A
American Depositary Receipt (ADR): A security that physically remains in a
foreign country, usually in the custody of a bank, but is traded in the U.S.
Arbitrage: The simultaneous purchase and sale of similar instruments in
different markets to take advantage of price discrepancies.
Ask price: The price at which a seller is offering to sell. See offer.
Associated Person (AP): An individual who solicits orders, customers, or
customer funds (or who supervises persons performing such duties) on behalf
of a Futures Commission Merchant, an Introducing Broker, a Commodity Trading
Adviser, or a Commodity Pool Operator.
Average daily volume: Equals volume for a specified time period divided by
the number of business days within that same time period.
B
Back months: The futures contracts being traded that are furthest in the
future from the nearest expiration. Also called deferred or distant months.
See also contract month, front month.
Bar Chart: A graph of prices, volume and/or open interest for a specified
time period used by a chartist to forecast market trends. A daily bar chart
typically plots each trading session's high, low and settlement price.
Basis: The difference between the cash market price and the price of the
futures contract (unless otherwise specified, the futures price of the
nearby contract month is generally used to calculate the basis).
Basis Contract: A forward contract in which the cash price is based on the
basis relating to a specified futures contract.
Bear: One who believes prices will move lower.
Bear Market: A market in which prices are declining.
Bear Spread: Selling the nearby contract month and buying a later contract
month in an attempt to profit from a change in the price relationship.
Beta: A measure of how a stock's price movement correlates to the price
movement of the entire stock market. Beta is not a measure of volatility.
See also Standard Deviation and Volatility.
Bid: An expression indicating a desire to buy an instrument at a given
price, opposite of the offer.
Breakaway Gap: A gap in prices that signals the end of a price pattern and
the beginning of an important market move.
Broad-Based: Generally referring to an index, it indicates that the index is
composed of a sufficient number of stocks or of stocks in a variety of
industry groups to satisfy certain economic or regulatory criteria. See also
Narrow-based.
Broker: A company or individual that executes transactions on behalf of
financial and commercial institutions and/or the general public. A full
service broker typically offers market information and advice to assist the
customer in trading. A discount broker may simply execute orders for
customers.
Brokerage Fee: A fee charged by a broker for executing a transaction.
Brokerage House: A firm that handles orders to buy or sell instruments on
behalf of its customers.
Bull: One who expects prices to rise in price.
Bull Market: A market in which prices are rising.
Bull Spread: Buying the nearby contract month and selling a later contract
month in an attempt to profit from the change in the price relationship.
Buy on opening: To buy at the beginning of a trading session at the opening
price.
Buying A Hedge: Buying futures contracts to protect against a possible price
increase of cash instruments that will be purchased in the future. At the
time the cash instruments are bought, the open futures position is typically
closed by selling an equal number and type of futures contracts as those
that were initially purchased. See also hedge.
C
Calendar Spread: The purchase of one contract month of a given futures
contract and simultaneous sale of another contract month of the same
instrument on the same exchange. Also referred to as an intra-market or
inter-delivery spread.
Call: An options contract that gives the option buyer the right to buy the
underlying instrument at a specified price for a certain, fixed period of
time. See also Put.
Capitalization-Weighted Index: A stock index that is computed by adding the
capitalization (float times cash price) of each individual stock in the
index and then dividing by the divisor. The stocks with the largest
aggregate market values have the heaviest weighting in the index. See also
dollar-weighted index, price-weighted index.
Cash Commodity: The underlying commodity as distinguished from a futures
contract.
Cash Contract: A sales agreement for either immediate or future delivery of
the actual security or other underlying instrument.
Cash Market: A place where people buy and sell the instrument underlying a
futures contract, such as a securities exchange. The terms "spot" and "spot
price" usually refer to the cash market price for the underlying instrument
that is available for immediate delivery. A forward contract is a cash
contract in which a seller agrees to deliver a specific cash instrument to a
buyer sometime in the future at an agreed-upon price. Forward contracts, in
contrast to futures contracts, are privately negotiated and are not
standardized.
Cash Price: Current market price of the stock or other instrument underlying
a futures contract. Also called "spot price."
Cash-Settled, Cash Settlement: Transactions generally involving futures
contracts that are settled in cash based on the final settlement price, in
contrast to those that specify the delivery of the underlying instrument at
expiration.
CBOE Direct: An electronic trading system developed by the Chicago Board
Options Exchange, which is used by CBOE for electronic options trading.
CFTC: Acronym for the Commodity Futures Trading Commission, which regulates
commodity futures trading in the U.S. and jointly regulates U.S. security
futures markets with the SEC.
CFMA: Acronym for the Commodity Futures Modernization Act of 2000, which
among other actions, permitted trading of security futures in the U.S. under
the joint regulation of the CFTC and the SEC.
Charting: The use of charts to analyze market behavior and anticipate future
price movements. Typically involves plotting such factors as high, low, and
settlement prices; average price movements; volume; and open interest.
Chartist: One who engages in technical analysis and/or uses charting
techniques.
Class: A term used to refer to all futures contracts on the same underlying
security. For example, all futures contracts on a given common stock are
part of the same "class" of contracts.
Clear / Clearing: The process by which a clearinghouse maintains records of
all trades and resulting positions, guarantees performance on those
positions, and facilitates daily pass through of profits and losses via a
mark-to-market process.
Clearinghouse: An entity that settles trades made at an exchange, reconciles
clearing member firm accounts each day to ensure that gains have been
credited and losses have been collected, and adjusts clearing member firm
margins for changing market conditions as appropriate.
Clearing Margin: Financial safeguards to ensure that clearing members
perform on their customers' open contracts. Clearing margins are distinct
from customer margins that individual buyers and sellers of futures and
options contracts are required to deposit with brokers. (See ‘customer
margin’) Within the futures industry, financial guarantees are required of
both buyers and sellers of futures contracts to ensure the fulfillment of
contract obligations. Also referred to as performance-bond margin.
Close: The period at the end of the trading session. Sometimes used to refer
to the closing price. It is the opposite of the open.
Commission: The fee charged by a broker to execute trades and maintain
records related to these trades.
Contingent Order: An order which can be executed only if another event
occurs.
Contract: The smallest unit of an instrument that can be traded. A future is
specified by its contract month.
Contract month: The month in which a futures contract may be settled by
making or accepting delivery. Also called the delivery month.
Convertible security: A security that is convertible into another security.
Generally, a convertible bond or convertible preferred stock is convertible
into the common stock of the same corporation. The rate at which the shares
of the bond or preferred stock are convertible into the common is called the
conversion ratio.
Customer Margin: Financial guarantees required of both buyers and sellers of
futures contracts to ensure fulfillment of contract obligations. Brokers are
responsible for overseeing customer margin accounts. Also referred to as
performance-bond margin. See also clearing margin.
D
Day Trader: A trader who establishes and liquidates positions within one
day's trading, ending the day with no open position in the market.
Day Trading: Refers to establishing and liquidating the same position or
positions within one day's trading, thus ending the day with no open
position in the market.
Deferred Month: The more distant contract month(s) in which futures trading
is taking place, as distinguished from the nearby contract month.
Deliver: To transfer a physical commodity or a security to another
individual or firm. The holder of a short position in a futures contract
that is physically settled must deliver the underlying instrument to the
holder of a long position in accordance with the standard delivery cycle
specified by the futures contract.
Delivery: The tender and receipt of an actual financial instrument (e.g.
shares of a security) in the settlement of a futures contract.
Delivery Month: See contract month.
Depository Trust Company (DTC): A corporation that facilitates transfers of
securities and holds securities for member institutions.
Derivative, Derivative Security: A financial security whose value is
determined in part from the value and characteristics of another security,
the underlying security. For example, a single stock futures contract is a
derivative security of the underlying stock on which it is based.
Discount:
1. A future is said to be trading at a "discount" if it is trading at a
price less than the cash price of its underlying instrument. See also Parity
and Premium.
2. When the issue (or trading) price of a debt instrument is below its par
value, it is said to be issued (or trading) at a discount.
Discretionary Account: An arrangement by which the holder of the account
gives written power of attorney to another person, often his or her broker,
to make trading decisions. Also known as a controlled or managed account.
Divisor: A mathematical quantity used to compute an index. It is initially
an arbitrary number that reduces the index value to a small, workable
number. Thereafter, the divisor may be adjusted for stock splits
(price-weighted index) or additional issues of stock
(capitalization-weighted index). See also Dollar-weighted index.
Dollar-Weighted Index: A stock index that is computed by adding the prices
of each stock in the index and then dividing by the divisor. In a
dollar-weighted index, the component stocks are typically weighted in order
to equalize the market value of each index component. This is likely to
result in a weighting that is approximately the inverse of a price-weighted
index of the same component stocks.
Double ‘Top’, ‘Bottom’: A bar chart formation that signals a possible trend
reversal. In a point and figure chart, double tops and bottoms are used for
buy and sell signals.
Down Trend: A price trend characterized by a series of lower highs and lower
lows.
E
Electronic Trading: Trading via computer through an automated, order entry
and matching system.
Equilibrium Price: The market price at which the quantity supplied of an
item equals the quantity demanded.
European Terms: A method of quoting exchange rates, which measures the
amount of foreign currency needed to buy one U.S. dollar, i.e., foreign
currency unit per dollar. Reciprocal of European Terms is another method of
quoting exchange rates, which measures the U.S. dollar value of one foreign
currency unit, i.e., U.S. dollars per foreign units.
Exchange for Physicals (EFP): A transaction generally used by two hedgers
who want to exchange futures for cash positions. Also referred to as
"against actuals" or "versus cash."
Exchange Traded Fund (ETF): An ETF is a basket of securities designed to
track an index yet trades like a stock.
Ex-Dividend: A reference to a stock where the value reflects an adjustment
for impending dividends. The ex-dividend date (ex-date) is the date after
which the stock trades without rights to that dividend distribution.
Investors who own the stock on the ex-date will receive the dividend, and
those who are short the underlying stock must pay out the dividend. Holders
of long single stock futures positions do not receive the dividend, and
holders of short single stock futures positions do not pay out the dividend.
Exhaustion Gap: A gap in prices near the top or bottom of a price move that
signals an abrupt turn in the market.
Expected Return: The result of mathematical analysis involving statistical
distributions of stock prices and their impact on the value of an
investment. It is the return in which an investor might theoretically expect
to make on an investment if he or she were to make exactly the same
investment many times throughout history.
Expiration Cycle: A term referring to the quarterly expiration dates
applicable to various classes of derivatives. There are three commonly used
cycles: January/April/July/October, February/May/August/November, and
March/June/September/December.
Expiration Date: The day on which all open positions in a futures contract
are transformed into delivery or receipt responsibilities for the underlying
instrument. Often used as a synonym for the last day of trading in a given
contract, although the expiration date may not actually be the last day of
trading. For example, the last trading date would normally occur on a Friday
for a contract with a Saturday expiration date.
F
Face Value: The amount of money printed on the face of the certificate of a
security; the original dollar amount of indebtedness incurred.
Fair Value: Normally, a term used to describe the theoretical worth of a
futures contract as determined by a mathematical model. See also overvalued
and undervalued.
Federal Funds: Member bank deposits at the Federal Reserve; these funds are
loaned by member banks to other member banks.
Federal Funds Rate: The rate of interest charged for the use of federal
funds.
Federal Reserve System: A central banking system in the United States,
created by the Federal Reserve Act in 1913, designed to assist the nation in
attaining its economic and financial goals. The structure of the Federal
Reserve System includes a Board of Governors, the Federal Open Market
Committee, and 12 Federal Reserve Banks.
Fill-Or-Kill order (FOK): A limit order that must be filled immediately or
canceled.
Financial Analysis Auditing Compliance Tracking System (FACTS): The National
Futures Association's computerized system of maintaining financial records
of its member firms and monitoring their financial conditions.
Financial Instrument: There are two basic types: (1) a debt instrument,
which is a loan with an agreement to pay back funds with interest; (2) an
equity security, which is a share of ownership or stock in a company.
Derivatives of these basic types are also considered financial instruments.
See instrument.
Float: The number of shares outstanding of a particular common stock.
Forex Market: An over-the-counter market where buyers and sellers conduct
foreign exchange business by telephone and other means of communication.
Also referred to as foreign exchange market.
Forward Contract: A cash contract in which a seller agrees to deliver a
specific cash instrument to a buyer sometime in the future. Forward
contracts, in contrast to futures contracts, are privately negotiated and
are not standardized.
Front Month: The nearest active contract month of a futures contract. Also
referred to as the lead month, nearby month, or spot month. See also back
months.
Fundamental Analysis: The study of supply and demand information to help
project future prices. For securities, a method of evaluating the prospects
of a security by analyzing accepted accounting measures such as earnings,
sales, and assets.
Fundamentalist: One who engages in fundamental analysis.
Futures: A term used to designate all contracts covering the purchase and
sale of financial instruments or physical commodities for future delivery on
a futures exchange.
Futures Commission Merchant (FCM): A firm or person engaged in soliciting or
accepting and handling orders for the purchase or sale of futures contracts,
subject to the rules of a futures exchange and, who, in connection with
solicitation or acceptance of orders, accepts any money or securities to
margin any resulting trades or contracts. An FCM must be registered with the
CFTC.
Futures Contract: A standardized agreement, traded on a futures exchange, to
buy or sell an instrument at a specified price at a date in the future. The
contract specifies the instrument, quality, quantity, delivery date and
settlement mechanism. For example, 100 shares of IBM common stock to be
physically delivered on December 18.
Futures Exchange: A central marketplace with established rules and
regulations where buyers and sellers trade futures contracts and/or options
on futures contracts.
G
Gap: A price area at which the market didn't trade from one day to the next.
See Breakaway gap, Exhaustion gap and Runaway gap.
Gap Theory: A type of technical analysis that studies gaps in prices.
Give-Up: A transaction in which one clearing firm places an order for
execution on behalf of a customer of different clearing firm which
ultimately will clear and carry the trade.
GLOBEX: An electronic trading system in use by the Chicago Mercantile
Exchange (CME). Also used for routing orders.
Good-Til-Canceled (GTC): An order that remains in effect until it's
canceled, filled or until the contract expires.
Gross Domestic Product: The value of all final goods and services produced
by an economy over a particular time period, normally a year.
Gross National Product: Gross Domestic Product plus the income accruing to
domestic residents as a result of investments abroad less income earned in
domestic markets accruing to foreigners abroad.
H
Head and Shoulders: A sideways price formation at the top or bottom of the
market that indicates a major market reversal.
Hedge: The purchase or sale of a futures contract or other derivative as a
temporary substitute for a cash market transaction to be made at a later
date. The hedge position is designed to protect the investor from temporary
price movements in an instrument that the investor already owns or plans to
own. Usually it involves opposite positions in the cash market and futures
market at the same time. See long hedge and short hedge.
Hedger: An individual or company owning or planning to own a cash instrument
and concerned that the cost of the instrument may change before either
buying or selling it in the cash market. A hedger achieves protection
against changing cash prices by buying (selling) futures contracts of the
same or similar instrument and later offsetting that position by selling
(buying) futures contracts of the same quantity and type as the initial
transaction. See pure hedger and selective hedger.
Hedging Line Of Credit: Financing from your lender for the purpose of
hedging the sale and purchase of an instrument.
High: The highest price of the day for a particular instrument (i.e. stock,
commodity, futures price, etc).
I
Implied Volatility: A measure of the volatility of the underlying stock
determined by using option prices currently existing in the market at the
time, rather than using historical data on the price changes of the
underlying stock. See also volatility.
Index: A compilation of the prices of several common entities into a single
number. See also Dollar-weighted index, Price-weighted index,
Capitalization-weighted index.
Instruments: Products traded on an exchange or in an over the counter
market, such as stocks, bonds, or futures contracts. See financial
instrument.
Initial Margin / Initial Performance Bond: The amount a futures market
participant must deposit into his margin account at the time he places an
order to buy or sell a futures contract. Also referred to as original
margin. See also maintenance margin.
Interdelivery Spread: See calendar spread.
Introducing Broker: A person or organization that solicits or accepts orders
to buy or sell futures contracts or options on futures contracts but does
not accept money or other assets from customers to support such orders.
Inverted: (1) A futures market in which the normal relationship between two
contract months of the same instrument is reversed is called an inverted
market.
(2) When long-term interest rates are lower than short-term interest rates
for debt instruments of similar credit-worthiness, and yields are plotted
against term to maturity, the resulting chart is called an inverted yield
curve.
L
Lagging Indicators: Market indicators showing the general direction of the
economy and confirming or denying the trend implied by the leading
indicators. Also referred to as concurrent indicators.
Last Trading Day: The final day when trading may occur in a given contract
month. Futures contracts outstanding at the end of the last trading day must
be settled by delivery of the underlying instrument or by agreement for
monetary settlement (in some cases by EFPs).
Lead Market Maker (LMM): A market maker responsible for making continuous,
two-sided markets in the products assigned to it.
Leading Indicators: Market indicators that signal the state of the economy
for the coming months. Some leading indicators include: average
manufacturing workweek, initial claims for unemployment insurance, orders
for consumer goods and material, percentage of companies reporting slower
deliveries, change in manufacturers' unfilled orders for durable goods,
plant and equipment orders, new building permits, index of consumer
expectations, change in material prices, prices of stocks, change in money
supply.
LEAPS®: Long-term Equity Anticipation Securities, or LEAPS®, are long-term
stock or index options. LEAPS®, like all options, are available in two
types, calls and puts, with expiration dates up to three years in the
future.
Leg: A risk-oriented method of establishing a multi-sided position. Rather
than entering into a simultaneous transaction to establish the position (a
spread, for example), the trader first executes one side of the position,
hoping to execute the other side at a later time and a better price. The
risk materializes from the fact that a better price may never be available,
and a worse price must eventually be accepted.
Letter of Guarantee: (1) A letter from a bank to a brokerage firm which
states that a customer (who has written a call option) does indeed own the
underlying stock and the bank will guarantee delivery if the call is
assigned. Thus the call can be considered covered. Not all brokerage firms
accept letters of guarantee. (2) A letter issued to the clearinghouse by
member firms covering a guarantee of any trades made by one of its
customers.
Leverage: The use of a smaller amount of assets to control a greater amount
of assets. For example, the use of a relatively small amount of cash to
control a futures contract with a relatively high notional value.
Limit Order: An order that can be filled only at a specified price or
better.
Liquid: A characteristic of a financial market with enough units outstanding
to allow large transactions without a substantial change in price.
Institutional investors are inclined to seek out liquid investments so that
their trading activity will not influence the market price.
Liquidation: Any transaction that offsets or closes out a long or short
position. For example, taking a second futures position opposite to the
initial or opening position.
Local: A professional trader at a futures exchange who buys and sells for
his or her own account and may sometimes also fill public orders.
Lognormal Distribution: A statistical distribution that is often applied to
the movement of stock prices. It is a convenient and logical distribution
because it implies that stock prices can theoretically rise forever but
cannot fall below zero.
Long: One who has bought an instrument such as a futures contract or stock
to establish a market position and who has not yet closed out this position
through an offsetting procedure. The opposite of short.
Long Cash: Owning the underlying instrument of a futures contract.
Long Hedge: The purchase of a futures contract to protect against potential
price increases in anticipation of a later purchase in the cash market. Also
referred to as a buying hedge. See hedge, short hedge.
Lot: The term used to describe a designated number of futures contracts,
e.g., a 5 lot purchase. Also called "cars."
Low: The lowest price of the day for a particular instrument (i.e stock,
futures contracts, etc.).
M
Maintenance Margin / Maintenance Performance Bond: A sum, usually smaller
than the initial margin, which must remain on deposit in the customer's
account for any position. A drop in funds below this level requires a
deposit back to initial margin levels.
Managed Futures: The industry comprised of professional money mangers known
as commodity trading advisors (CTA’s) who manage client assets on a
discretionary basis, using global futures markets as an investment medium.
Margin: Funds that must be deposited by a customer with his or her broker,
by a broker with a clearing member or by a clearing member with the
clearinghouse. The margin helps to ensure the financial integrity of
brokers, clearing members and the clearinghouse as a whole. Also referred to
as performance bond. See initial margin, maintenance margin, customer
margin, clearing margin, margin call.
Margin Call: A call from a clearinghouse to a clearing member, or from a
brokerage firm to a customer, to bring margin deposits up to a required
minimum level.
Mark-To-Market: The daily adjustment of accounts and margin requirements to
reflect profits and losses. Positions are marked-to-market.
Market Basket: A portfolio of common stocks whose performance is intended to
simulate the performance of a specific index or other benchmark.
Market Maker: An exchange member whose function is to aid in the making of a
market, by making bids and offers for his or her account in the absence of
or in addition to public buy or sell orders.
Market Order: An order to be filled immediately at the best price available.
Market-If-Touched (MIT): A price order that becomes a market order when the
market trades at a specified price at least once.
Matched Trade: The execution of buy and sell orders that together consummate
a trade. A matched trade consists of one or more contracts and occurs when
the same price is specified by buy and sell orders, for a specified number
of contracts.
Maximum Price Fluctuation: The maximum amount a contract price can change up
or down during one trading session, as stipulated by exchange rules.
Minimum Price Fluctuation: The smallest increment of price movement possible
in trading a given contract, often referred to as a "tick."
Money Supply: The amount of money in the economy, consisting primarily of
currency in circulation plus deposits in banks: M-1 refers to the U.S. money
supply consisting of currency held by the public, traveler's checks,
checking account funds, NOW and super- NOW accounts, automatic transfer
service accounts, and balances in credit unions. M-2 refers to the U.S.
money supply consisting M-1 plus savings and small time deposits (less than
$100,000) at depository institutions, overnight repurchase agreements at
commercial banks, and money market mutual fund accounts. M-3 refers to the
U.S. money supply consisting of M-2 plus large time deposits ($100,000 or
more) at depository institutions, repurchase agreements with maturities
longer than one day at commercial banks, and institutional money market
accounts.
Moving Average Chart: A chart recording moving averages of market prices.
Moving Averages: A type of technical analysis using the averages of
settlement prices. A moving average is calculated by adding the prices for a
predetermined number of days and then dividing by the number of days.
N
Narrow-Based: Generally used to describe a stock index, the term
narrow-based indicates that the index is composed of three to nine
components, generally in a specific industry group. See also broad-based.
National Futures Association (NFA): An industry-supported, self-regulatory
organization for futures and options markets. The primary responsibilities
of the NFA are to enforce ethical standards and customer protection rules,
screen futures professional for membership, audit and monitor professionals
for financial and general compliance rules and provide for arbitration of
futures-related disputes.
Nearby (contract) Month: The nearest contract month of a futures contract.
Also referred to as the front month, lead month, or spot month.
Notional Value: The underlying value (face value), normally expressed is
U.S. dollars, of the instrument specified in a futures contract.
O
Offer: Indicates a willingness to sell at a given price; opposite to the
bid. Also called the ask price.
Offset: Selling if one has bought, or buying if one has sold, in effect
eliminating one's position in a futures contract. Many futures contracts are
offset prior to expiration.
Offsetting a Hedge: For a short hedger, to buy back futures and sell the
underlying instrument. For a long hedger, to sell back futures and buy the
underlying commodity. See also hedge.
Open, Opening: The period at the beginning of the trading session. Sometimes
used to refer to the opening price. Opposite of close.
Open Interest: Total number of futures contracts that have not yet been
offset or fulfilled for delivery. Each open position has both a buyer and a
seller, but for calculation of open interest, only one side of the contract
is counted.
Open Order: Any order resident in the order book, such as a day order or a
good-til-cancelled order.
Open Outcry: Method of public auction for making verbal bids and offers in
the trading pits or rings of traditional futures exchanges.
Option, Options Contract: The right, but not the obligation, to buy or sell
the underlying instrument at a specified price within a specified time.
Option Buyer: One who purchases an option and pays a premium. Also referred
to as the option holder.
Option Seller: The person who sells an option in return for a premium and is
obligated to perform if the holder exercises his right under the option
contract. Also referred to as the option writer.
Options Clearing Corporation (OCC): One of the entities that serves as a
clearinghouse for various markets. Also, the issuer of all listed option
contracts that are trading on the U.S. national option exchanges.
Order: In most cases, a request for the purchase or sale of an instrument
(including execution instructions).
Order-Cancels-Other (OCO): An order that includes two orders, one of which
cancels the other when filled. Also referred to as one-cancels-other.
Original Margin: See initial margin.
Overbought/Oversold: A technical opinion of a market which has risen/fallen
too much in relation to underlying fundamental factors.
Over-The-Counter Market (OTC): A market where instruments such as stocks and
foreign currencies are bought and sold by telephone and other means of
communications.
Overvalued: Describing an instrument trading at a higher price than it
logically should. Normally associated with the results of price predictions
by mathematical models. If an instrument is trading in the market for a
higher price than the model indicates, the instrument is said to be
overvalued. See also fair value and undervalued.
P
Par, Par Value: The face value of a security. For example, a bond selling at
par is worth the same dollar amount it was issued for or at which it will be
redeemed at maturity.
Parity: A future is trading at parity if it is trading at the cash price of
its underlying index or commodity. See also Discount and Premium.
Performance Bond: Funds that must be deposited by a customer with his or her
broker, by a broker with a clearing member or by a clearing member with the
clearinghouse. The performance bond helps to ensure the financial integrity
of brokers, clearing members and the Exchange as a whole. Often referred to
as margin. See initial margin, maintenance margin, customer margin, clearing
margin, margin call.
Physical Settlement: The process of settling a futures contract at the
expiration date by delivering the underlying instrument. In the case of a
single stock futures contract, for example, the holder of the short position
delivers actual shares of stock to the holder of the long position. Contrast
with cash settlement.
Point and Figure Chart: A graph of prices charted with x's for price
increases and o's for price decreases, used by the chartist for buy and sell
signals.
Position: An interest in the market, either long or short. A buyer of a
futures contract is said to have a long position and, conversely, a seller
of futures contracts is said to have a short position. See open interest.
Position Limit: The maximum number of speculative futures contracts one can
hold as determined by the CFTC and/or the exchange upon which the contract
is traded. Also referred to as trading limit.
Position Trader: A trader who takes a position in the market and may hold
that position over a long period of time.
Premium: (1) A futures contract is said to be trading at a premium if it is
trading at a price greater than the cash price of its underlying instrument.
See also Discount and Parity.
(2) A future is also sometimes described as trading at a premium compared to
another contract month on the same underlying instrument when it is trading
at a higher price than the other contract month.
(3) The price an option buyer pays the option seller when purchasing an
options contract.
(4) In other financial instruments (e.g. bonds), the dollar amount by which
a security trades above its principal or face value.
Price Discovery: The generation of information about "future" cash market
prices through the futures markets. Also refers to the economic function
provided by futures markets in determining these prices.
Price Order: An order to sell or buy at a certain price or better.
Price Limit: The maximum advance or decline in price from the previous day's
settlement for a futures contract in one trading session by the rules of the
exchange.
Price Limit Order: A customer order that specifies the price at which a
trade can be executed.
Price-Weighted Index: A stock index that is computed by adding the prices of
each stock in the index and then dividing by the divisor. In a
price-weighted index, the component stocks are typically weighted such that
the number of shares of each stock is proportional to the price at which the
stock is trading. This is likely to result in a weighting that is
approximately the inverse of a dollar-weighted index of the same component
stocks. See also capitalization-weighted index.
Prime Rate: Interest rate charged by major banks to their most creditworthy
customers.
Producer Price Index (PPI): An index that shows the cost of resources needed
to produce manufactured goods during the previous month.
Pure Hedger: A person who places a hedge to lock in a price for an
instrument. He or she offsets the hedge and transacts in the cash market
simultaneously.
Put: An options contract that gives the holder the right to sell the
underlying instrument at a specified price for a certain, fixed period of
time. See also Call.
R
Rally: An upward movement of prices following a decline.
Range: The price span (‘High’ to ‘Low’) during a given trading session or
other time period.
Reciprocal of European Terms: One method of quoting exchange rates, which
measures the U.S. dollar value of one foreign currency unit, i.e., U.S.
dollars per foreign units. See also European Terms.
Registered Representative: A person employed by, and soliciting business for
a broker-dealer.
Resistance, Resistance Line: A term in technical analysis indicating a price
area where sufficient supply exists such that the price may have trouble
rising above that area. See also support.
Retracement: A price move in the opposite direction of a recent trend.
Return (on investment): The percentage profit that one makes, or might make,
on his investment.
Risk Arbitrage: A form of arbitrage that has some risk associated with it.
Commonly refers to potential takeover situations where the arbitrageur buys
the stock of the company about to be taken over and sells the stock of the
company that is affecting the takeover.
Roll (forward): Closing out a futures position in a nearby contract month
and opening a similar position in a more distant contract month.
Round Turn: A round turn counts both the buy and the sell of a trade as one
event. In a typical exchange volume measurement, a one-contract trade
between a buyer and seller would be counted as one round turn. From the
customer's perspective, a round turn represents two filled orders from his
or her brokerage firm - one to take a position and one to offset that
position (i.e., same customer, different trades)..
Runaway Gap: A gap in prices after a trend has begun that signals the
halfway point of a market move.
S
Scalper: A trader who trades intending to make small, short-term profits
during the course of a trading session, rarely carrying a position
overnight.
SEC: Acronym for the Securities and Exchange Commission. This government
agency jointly regulates U.S. security futures markets with the CFTC.
Security: Common or preferred stock; a bond of a corporation, government, or
quasi- government body.
Security Futures: The term for the class of instruments that includes single
stock futures and narrow-based indices.
Selective Hedger: A market participant who hedges only when he or she
believes that prices are likely to move against him or her.
Selling Climax: An extraordinarily high volume occurring suddenly in a
downtrend signaling the end of the trend
Settlement: At the close of the trading session, the clearinghouse
determines a firm's net gains or losses, margin requirements, and the next
day's price limits, based on the settlement price for each futures contract.
Settlement Price: The official price at the end of a trading session as
determined by the exchange. Also referred to as the daily settlement price,
except on the last day of trading prior to expiration, in which case it is
called the final settlement price.
Short: One who has sold an instrument such as a futures contract to
establish a market position and who has not yet closed out this position
through an offsetting procedure. The opposite of long. In verb form, the act
of taking on a short position.
Short Cash: Describes a trader who needs and plans to buy a cash instrument.
Short Hedge: The sale of a futures contract to protect against potential
price declines in anticipation of a later sale in the cash market. Also
referred to as a selling hedge. See hedge, long hedge.
Side: A side considers the buy and sell actions of a trade as separate
events. Each matched trade, and each contract, has two sides - the buyer
side and the seller side. Taken together, these two sides equal one round
turn. Measuring matched trade volume "per side" counts volume on each side
of the trade.
Sideways Trend: Seen in a bar chart when prices tend not to go above or
below a certain range of levels.
Single Stock Futures (SSF): Futures contracts on individual stocks.
Speculator: A market participant who tries to profit from buying and selling
instruments by anticipating future price movements. Speculators assume
market price risk and add liquidity and capital to futures markets.
Spot: Usually refers to the cash price for a physical commodity that is
available for immediate delivery.
Spot Month: See front month.
Spread: (1) During trading, the difference between the best bid and best
offer for a given instrument at a given point in time. Referred to as the
bid-offer spread or bid-ask spread.
(2) The price difference between two related markets or instruments.
(3) A position whereby a long position is held in one market and a short
position is held simultaneously in a different but related market.
Spreading, Spread Trading: The simultaneous buying and selling of two
related markets to hold both a long and a short position - a spread -- with
the objective of profiting from a changing price relationship. Examples
include: buying one futures contract and selling another futures contract on
the same instrument but with a different contract month; buying and selling
the same contract month of the same instrument on different exchanges;
buying a given contract month of one futures contract and selling the same
contract month of a different, but related, futures contract.
Spread Order: An order that indicates the simultaneous purchase and sale of
related instruments.
Standard Deviation: A statistical measure of the spread of a distribution.
In financial markets, often used as a measure of the price volatility of an
instrument - e.g. the magnitude of the daily price changes in a given stock.
Stock Index: An indicator used to measure and report value changes in a
selected group of stocks. How a particular stock index tracks the market
depends on its composition, the sampling of stocks, the weighting of
individual stocks, and the method of averaging used to establish an index.
See also Price-weighted index, Capitalization-weighted index.
Stock Market: A market in which shares of stock are bought and sold.
Stop Order: An order to buy or sell when the market reaches a specified
point. A stop order to buy becomes a market order when the market trades (or
is bid) at or above the stop price. A stop order to sell becomes a market
order when the market trades (or is offered) at or below the stop price.
Stop-Limit Order: A variation of a stop order in which a trade must be
executed at the exact price or better. If the order cannot be executed, it
is held until the stated price or better is again reached.
Strike Price: The price at which the instrument underlying an options
contract can be purchased (if a call) or sold (if a put). Also referred to
as the exercise price.
Suitability Requirement: A requirement that any investing strategy fall
within the financial means and investment objectives of an investor.
Suitable: Describing a strategy or trading philosophy in which the investor
is operating in accordance with his or her financial means and investment
objectives.
Support, Support Line: A term in technical analysis indicating a price area
where sufficient demand exists such that the price may have trouble falling
below that area. See also resistance.
Synthetic Call Option: A combination of a long futures contract and a long
put, called a synthetic long call. Also, a combination of a short futures
contract and a short put, called a synthetic short call.
Synthetic Futures: A combination of a put and a call with the same strike
price, in which both are bullish, called synthetic long futures. Also, a
combination of a put and a call with the same strike price, in which both
are bearish, called synthetic short futures.
Synthetic Option: A combination of a futures contract and an option, in
which one is bullish and one is bearish.
Synthetic Put Option: A combination of a short futures contract and a long
call, called a synthetic long put. Also, a combination of a long futures
contract and a short call, called a synthetic short put.
T
Technical Analysis: The study of historical price patterns to help forecast
future prices.
Tick: Refers to a change in price, either up or down. See minimum price
fluctuation.
Theoretical Value: The price at which a futures contract or other instrument
should trade, as computed by a mathematical model. See fair value.
Time Limit Order: A customer order that designates the time during which it
can be executed.
Tracking Error: The difference between the performance of a specific
portfolio of stocks and an index or other benchmark to which their
performance is being compared. See also market basket.
Trader: A market participant who buys and sells instruments on an exchange
or over-the-counter market. See day trader, hedger, position trader, and
scalper.
Transaction: This term is context-dependent. From an operational standpoint,
it refers to a matched trade, but has other meanings for clearing and
systems purposes.
Treasury Bill: A Treasury bill is a short-term U.S. government obligation
with an original maturity of one year or less. Unlike a bond or note, a bill
does not pay a semi-annual, fixed rate coupon. A bill is typically issued at
a price below its par value and is therefore a discounted instrument. The
level of the discount depends on the level of prevailing interest rates. In
general, the higher short-term interest rates are, the greater the discount.
The return to an investor in bills is simply the difference between the
issue price and par value.
Treasury Bond: U.S. Government-debt security with a coupon and original
maturity of more than 10 years. Interest is paid semiannually.
Treasury Note: U.S. Government-debt security with a coupon and original
maturity of one to 10 years.
Trend: The general direction of the market.
U
Underlying, Underlying Security: The cash instrument on which a futures
contract is based.
Undervalued: Describing an instrument trading at a lower price than it
logically should. Normally associated with the results of price predictions
by mathematical models. If an instrument is trading in the market for a
lower price than the model indicates, the instrument is said to be
undervalued. See also fair value and overvalued.
Unit Of Trading: The minimum quantity or amount allowed when trading. The
normal minimum for common stock is one round lot or 100 shares. The normal
minimum for security futures is one contract. Each security futures exchange
sets the size of its own contracts.
UPTrend: A price trend characterized by a series of higher highs and higher
lows.
U.S. Treasury Bill: See treasury bill.
U.S. Treasury Bond: See treasury bond.
U.S. Treasury Note: See treasury note.
V
Volatility, Price Volatility: An annualized measure of the fluctuation in
the price of an instrument such as a security or a futures contract.
Historical volatility is the actual measure of price movement from the past.
It is often expressed as a percentage and computed as the annualized
standard deviation of the percentage change in daily price. Implied
volatility is a measure of what the market implies it is, as reflected in
option prices.
Versus Cash: See exchange for physicals (EFP).
Volume: A measure of trading activity typically expressed for futures
exchanges as the number of round-turn contracts traded in a given period,
unless otherwise noted. See also average daily volume.
W
Wire House: An alternate term for a brokerage firm .
Writer, Writing: The person who sells an option in return for a premium and
is obligated to perform when a holder exercises his or her right under the
contract is called the writer of the option. He or she is also referred to
as the option seller. The act of making the initial.
Y
Yield Curve: A chart in which the yield level is plotted on the vertical
axis and the term to maturity of debt instruments of similar
creditworthiness is plotted on the horizontal axis. The yield curve is
positive when long-term rates are higher than short-term rates. However, the
yield curve is negative or inverted when long-term rates are lower than
short-term rates.
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