Definition of Trading
Trading
Buying and selling securities.
Related Terms:
Refers to establishing and liquidating the same position or positions within one day's trading.
trading by officers, directors, major stockholders, or others who hold private inside
information allowing them to benefit from buying or selling stock.
The final day under an exchange's rules during which trading may take place in a particular
futures or options contract. Contracts outstanding at the end of the last trading day must be settled by delivery
of underlying physical commodities or financial instruments, or by agreement for monetary settlement
depending upon futures contract specifications.
Trades based on signals from computer programs, usually entered directly from the trader's
computer to the market's computer system and executed automatically.
Costs of buying and selling marketable securities and borrowing. trading costs include
commissions, slippage, and the bid/ask spread. See: transaction costs.
trading of a stock, bond, option or futures contract can be halted by an exchange while news is
being broadcast about the security.
CDs purchased by accounts that are likely to resell them. The term is commonly used in the Euromarket.
The posts on the floor of a stock exchange where the specialists stand and securities are traded.
The difference between the high and low prices traded during a period of time;
with commodities, the high/low price limit established by the exchange for a specific commodity for any one day's trading.
A debt or equity security bought and held for sale in the near term to generate income on short-term price changes.
A market in which there is much trading.
Also known as a trading index (TRIN)= (number of advancing issues)/ (number of declining
issues) (Total up volume )/ (total down volume). An advance/decline market indicator. Less than 1.0 indicates
bullish demand, while above 1.0 is bearish. The index often is smoothed with a simple moving average.
An option is at-the-money if the strike price of the option is equal to the market price of the
underlying security. For example, if xyz stock is trading at 54, then the xyz 54 option is at-the-money.
Brokerage house clerical operations that support, but do not include, the trading of stocks and
other securities. Includes all written confirmation and settlement of trades, record keeping and regulatory
compliance.
Back-end loan fund
A mutual fund that charges investors a fee to sell (redeem) shares, often ranging from
4% to 6%. Some back-end load funds impose a full commission if the shares are redeemed within a
designated time, such as one year. The commission decreases the longer the investor holds the shares. The
formal name for the back-end load is the contingent deferred sales charge, or CDSC.
An international trade policy of competitive devaluations and increased protective
barriers where one country seeks to gain at the expense of its trading partners.
Big Bang
The term applied to the liberalization in 1986 of the London Stock Exchange in which trading was
automated with the use of computers.
Block trade
A large trading order, defined on the New York Stock Exchange as an order that consists of
10,000 shares of a given stock or a total market value of $200,000 or more.
Blue-sky laws
State laws covering the issue and trading of securities.
Buy limit order
A conditional trading order that indicates a security may be purchased only at the designated
price or lower.
Related: Sell limit order.
Buy on close
To buy at the end of the trading session at a price within the closing range.
Buy on opening
To buy at the beginning of a trading session at a price within the opening range.
Capital market
The market for trading long-term debt instruments (those that mature in more than one year).
Capitalization ratios
Also called financial leverage ratios, these ratios compare debt to total capitalization
and thus reflect the extent to which a corporation is trading on its equity. Capitalization ratios can be
interpreted only in the context of the stability of industry and company earnings and cash flow.
CBOE
Chicago Board Options Exchange. A securities exchange created in the early 1970s for the public
trading of standardized option contracts.
CFTC
The Commodity Futures trading Commission is the federal agency created by Congress to regulate
futures trading. The Commodity Exchange Act of 1974 became effective April 21, 1975. Previously, futures
trading had been regulated by the Commodity Exchange Authority of the USDA.
Chicago Mercantile Exchange (CME)
A not-for-profit corporation owned by its members. Its primary
functions are to provide a location for trading futures and options, collect and disseminate market information,
maintain a clearing mechanism and enforce trading rules.
Churning
Excessive trading of a client's account in order to increase the broker's commissions.
Close, the
The period at the end of the trading session. Sometimes used to refer to closing price. Related:
Opening, the.
Common stock equivalent
A convertible security that is traded like an equity issue because the optioned
common stock is trading high.
Common stock market
The market for trading equities, not including preferred stock.
Contract
A term of reference describing a unit of trading for a financial or commodity future. Also, the actual
bilateral agreement between the buyer and seller of a transaction as defined by an exchange.
Current issue
In Treasury securities, the most recently auctioned issue. trading is more active in current
issues than in off-the-run issues.
Debt market
The market for trading debt instruments.
Discretionary account
Accounts over which an individual or organization, other than the person in whose
name the account is carried, exercises trading authority or control.
Domestic market
Part of a nation's internal market representing the mechanisms for issuing and trading
securities of entities domiciled within that nation. Compare external market and foreign market.
Equity
Represents ownership interest in a firm. Also the residual dollar value of a futures trading account,
assuming its liquidation at the going market price.
Expense ratio
The percentage of the assets that were spent to run a mutual fund (as of the last annual
statement). This includes expenses such as management and advisory fees, overhead costs and 12b-1
(distribution and advertising ) fees. The expense ratio does not include brokerage costs for trading the
portfolio, although these are reported as a percentage of assets to the SEC by the funds in a Statement of
Additional Information (SAI). the SAI is available to shareholders on request. Neither the expense ratio or the
SAI includes the transaction costs of spreads, normally incurred in unlisted securities and foreign stocks.
These two costs can add significantly to the reported expenses of a fund. The expense ratio is often termed an
Operating Expense Ratio (OER).
Expiration date
The last day (in the case of American-style) or the only day (in the case of European-style)
on which an option may be exercised. For stock options, this date is the Saturday immediately following the
3rd Friday of the expiration month; however, brokerage firms may set an earlier deadline for notification of
an option holder's intention to exercise. If Friday is a holiday, the last trading day will be the preceding
Thursday.
External market
Also referred to as the international market, the offshore market, or, more popularly, the
Euromarket, the mechanism for trading securities that (1) at issuance are offered simultaneously to investors
in a number of countries and (2) are issued outside the jurisdiction of any single country. Related: internal
market
Ex-dividend date
The first day of trading when the seller, rather than the buyer, of a stock will be entitled to
the most recently announced dividend payment. This date set by the NYSE (and generally followed on other
US exchanges) is currently two business days before the record date. A stock that has gone ex-dividend is
marked with an x in newspaper listings on that date.
Ex-rights
In connection with a rights offering, shares of stock that are trading without the rights attached.
Ex-rights date
The date on which a share of common stock begins trading ex-rights.
Fill or kill order
A trading order that is canceled unless executed within a designated time period.
Related: open order.
Fixed-income equivalent
Also called a busted convertible, a convertible security that is trading like a straight
security because the optioned common stock is trading low.
Fixed-income market
The market for trading bonds and preferred stock.
Floating exchange rate
A country's decision to allow its currency value to freely change. The currency is not
constrained by central bank intervention and does not have to maintain its relationship with another currency
in a narrow band. The currency value is determined by trading in the foreign exchange market.
Foreign market
Part of a nation's internal market, representing the mechanisms for issuing and trading
securities of entities domiciled outside that nation. Compare external market and domestic market.
Fourth market
Direct trading in exchange-listed securities between investors without the use of a broker.
Global bonds
Bonds that are designed so as to qualify for immediate trading in any domestic capital market
and in the Euromarket.
Herstatt risk
The risk of loss in foreign exchange trading that one party will deliver foreign exchange but the counterparty financial institution will fail to deliver its end of the contract. It is also referred to as settlement risk.
Hybrid security
A convertible security whose optioned common stock is trading in a middle range, causing
the convertible security to trade with the characteristics of both a fixed-income security and a common stock
instrument.
Index and Option Market (IOM)
A division of the CME established in 1982 for trading stock index
products and options. Related: Chicago Mercantile Exchange (CME).
Index arbitrage
An investment/trading strategy that exploits divergences between actual and theoretical
futures prices.
Internal market
The mechanisms for issuing and trading securities within a nation, including its domestic
market and foreign market.
Compare: external market.
International Monetary Market (IMM)
A division of the CME established in 1972 for trading financial
futures. Related: Chicago Mercantile Exchange (CME).
In-the-money
A put option that has a strike price higher than the underlying futures price, or a call option
with a strike price lower than the underlying futures price. For example, if the March COMEX silver futures
contract is trading at $6 an ounce, a March call with a strike price of $5.50 would be considered in-the-money
by $0.50 an ounce.
Related: put.
Investment bank
Financial intermediaries who perform a variety of services, including aiding in the sale of
securities, facilitating mergers and other corporate reorganizations, acting as brokers to both individual and
institutional clients, and trading for their own accounts. Underwriters.
ISDA
International Swap Dealers Association. Formed in 1985 to promote uniform practices in the writing,
trading, and settlement of swaps and other derivatives.
ISMA
International Security Market Association. ISMA is a Swiss law association located in Zurich that
regroups all the participants on the Eurobond primary and secondary markets. Establishes uniform trading
procedures in the international bond markets.
Limit order
An order to buy a stock at or below a specified price or to sell a stock at or above a specified
price. For instance, you could tell a broker "Buy me 100 shares of XYZ Corp at $8 or less" or to "sell 100
shares of XYZ at $10 or better." The customer specifies a price and the order can be executed only if the
market reaches or betters that price. A conditional trading order designed to avoid the danger of adverse
unexpected price changes.
Liquidity
A market is liquid when it has a high level of trading activity, allowing buying and selling with
minimum price disturbance. Also a market characterized by the ability to buy and sell with relative ease.
Market order
This is an order to immediately buy or sell a security at the current trading price.
Market value
1) The price at which a security is trading and could presumably be purchased or sold.
2) The value investors believe a firm is worth; calculated by multiplying the number of shares outstanding by the
current market price of a firm's shares.
Maximum price fluctuation
The maximum amount the contract price can change, up or down, during one
trading session, as fixed by exchange rules in the contract specification. Related: limit price.
Minimum price fluctuation
Smallest increment of price movement possible in trading a given contract. Also
called point or tick. The zero-beta portfolio with the least risk.
Multirule system
A technical trading strategy that combines mechanical rules, such as the CRISMA
(cumulative volume, relative strength, moving average) trading System of Pruitt and White.
Mutual offset
A system, such as the arrangement between the CME and SIMEX, which allows trading
positions established on one exchange to be offset or transferred on another exchange.
Nearby
The nearest active trading month of a financial or commodity futures market. Related: deferred futures
Nominal price
Price quotations on futures for a period in which no actual trading took place.
Odd lot
A trading order for less than 100 shares of stock. Compare round lot.
Open-outcry
The method of trading used at futures exchanges, typically involving calling out the specific
details of a buy or sell order, so that the information is available to all traders.
Opening, the
The period at the beginning of the trading session officially designated by the exchange during
which all transactions are considered made "at the opening". Related: Close, the
Perfectly competitive financial markets
Markets in which no trader has the power to change the price of
goods or services. Perfect capital markets are characterized by the following conditions: 1) trading is costless,
and access to the financial markets is free, 2) information about borrowing and lending opportunities is freely
available, 3) there are many traders, and no single trader can have a significant impact on market prices.
Pit
A specific area of the trading floor that is designed for the trading of commodities, individual futures, or
option contracts.
Pit committee
A committee of the exchange that determines the daily settlement price of futures contracts.
Premium
1) Amount paid for a bond above the par value.
2) The price of an option contract; also, in futures
trading, the amount the futures price exceeds the price of the spot commodity. Related: inverted market premium payback period. Also called break-even time, the time it takes to recover the premium per share of a
convertible security.
Prices
Price of a share of common stock on the date shown. Highs and lows are based on the highest and
lowest intraday trading price.
Primary market
The first buyer of a newly issued security buys that security in the primary market. All
subsequent trading of those securities is done in the secondary market.
Real market
The bid and offer prices at which a dealer could do "size." Quotes in the brokers market may
reflect not the real market, but pictures painted by dealers playing trading games.
Rights-on
Shares trading with rights attached to them.
Rings
trading arenas located on the floor of an exchange in which traders execute orders. Sometimes called a pit.
Round lot
A trading order typically of 100 shares of a stock or some multiple of 100. Related: odd lot.
Secondary market
The market where securities are traded after they are initially offered in the primary
market. Most trading is done in the secondary market. The New York stock Exchange, as well as all other stock exchanges, the bond markets, etc., are secondary markets. Seasoned securities are traded in the
secondary market.
Sell limit order
Conditional trading order that indicates that a, security may be sold at the designated price or
higher. Related: buy limit order.
Semi-strong form efficiency
A form of pricing efficiency where the price of the security fully reflects all
public information (including, but not limited to, historical price and trading patterns). Compare weak form
efficiency and strong form efficiency.
Seykota, Ed
Ed Seykota is interviewed by Jack Schwager in Schwager's book, Market Wizards. Seykota was
graduated from MIT in the early 1970s, and went on to develop the first commercially sold commodities trading system. Seykota went into business for himself, and in the years 1974-1989, managed to grow a
$5,000 trading account to over $15 million dollars. Mr. Seykota is a trading genius who has been able to
identify robust patterns of price action that repeat themselves in different markets. His quantitative and
systematic approach to trading has been an inspiration for many. Mr. Seykota is also a genius when it comes
to understanding human psychology.
Stock market
Also called the equity market, the market for trading equities.
Target cash balance
Optimal amount of cash for a firm to hold, considering the trade-off between the
opportunity costs of holding too much cash and the trading costs of holding too little cash.
Thin market
A market in which trading volume is low and in which consequently bid and asked quotes are
wide and the liquidity of the instrument traded is low.
Third market
Exchange-listed securities trading in the OTC market.
Tight market
A tight market, as opposed to a thin market, is one in which volume is large, trading is active
and highly competitive, and spreads between bid and ask prices are narrow.
Traders
Persons who take positions in securities and their derivatives with the objective of making profits.
Traders can make markets by trading the flow. When they do that, their objective is to earn the bid/ask spread.
Traders can also be of the sort who take proprietary positions whereby they seek to profit from the directional
movement of prices or spread positions.
Turnover
Mutual Funds: A measure of trading activity during the previous year, expressed as a percentage of
the average total assets of the fund. A turnover ratio of 25% means that the value of trades represented onefourth
of the assets of the fund. Finance: The number of times a given asset, such as inventory, is replaced
during the accounting period, usually a year. Corporate: The ratio of annual sales to net worth, representing
the extent to which a company can growth without outside capital. Markets: The volume of shares traded as a
percent of total shares listed during a specified period, usually a day or a year. Great Britain: total revenue.
Two-sided market
A market in which both bid and asked prices, good for the standard unit of trading, are quoted.
Upstairs market
A network of trading desks for the major brokerage firms and institutional investors that
communicate with each other by means of electronic display systems and telephones to facilitate block trades
and program trades.
Weak form efficiency
A form of pricing efficiency where the price of the security reflects the past price and
trading history of the security. In such a market, security prices follow a random walk. Related: Semistrong
form efficiency, strong form efficiency.
Yard
Slang for one billion dollars. Used particularly in currency trading, e.g. for Japanese yen since on
billion yen only equals approximately US$10 million. It is clearer to say, " I'm a buyer of a yard of yen," than
to say, "I'm a buyer of a billion yen," which could be misheard as, "I'm a buyer of a million yen."
basic earnings per share (EPS)
This important ratio equals the net
income for a period (usually one year) divided by the number capital
stock shares issued by a business corporation. This ratio is so important
for publicly owned business corporations that it is included in the daily
stock trading tables published by the Wall Street Journal, the New York
Times, and other major newspapers. Despite being a rather straightforward
concept, there are several technical problems in calculating
earnings per share. Actually, two EPS ratios are needed for many businesses—
basic EPS, which uses the actual number of capital shares outstanding,
and diluted EPS, which takes into account additional shares of
stock that may be issued for stock options granted by a business and
other stock shares that a business is obligated to issue in the future.
Also, many businesses report not one but two net income figures—one
before extraordinary gains and losses were recorded in the period and a
second after deducting these nonrecurring gains and losses. Many business
corporations issue more than one class of capital stock, which
makes the calculation of their earnings per share even more complicated.
dividend yield ratio
Cash dividends paid by a business over the most
recent 12 months (called the trailing 12 months) divided by the current
market price per share of the stock. This ratio is reported in the daily
stock trading tables in the Wall Street Journal and other major newspapers.
Securities and Exchange Commission (SEC)
The federal agency that
oversees the issuance of and trading in securities of public businesses.
The SEC has broad powers and can suspend the trading in securities of a
business. The SEC also has primary jurisdiction in making accounting
and financial reporting rules, but over the years it has largely deferred to
the private sector for the development of generally accepted accounting
principles (GAAP).
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