Trading Terminology

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Trading Terminology Glossary

10-K - the 10-K is a comprehensive report filed annually by a publicly traded company about is

financial performance and is required by the SEC. This type of report contains much more detail

than a company's standard annual report.

Acquisition - An acquisition is when one company purchases most or all another company's
shares to gain control of that company. Purchasing over 50% of the available shares and assets

allows the acquirer to make decisions about the newly purchased assets without the need of
approval from the other shareholders of that company.

After-Hours - After-Hours trading starts at 4pm EST after the market closes. This session can run

until as late as 8:00pm, however volume typically thins out much earlier in this session.

Alternative Investment Market (AIM) - This was first established in 1995 by the London Stock

Exchange as a way for new firms to gain access to public funds.

Altman Z-Score - This was created in the 1960s by Edward Altman, this score indicates the

probability of a company entering bankruptcy within the next two years. It uses profitability,
leverage, liquidity, solvency, and activity to predict the likelihood of a company becoming
bankrupt.

American Depositary Receipt (ADR) - An ADR enables US investors to access ownership of

foreign public companies. They are beneficial for foreign companies since it enhances investor
interest in their shares beyond their countries market.

Amortisation - Amortisation has two meanings, firstly it is the practice of reducing the value of

assets to properly reflect their value over time. Secondly it can mean the servicing of debt in
regular increments.

Annual Report - An annual report is a document that public companies must provide to its

shareholders annually, it describes their operations and financial conditions.

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Annuity - An annuity is a product that can provide you with a lifetime income, typically on

retirement. They are viewed to hedge against longevity risk, or the potential for one to outlive his

or hers invested assets. Social securities or defined pension benefits are examples of this.

Alpha - Alpha is the measurement of the performance of an investment in relation to a benchmark

index. It is often referred to as a percentage, an alpha of 1% means that the return on investment
was 1% better than the benchmark.

Arbitrage - This is a technique used to take advantage of differences in price in substantially

identical assets across different markets or instruments.

Assets - An asset is a resource with economic value that an individual, corporation or country

owns or controls with the expectation that it will provide a future benefit. Assets are reported on

a company's balance sheet and are bought or created to increase a firm's value.

Auditor - The law requires an independent person (an auditor) to sign off that a firm's financial
statements are true and fair and have been prepared using the relevant legislation.

B/C Share Scheme - Companies occasionally hand cash back to shareholders by issuing new
types of shares, typically known as B shares and C shares. Each shareholder has the choice of
which type of share they wish to receive.

Backwardation - If the current cash price for an asset slips above the price for forward delivery.

Balance of Payments - This refers to the accounts that sum up a country's financial position
relative to other countries.

Balance Sheet - (2/3) A balance sheet is a financial statement that reports a company's assets,

liabilities and shareholders' equity at a specific point in time. It provides a snapshot of what a
company owns and owes as well as the amount invested by shareholders.

Bearish - A bearish investor is someone who believes the market is headed downwards and will

attempt to profit from the decline of stock prices. Bears are pessimistic about the state of a given

market; therefore they 'borrow' shares from their broker who then sell it at the current market

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price. If the stock falls in price, the bear will return the shares to their broker and net a profit, this

is called 'shorting'.

Beta - Beta is a way to measure the relative risk of a share.

Bid-Offer Spread - This is sometimes called the bid-ask spread, it is simply the difference between
the price at which you can buy a share and the price that it can be sold at. If the bid is $2 and the

ask is $2.20 then the spread is $0.20.

Bonds - A bond is a type of debt instrument issued and sold by a government or company to

raise money. Investors who buy bonds are paid interest which for bonds are known as a 'coupon'.

Bonus Issue - This is most common among British companies; wherein free additional shares are
added to the positions of existing shareholders.

Breakeven - This is the price that an asset must hit in order to enable an option buyer to recover

their premium

Bullish - A bull is an investor that thinks the price of a stock is subject to rise due to either technical

or fundamental analysis. Investors with a bullish approach purchase shares under the assumption
that they can sell it later for a higher price. Bulls look to profit from the upward movement of a

stock.

Call Options - These allow the holder to buy the asset at a stated price within the specific

timeframe.

Candlesticks - A candlestick is form of price chart used in technical analysis that displays the high,
low, open, and closing price of a stock within a specific timeframe. It originally formed from

Japanese rice merchants and traders to track market prices and daily momentum hundreds of

years before being a norm in the U.S.

Capital Gain - Capital gain is an increase in a capital asset's value. It is considered to be realised

when you sell the asset. A capital gain can occur on any security that is sold for a price higher than

the ask price that was paid for it. Capitals gains are realised once the asset is sold, unrealised gains

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and losses demonstrate an increase or decrease in an investment's value but has not yet triggered

a taxable event (exiting the trade).

Cash flow - Cash flow is the net amount of cash and cash-equivalents being transferred into and

out of a business. A company's ability to create value for shareholders is determined by its ability
to generate positive cash flows.

Cash Flow Statement - (3/3) A cash flow statement is a financial statement that provides

aggregate data regarding all cash inflows a company receives from its ongoing operations and

external sources of investments. It also provides cash outflows that pay for business activities and
investments throughout a specific period.

Cash in/outflows - Cash in/outflows suggest the net amount of cash being transferred into (Cash

inflow) or out of (Cash outflows) the company.

Cognitive Bias - Humans use mental shortcuts (heuristics) to make a quick decision. These work

in many circumstances, but when it comes to investing, they can be a major handicap due to
irrationality.

Commodity - A commodity is a basic good used in commerce that is interchangeable with other

goods of the same type. Examples of commodities are: Grains, Gold, Oil, and Natural gas.

Commodity Forwards - Forward contracts are non-standardised agreements between two

parties, concerning the future delivery of a commodity for a set price. These contracts are
customisable, they are not traded through centralised exchanges and are therefore considered to

be over the counter instruments.

Consolidation - From a technical analysis perspective, consolidation refers to the oscillation of an

asset between a well-defined pattern of trading i.e., a consistent rate of up and down.
Consolidation is interpreted as market indecisiveness, which ends when the assets price either

breaks resistance or support.

Convexity - Convexity is a concept in finance where there are non-linearities in a potential output
after adjusting an input variable.

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Correlation - This describes the mutual relationship between two independent values. In trading,

it is used to find out whether there is a relationship between two variables and if there is, what

kind of relationship there is. -1 represents a negative correlation, 0 implies no correlation and 1
suggests a positive correlation.

Currency Risk - This stems from the fluctuation of the exchange rate between two currencies.

Companies that engage in cross-border operations are most exposed to currency risk. Such

operations may experience unexpected profit or loss due to currency rate fluctuations.

Day Trading - Day trading is a form of trading whereby an individual will execute trades either

long and/or short on intraday (within the day) market price action. A day trader will typically not

have any open positions after the market closes.

Defensive Stocks - Defensive stocks are based on underlying assets which tend to be less prone
to economic cycles. Considering this, they're generally invested in when traders see an economic
slowdown approaching and want to hedge their portfolios.

Deflation - Deflation occurs when the nominal prices of goods and services drop. Deflation is a
positive from a consumer's perspective as it directly boosts the purchasing power. However, it can
have a negative effect on the economy.

Delta - Delta is the ratio that compares the change in the price of an asset, usually marketable
securities, to the corresponding change in the price of its derivative. For example, if a stock option

has a delta value of 0.65, this means that if the underlying stock increases in price by $1 per share,
the option on it will rise by $0.65 per share.

Depreciation - Depreciation is the accounting practice of spreading out the cost of a fixed asset

over time and deducting it from taxable income.

Derivatives - This is the collective term used for a wide variety of financial instruments whose

prices derives from or depends on the performance of underlying assets, markets or investments.

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Diversification - This is an investment strategy focused on risk mitigation, it calls for the creation

of a portfolio that contains a variety of investments. The aim of this is to neutralise negative yields

by the positive yields of other investments in the portfolio.

Elliot Wave Theory (EWT) - This theory makes use of fractal and repetitive patterns to predict
future market movements. It was developed in the 1930s by Ralph Nelson Elliot who recognised

the fact that investors' psychology gives rise to certain 'wave' patterns in stock price action.

Equity - An equity represents the amount of money that would be returned to a company's

shareholders if all the assets were liquidated and all the company's debt was paid off in the case
of liquidation. In a case of acquisition, equity is the value of company sales minus any liabilities

owed by the company not transferred with the sale. Equity can be found on a company's balance
sheet and is the most common data analysed to assess financial health of a company.

Exchange-Traded Funds (ETF) - These are baskets of securities that act like securities themselves.

They track an underlying index (comprised of all the securities covered by the ETF) and they are
marketable. There is no limit on what an ETF can contain, for example: stocks, bonds, and

commodities.

Exit Strategy - An exit strategy is a contingency plan that is executed by investors, traders,

business owners etc. to liquidate a position in a financial asset once predetermined criteria have

been met or exceeded. For day traders, a stop loss/limit is a form of exit strategy since they are
choosing when to exit the trade based on a certain criterion (price) being met.

Exponential Moving Average (EMA) - An EMA is a type of moving average that places a greater
weight and significance on the most recent date points relevant to your time frame. EMA's react

more significantly to recent price changes than a simple moving average. It is used to create buy
and sell signals based on the crossover and divergences from the historical average.

Financial Instruments - Financial instruments are assets that can be traded, or they can also be

packages of capital that may be traded. Most types of financial instruments provide efficient flow

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and transfer of capital all throughout the world's investors. These assets can be cash, a contractual

right to deliver or receive cash.

Float - Float refers to the regular shares a company has issued to the public that are available for

investors to trade. A company's float is an important number for investors since it indicates how
many shares can be bought and sold by retail investors (us!). Float does not include restricted

shares, these are shares that are on a sale restriction, meaning that they may be owned by insiders
of the company. The less shares in the market, the higher the volatility!

Foreign Exchange Reserves (FER) - FERs are foreign currency funds and various foreign assets
held by a country's central bank or other monetary authority. Their purpose is to allow the said

authority to pay its liabilities as such liabilities may arise from the currency issued by the central

bank.

Fundamental investing - Researching a company and their revenue reports, data, headlines etc.

and using this information to make an educated decision on a trade.

Futures - Futures are derivative financial contracts that obligate the parties to transact an asset at

a predetermined future date and price. The buyer must purchase, or the seller must sell the
underlying asset at the set price, regardless of the current market price at the expiration date.

Gap Scanning - Gaps are areas on a chart where the price of a stock moves sharply up or down
with little to no trading in between. As a result, the asset's chart shows a gap in the normal price
pattern, these gaps can then be exploited for profit by traders.

Hedge - A hedge is an investment that is made with the intention of reducing the risk of adverse
price movements in an asset. Typically, a hedge consists of taking an offsetting or opposite

position in a related security. While hedging reduces the potential risk of losing money, it also

chips away at potential gains.

Income Statement - (1/3) An income statement AKA 'profit and loss statement' is an important

financial statement used to report a company's financial performance over a specific accounting
period e.g., first quarter (Q1).

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Index/Indices - Market indices are a hypothetical basket of securities which provide a relevant

snapshot of a given market. The value of an index reflects the values of its included securities.

Individual Savings Account (ISA) - Individual savings accounts are a way of saving and investing

without paying income tax or capital gains.

Information Ratio - Sometimes referred to as the appraisal ratio, works to measure the risk-

adjusted return of a financial asset portfolio (a collection of assets)

Interest Rates - An interest rate represents the amount of interest that is due per period in

relation to the amount borrowed. Interest rates can refer to any period, but it generally takes the
form of an annual percentage.

Leverage - Leverage occurs when using borrowed capital as a funding source when investing to

expand the firm's asset base and generate returns on a risk capital. This strategy involves using

borrowed money to increase the potential return of an investment. Leverage can be referred to
as the amount of debt a firm uses to finance assets.

Liabilities - A liability is something a person or company owes, usually an amount of money.

Liabilities are settled over time via the transfer of economic benefits such as money, goods, or
services, Liabilities include loans, mortgages account payable, and accrued expenses.

Liquidity - Liquidity is the term used to dictate the ease of which an asset or security can be
converted into ready cash without affecting its market price. Liquidity describes the degree to
which an asset can be quickly bought or sold in the market without it affecting its intrinsic value.

Cash is considered the most liquid asset because it can most quickly be converted into other
assets.

Momentum Trading - Momentum trading is a strategy that looks to capitalise on a stocks

momentum to enter a trend as it is picking up movement in a certain direction. Momentum refers

to the price trend continuing either to rise or fall whilst considering the price and volume
information.

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Moving Average (MA) - Generally speaking, the moving average helps to identify average price

data, by calculating the moving average, the impacts of random, short-term fluctuations on the

price of a stock are mitigated as you have an understanding of the movement of a stock price.

Options - Options are financial instruments that are derivatives based on the value of underlying

securities such as stocks. An option contract offers buyers the opportunity to buy or sell the

underlying asset. Unlike futures, the holder is not required to buy or sell the asset if they choose

not to

Paper Trading - Paper trading is a simulated trade that allows new investors to practice their

strategies without the risk of losing money. The term refers to when aspiring traders would

practice on paper before making real trades with real money. Paper trading allows you to see
whether or not your strategy is working.

Pattern Day Trader (PDT) - The PDT rule is a regulation for traders using Financial Industry
Regulated Authority (FINRA) regulated brokers that execute four or more day trades over the span

of five business days using a margin account. Pattern day traders are required to hold $25,000 in
their margin accounts to bypass the PDT rule. Breaking this rule will result in a 90 day ban from

your platform.

Pre-Market - The pre-market is the period of trading activity that occurs before the regular
market session opens. The pre-market occurs between 8:00am and 9:30am EST each trading day.

Many day traders watch the pre-market activity to judge the strength and direction of the market
in anticipation for the regular trading session.

Pre-Market Scanning - Pre-market scanning allows you to identify potential stocks of interest

with the help of a screener, a good analogy of this is relating it to the way avid horse race betters
choose their horse, they will analyse the horses performance prior to the race (market open) and

make a decision. Of course, you cannot predict which horse (stock) will make you money, but you

can get a good sense of which one to back.

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Premium - Premium can mean several things in finance, the first being the total cost to buy an

option. A premium is also the difference between the price paid for a fixed-income security and

the security's face amount at issue.

Price Earnings Ratio (P/E Ratio) - This is the ratio of a company's share price relative to its

earnings per share.

Put Options - These allow the holder to sell the asset at a stated price within the specific

timeframe.

Resistance Line - The resistance line is the price at which an asset meets pressure from sellers at

a general price zone. New information can change the markets attitude towards the price of an

asset and can result in the price breaking the resistance line. The resistance line can be charted by

drawing a line along the highest highs for a specific time period.

Risk Reversal - Risk reversal is an options strategy designed to hedge directional strategies. For

example, a long position will be hedged two-fold in a risk reversal scenario.

Scalping - Scalping is a trading strategy geared towards profiting from minor price changes in a
stock's price. Traders that follow this strategy tend to make much more trades in a day when

compared to a trader that trades gappers for example as they believe small movements in stock
price are easier to catch than large ones.

SEC Form 10-Q - The SEC form 10-Q is a comprehensive report of a company's performance that

must be submitted quarterly by all public companies to the Securities and Exchange Commission

(SEC).

Security - Securities are negotiable financial instruments that hold some form of monetary value
i.e., stocks.

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Shareholder - A shareholder or 'stockholder' is a person or company that owns at least one share

of a company's stock, which is known as equity. Due to shareholders essentially owning a segment

of a company, they reap the benefits of a business' success.

Sharpe Ratio - The Sharpe ratio is a way to determine how much return is achieved per each unit
of risk. It is useful to, and can be computed by, all forms of capital market participants to evaluate

their performance from day traders to long-term buy-and-hold investors.

Stock - A stock (also referred to as equity) is a security that represents ownership of a fraction of

a corporation. The owner of the stock is entitled to a proportion of the corporation's assets in
relation to how much stock they own. Units of stock are called 'shares'.

Stock Screener - A stock screener is a set of tools that enable investors to quickly gather

information about a range of stocks that relate to the investors search criteria. Some brokers offer
stock screeners on their platform, however there are independent stock screeners available. Stock

screeners can convey volume of a stock, price changes, float and much more.

Supernova Pattern - The supernova is an explosion in stock price that creates many opportunities

to buy on the way up and short on the way down. Supernovas can be triggered through world
events, social media hype and company news. Stocks that experience supernovas hold massive

volatility and liquidity and therefore are risky if investors join the hype too late (GME as a prime

example).

Support line - The support line refers to the price level that an asset does not fall below within a

specific timeframe. The support level is created by buyers entering the market whenever the asset
dips to a lower price. Using technical analysis, the support line can be identified by drawing a line

underneath the lowest lows for the specific timeframe. The support line can be horizontal, slanted,
or up and down following the price trend.

Swing Trading - Swing trading is a style of trading that attempts to capture short-term to

medium-term gains in a financial instrument over a period of a few days to several weeks. Swing

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traders are more likely to use both fundamental and technical analysis to influence an execution

of a trade.

Technical Analysis investing - Technical analysis focuses on understanding trends, price

movement, and volume. Technical analysis is often used to generate short-term trading signals
using charting tools, scanners and indicators.

Time frame - A time frame refers to the type of time per open and close of a stock that traders

use to determine trends in the market. Day traders typically use smaller time frames such as 1min
and 5min as it is relevant to their trading style. However, it is important to also refer to longer

time frames such as 1hour and 1day to get a better indication to the stocks overall trend.

Treynor Ratio - The Treynor ratio, also known as the reward-to-volatility ratio, is a measure that

quantifies return per unit of risk. It is similar to the Sharpe and Sortino ratio.

Underlying Security - An underlying security is a stock or bond on which derivative instruments,

such as futures, ETFs and options are based. It is the primary component of how the derivative

gets its value.

Volume - Volume is the amount of an asset or security that changes hands between buyers and

sellers over a period of time. Trading volume and changes to volume over a period of time, are a

vital part of technical analysis.

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