and the USD will drop, as investors shy away from relying on what they see as a weak fiat currency. Gone are the days when that value would be linked to the price of gold, so the less faith the public has in a currency – and the higher the inflation rate of that currency – the lower its intrinsic value may fall.
The highest and lowest prices that a security or financial instrument has traded in the last 52 weeks.
What is the FCA?
The Financial Conduct Authority (FCA) is an independent body responsible for regulating more than 56,000 financial brokers (including Fortrade) and markets in the United Kingdom. Its three-point goals are to:
- Protect consumers of financial services in the U.K.
- Maintain the integrity of the U.K. financial system
- To encourage healthy competition among the financial services in a way that benefits consumers
Regulated brokers and markets are generally more transparent than non-regulated ones, and where there is a suspicion of unfair or illegal practices, traders can turn to the regulatory body to seek justice. It is important to note that by definition, the FCA has no authority over any brokers trading on the OTC Market.
How does one use the FCA?
The first step for a trader is to check that the broker they wish to use is in fact regulated by an overseeing body, in whatever country the broker is incorporated to work. The Fortrade FCA authorization can be seen here. In the event of a dispute with your broker, if you are unable to resolve the matter on your own, then you may turn to the FCA for arbitration. If the FCA determines that a broker has behaved in violation of the law, or of the FCA’s guidelines and standards, then the regulatory body may step in and impose fines, or even withdrawing FCA authorization from the broker if the proper standards are not met.
What is a financial instrument?
In its most basic form, a financial instrument is any asset that can be bought, sold, or traded. Financial instruments can be currency, shares in a company or bonds. Financial instruments can also be derivatives, which are contracts whose values are based on underlying assets, and are determined by the rise and fall of that underlying asset.
How do financial instruments affect forex traders?
Financial instruments are the basis of stock markets, foreign currency exchanges, and CFD trading. Traders either trade actual possession of financial instruments, such as purchasing one currency for an equivalent (at the time) amount of a different currency, or shares of publicly traded companies. CFD traders do not take actual possession of the currencies or stocks, but rather trade against the projected price action.
A summary of all transactions and positions (both long and short) between a broker and a client. Also known as an “Account statement”.
With regard to online trading, financial strength reflects a trader’s ability to open new trades from within a trading platform. It is calculated according to his/her free margin (i.e., the difference between equity and used margin).
A term with three different meanings: with regard to market movements, a flat market is neither rising nor falling; when referring to a specific asset, a flat asset is a financial instrument that has neither gained nor lost interest; with regard to trading, a trader is said to have a flat trading position if he is neither long nor short.
What is Foreign exchange?
Foreign exchange, otherwise known as forex, or FX, refers to the exchange – or purchase – of one currency for another. Rates of exchange are constantly fluctuating, sometimes greatly, other times only slightly. Exchange rates are always presented in pairs, known as currency pairs. The first currency in the pair is known as the base currency and is always equal to 1. The second currency is the quote currency, and is the equivalent of one unit of the base currency. For example, if the EUR/USD is trading at 1.1150, that means that one euro is the equivalent of 1.1150 U.S. dollars. If the rate of exchange goes up, that indicates that the euro has grown stronger against the dollar, because one euro will be able to buy more dollars than previously. If the rate drops, then the U.S. dollar has grown stronger against the euro. Three types of currency pairs are traded on forex markets:
- Majors pair the U.S. dollar with each of the six major currencies – the euro, Japanese yen, British pound, Swiss franc, Canadian dollar, Australian dollar, and New Zealand dollar.
- Minors/Cross currencies pair the euro, Japanese yen or British pound with other majors, except the U.S. dollar.
- Exotics pair one of the seven Majors with a currency not on that list, generally with a lower trading volume.
How do forex traders use Foreign exchange?
Forex traders buy and sell foreign currencies, speculating what the price movement will be in either the short- or long-term future. When a trader takes what is known as a long position, he purchases a currency, with the expectation that the price will rise and he can sell it back at the higher price for a profit. Alternately, a trader who sells a currency, or takes a short position, believes that the price of that currency will drop and he can buy back the units at a later date, paying less for them than he received to sell them.
Traders can also trade on currency CFDs, in which they do not actually take ownership of the currency, but they invest on the price movement of the currency pair.
Links related to Foreign exchange
A global decentralized market for the trading of foreign currencies. In terms of trading volume, the FX market is the largest financial market in the world, with a daily turnover of more than 5 trillion dollars.
A forward contract, colloquially known as a forward, is an agreement to buy or sell a commodity, security or financial instrument at a specified future date at a specified price. It is a completed contract and the commodity or financial asset will be delivered, unlike an option which offers a choice of whether or not to complete the trade. Unlike futures contracts forwards are not contracts with standard terms. They are tailor-made between the buyer and seller for each trade and are bought and sold over the counter (OTC) and not on an exchange.
What is Forward Contract?
A forward contract is an agreement between a buyer and seller to trade an asset, usually a currency, at a mutually agreed upon fixed price and set date. Unlike futures contracts, forward contracts are private arrangements between the buyer and seller, and, as such, they are not traded on the centralized exchange, but rather are considered part of the OTC market. This makes forward contracts a riskier venture than futures contracts. The primary factors in determining the price of a forward contract are the market value of the asset and the time at which point the contract will be fulfilled, which is influenced by the swap rates.
How does one use Forward Contract?
Forward contracts are purchased in a manner similar to that of futures contracts. The buyer and seller agree on the asset to be sold, on the price, and on the date that the exchange will take place. The forward contract is settled only when the contract term expires, unlike futures contracts, which settle on a daily basis. Forward contracts are primarily used as a tool to hedge the volatility in the asset being traded. That forward contracts can be more highly customized than futures contracts provides both more flexibility, but also a higher risk.
Refers to the available margin a trader has in order to open a trading position in a security or financial instrument. Free margin is therefore equivalent to the trader’s ‘Equity’ – ‘Used Margin’. Free margin increases or decreases according to the trader’s total profits earned or losses realized.
What is a front fee?
A front fee is the initial payment made by an investor when he purchases a compound option. Compound option is the term given to what is essentially an option on an option. That is to say, the trader may wish to buy or sell an option at a future date, and the front fee is what he must pay in order to have that opportunity. The four types of compound options are:
- Call on a call option
- Put on a put option
- Call on a put option
- Put on a call option
For example, an investor sees a company stock valued at $24 per share, and he believes the price will rise dramatically, but is not certain. He decides that if the price reaches $30 per share, then his prediction is probably correct, and the price is likely to continue rising well beyond $30. In this case, he can decide to purchase a compound option – a call on a call, which will give him the right to purchase, say, 100 shares, if the stock reaches $30 by a particular date. December 31. He would then pay a front fee, for example, $500, thus giving him the right to make that purchase if the stocks hit $30. If he chooses to exercise his option and buy 100 shares when the price reaches $30, he would pay the full $3,000 (100 shares x $30/share). The $3,000 is called the back fee. The front fee does not obligate the trader to exercise the compound option, but it does allow him to do so.
How does front fee affect forex traders?
The ability to place a compound option gives traders leeway in future decisions. The advantage to compound options is that if a trader believes prices will rise (or fall, as the case may be), but is not certain, he has the opportunity to trade if he proves to be correct. He will pay more on the compound option than he would have in a single option (front fee – $500 + back fee – $3,000), but if his projection is correct, then his profits should outweigh that additional cost. Without paying the front fee, he may not even have the ability to purchase the shares. The disadvantage is that if he chooses not to exercise the option, he has paid the front fee with no return.
*Please note: Fortrade does not offer options.
An agreement to purchase or sell a financial instrument or security (e.g. a commodity, stock, index), at a future date and at a fixed price. Futures contracts are traded on a futures exchange or futures market according to standardised terms (i.e. predetermined quantities for each specific type).
A market for purchasing and selling futures contracts of a financial instrument or security at a future date and at a fixed price.
An abbreviation for Frankfurt Stock Exchange (also referred to as Börse Frankfurt).