Important CFD Terminology

9cfd1If you are planning to trade CFDs, then you are well-advised to acquire an understanding of the important terminology that is associated with this intriguing subject.  The following list identifies and defines some of the key terms:

Blue chip stock: A firm that is classified as traditional and not technical. They are conservatively managed, profitable and large corporations  

Contract for difference (CFD): An agreement conducted between two parties, who are the seller and buyer, which specifies that the seller will pay the buyer the difference between the present price of a security and that of its final value when the contract expires. A CFD is a derivative implying that no physical ownership of the asset is required during the entire transaction. CFDs provide the advantages of minimizing capital investment while enhancing profit potential.

Gearing: This is the ratio representing a firm’s long-term assets to its total capital.

Hedging: This is the technique of instigating an investment activity with the intent of safeguarding against a loss from another. While hedging can minimize the size of potential losses, it also restricts profits.

Limit orders: Instructions that define the maximum and minimum price at which you want to sell or buy CFDs.

Over the Counter: OTC defines market conditions in which CFDs are traded either by telephone and computer networks that connect brokers dealing in bonds and stocks, etc. No central exchange floor is utilized.

Other important terminology is now represented:

Ask: The selling price of an underlying asset.

Candlesticks: A famous methodology for representing the daily trading price range (open, high, low, and close).

Carry: The cost incurred for maintaining an underlying asset active from one day to the next.

Bear Market: Represents a time period during which the value of underlying assets continuously declines.

Bear: A trader who is of the opinion that the values of particular underlying assets will fall.

Bid: The buying price of an underlying asset.

Bid/Ask Spread: The point difference between the ask value and bid value of an underlying asset.

Broker: An agent used to action orders such as the buying and selling of CFDs.

Bull: A trader who is of the opinion that the values of particular underlying assets will rise

Bull Market: Represents a time period during which the value of an underlying asset will continuously appreciate. 

Correlation: A statistical term that represents a relationship between two underlying assets

Currency Pair: Represents how two currencies trade against each other.

Day Trader: A trader who attempts to undertake short-term price movements for profit

Drawdown: The reduction in equity produced by a losing CFD trade. 

ECN broker: Provides traders with access to an electronic CFD trading network.

Equity: Net worth equaling total assets minus total liabilities.

Foreign Exchange: Used to buy and sell currency pairs. 

Fundamental Analysis: The study of economic factors that affect the values of underlying assets.

Fundamental Trader: An investor who favors using fundamental analysis 

Hedge: A term used to define the action of reducing risk by utilizing two counterbalancing underlying assets.

Intra-day Trading: Positions that are entered and exited within the same trading day 

Liquidity: Term used to assess the active volume of active traders who are buying and selling CFDs.

Long: Involves the purchase of the underlying asset of a CFD

Margin: The minimum deposit required to keep a CFD open.

Margin Call: A notification produced by a broker informing traders that more funds are required in order to keep their positions open.

Market Order: An order to open a new CFD trading position immediately at the best price

Overbought; Occurs after the price of an underlying assets rises to an abnormal high value after climbing in value more quickly than its usual trading patterns.

Oversold: Occurs after the price of an underlying assets drops to an abnormal low value after falling in value more quickly than its usual trading patterns.

PipThe smallest price movements used in Forex trading.

Profit Taking: Exiting a position to secure a profit

Quantitative Easing: Quantitative easing is utilized by central banks to stimulate spending within an economy.

Resistance: Price level at which an underlying asset is anticipated to sell off.

Risk Management: A strategy used to reduce financial risk.

Short: Involves the sale of the underlying asset of a CFD

Spike:An abnormal rapid movement in price. 

Spread: The difference or variance between the ask value and the bid value of an underlying asset

Stochastic Oscillator: A famous technical indicator

Stop Losses: A pre-set position at which a position will be closed in order to control and restrict financial losses.

Technical AnalysisAttempts to predict the price movements of an underlying asset by studying market data such as historical price trends, etc. 

Technical Indicators: Tools used to track and predict the movements in the values of an underlying asset.

Technical Trader: A trader who prefers using technical analysis

Trading Platforms: Sophisticated software applications used to trade CFDs usually via the internet.

Trend: The current directions of an underlying asset.

Volatility: Represents the size in fluctuation that the value of an underlying asset can achieve during a predetermined time period.

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