Authorised and regulated by the Financial Services Authority
Glossary of terms found on this website and in our download materials (e.g. CFD Guide).
AFTER HOURS |
Although markets have fixed guaranteed dealing times, certain issues can be traded outside of these times. In the UK, for instance, the equity market is open between 8am and 4pm, but several shares can be dealt outside these times. It is worth noting that spreads on trading are usually wider after hours. |
AT BEST |
An order to deal at the best buying or selling price available in the market at the time. Also known as ‘at market’ |
AT MARKET |
An order to deal at the best buying or selling price available in the market at the time. |
BETA |
The measure of historic volatility |
BID PRICE |
The selling price in the market. |
CFD |
Contract For Difference. A CFD is an agreement between a broker or marketmaker and an investor to pay the difference between the opening and closing price of a contract. With a CFD, the investor does not take delivery of the underlying shares, and thus there is no stamp duty to pay. CFDs are a derivative instrument and considered higher risk than the straightforward purchase or sale of the share. |
CFD PRICING |
CFDs are priced the same as that of the underlying instrument. |
CURRENCY CALCULATIONS |
At the end of each day, the ‘mark to market’ values for each instrument are calculated in the base currency i.e. FTSE 100 index in sterling, US stocks in dollars, and so on. The final totals are converted into the investor’s chosen currency to which margin values are then calculated. |
DAY TRADING |
The opening and closing of trades within a trading session. This incurs no financing charges. |
DEPOSIT |
Also known as the initial margin, this represents the minimum amount that must be placed on deposit by the investor to cover the opening of a position. It varies between 1% and 20% of the contract value according to the type of instrument, and is also known as the NTR or Notional Trading Requirement. |
DERIVATIVES |
Trading vehicles or contracts derived from an underlying instrument, such as a share or index. CFDs are derivatives, and are considered high risk investments. |
DIVIDENDS |
For CFDs, net dividends are credited on long positions held on the ex-dividend date, and deducted on short positions. Currently, UK dividend adjustments are paid and deducted at 90% of the gross dividend. |
EX-DIVIDEND |
When a company announces a dividend, there is a gap between the day the books close and the payment date, giving the registrar time to arrange the dividend payments. The first date is known as the ex-dividend date, and all shareholders or CFD long positions held prior to this date receive the dividend. On the ex-dividend day, the opening market price is reduced by the amount of the dividend. Purchases on or after this date are termed ex-dividend and do not attract the payment. Dividends due on CFD long positions are normally paid on the ex-dividend date rather than having to await payment day. For short positions, dividends are deducted accordingly. |
FINANCING |
CFDs often involve buying using margin. The purchase needs to be financed, and charges are levied daily on long positions at a rate related to LIBOR. Where a trader takes a short position, financing is paid back in certain cases, and the amount here is related to LIBID. |
FUNDAMENTAL ANALYSIS |
The forecasting of future values based on the analysis of economics, industry trends and corporate valuations. |
GAP |
A gap occurs where a market or share closes at a certain level, but opens the next session at a level not seen within the previous session. This creates a gap, or an area where there has been no trading. It has implications for margin, as the sharp movement can create a margin call. Also, it may trigger stop losses, and the actual closing stop trade will be related to the opening level of the session, rather than the stop requested. To avoid this, a Guaranteed Stop should be used. |
GEARING |
Also known as leverage, using a deposit to magnify gains and losses. For traders, it offers potentially higher risk and reward. |
GFD |
Good For The Day. An order left open until the end of the trading day. |
GILTS |
Government stocks. |
GTC |
Good Till Cancelled. An order left open until executed or cancelled. |
GUARANTEED STOP |
An order to close a position at a guaranteed level. With a normal stop order, the closing trade may be worse than the stop placed, due to an external shock, or sharp overnight move resulting in a gap opening. Guaranteed stops mean that the counterparty takes the risk, not the investor. There is an increased commission payable for this, and the instruction can only be given at the opening of the trade. |
HEDGING |
Taking a position to protect existing open positions. For instance, an investor may have a long term portfolio of UK shares, but feels the UK market may fall in the short term. The solution is to sell (also known as going short of) the FTSE 100 index CFD. If the Index falls as expected, the investor has benefited by hedging against possible losses on his individual shares. |
INDEX CFDS |
Contracts based on an index such as FTSE 100 index. Trading Index CFDs enables investors to take a view on the wider market, and is useful both for speculation and hedging. |
INITIAL MARGIN |
Also known as the deposit, this represents the minimum amount that must be placed on deposit by the investor to cover the opening of a position. It varies between 1% and 20% of the contract value according to the type of instrument, and is also known as the NTR or Notional Trading Requirement. |
LEVERAGE |
Also known as gearing, using a deposit to magnify gains and losses. For traders, it offers potentially higher risk and reward. |
LIBID |
London Inter Bank Bid Rate |
LIBOR |
London Inter Bank Offered Rate. |
LIMIT ORDER |
An order to sell a position at a specific level above the current price, or to buy a position at a specific level below the current price. |
LONG |
A positive position, or holder of an instrument. |
MARGIN |
This represents the minimum amount that must be placed on deposit by the investor at any time to cover outstanding positions. It is made up of the initial margin, also known as the deposit, representing the required percentage of the contract value, and the variation margin which reflects the movement of the underlying instrument during the trade. |
MARGIN CALL |
Where the loss on a position results in a shortfall of margin held, the investor will be asked to deposit further margin. Failure to do so can result in the position being closed at the best price in the market. |
MARKET SPREAD |
The normal difference between the buying and selling price. |
MARK TO MARKET |
The price level of each underlying instrument at the close of the trading session. This figure is used to calculate margin each day. |
MID PRICE |
Mid point between the offer price and bid price. |
NTR |
Notional Trading Requirement. The amount of margin required for specific instruments. Also known as initial margin. |
OCO |
One Cancels Other. This is a combination of two orders, for instance where an investor might wish to buy more shares if the price rises above a certain level. To protect the long position, he may place a sell stop at a lower level, and if triggered before the buy order, the latter is naturally cancelled. |
OFFER PRICE |
Buying price in the market. |
OPEN OFFER |
An issue of shares offered to existing investors. The offer can be taken up or lapsed, but not sold in the market. Holders of CFD long positions receive either the extra new shares or an equivalent cash sum. |
PAIRS TRADING |
Taking advantage of perceived mispricing within the market. For instance, one stock with similar characteristics to another may be priced fundamentally cheaper, which often happens within industry sectors. A trader may take advantage by buying the first (going long) and selling the second (going short). If the anomaly is rectified over time the trader should profit from the mispricing. |
PIP |
The smallest price movement on a currency trade. PIP stands for ‘price interest point’. |
REAL TIME |
Live prices quoted without a time delay. |
RIGHTS ISSUE |
An issue of shares offered to existing investors on a pro-rata basis. The rights can normally be taken up, lapsed, or sold in the market. Holders of CFD long positions receive either extra new shares or an equivalent cash sum. |
SECTOR CFDS |
CFDs offered on industry sectors such as banks, pharmaceuticals, and oil & gas. |
SELLING SHORT |
Taking a negative, or short position, without already being a holder. The intention is to buy back at a later stage for a profit. |
SHAREHOLDER RIGHTS |
Holders of CFDs have no voting rights and receive no certificated documentation or perks. Otherwise, holders are entitled to dividends and other corporate events in the same way as shareholders. |
SHORT |
A negative position. The trader has effectively sold an instrument without holding it, the intention being to buy it back at a later stage. |
SPECULATION |
Trading to profit from an expected movement in an underlying instrument. |
STAMP DUTY |
A Government tax on the purchase of certain items. In the UK, duty is 0.5% for UK shares under current legislation. |
STOP LOSS |
A level at which a trader wishes to close a position. Stop losses can be set to sell below the current price or buy above it. |
STOP ORDER |
An order to close a position, selling at a specific level below the current price, or buying at a specific level above the current price. |
TAX EFFICIENCY |
CFDs can be useful for deferring Capital Gains Tax (CGT). Where an investor has a longstanding holding in a stock, an immediate sale may incur a hefty CGT bill. An alternative is to open a short CFD position, enabling the investor to hedge all or part of the underlying holding without having to immediately crystallise the gain. The benefits are that the investor receives financing interest on the short CFD, and can choose when to crystallise gains without worrying over adverse price movements. |
TECHNICAL ANALYSIS |
The forecasting of future price movements based on examination of past share price patterns, sentiment and historical technical indicators. |
TICK |
The smallest price movement on a stock or index trade. |
TRADING HOURS |
These reflect normal market opening hours i.e. 8.00am -16.30pm for the UK equity market and 14.30pm – 21.00pm for the US equity market. Certain shares and indices can be traded outside of these hours. |
TRANSPARENCY |
The clear definition of trade prices, commissions and financing charges reflecting actual market prices with no hidden extras. |
VARIATION MARGIN |
The required margin on each trade varies according to the movement of the underlying instrument. This profit or loss is added to or subtracted from the initial margin each day and is called variation margin. When the trade is closed total variation margin reflects the profit or loss on the overall trade. |
VOLATILITY |
Related to risk, volatility is a measure of how much one instrument moves in relation to another. For instance, UK Gilts are less volatile than technology stocks, and are thus less risky. Each instrument’s historic volatility is compared to its underlying market. This figure can be tabulated and is known as Beta. Betas are important in assessing money management and risk for portfolios. |
VWAP |
Volume Weighted Average Price. This enables market participants to gauge the underlying supply and demand for a stock by measuring average price dependent on the size traded. This is useful when there are numerous orders in place at varying sizes and prices in the market. |
