Glossary of terms
At CFI you trade with what is called a Margin Account. Margin is the term used when we refer to the money required to open and maintain a leveraged position in a trading account. We use the term Margin Call to describe the notification sent to a trader to inform them that the margin/funds in their account have dropped past the minimum amount required (usually because of a losing trade) to keep a trading position open. When this happens, the trader has two options, fund the account some more or close the position to reduce the maintenance margin required.
Leverage is used on margined accounts which means the amount of money you have in your account allows you to buy or sell positions that are bigger in value than the actual funds available in your balance. For example, $1,000 allows you to open a position of $100,000 which is effectively, 100 times the amount you have deposited.
Sometimes ‘on Margin Call’ can also be used as a phrase, meaning your trading funds are below the minimum margin requirement to maintain the open position. If you deposit some more money into your account it will stay open, if you do not however the position will be closed and any losses you have incurred will be fulfilled.Example of a Margin Call
You will receive a margin call if the capital in your trading account falls below 100% of your maintenance margin – usually you will be notified of this via email. We start to close positions if your margin falls below 50% of the required capital.Key Takeaways
- When a margin call occurs, the trader needs to decide if he/she will either deposit more money or close the position.
- You will receive a margin call if the capital in your trading account falls below 100% of your maintenance margin and you will need to bring it up to the minimum maintenance margin.
- Trading on margin accounts carries a high level of risk.
Learn more about margin calls
Discover CFI's margin requirements and margin call procedure.
The Margin Deposit is also known as the initial margin, deposit margin or simply the deposit. If you trade Forex, equities, commodities, or indices with a broker using leverage or 'on margin', it means you are ultimately borrowing money as you will be using [leverage] on your trades. To start borrowing that money, you need to put down a deposit.
When you start trading on margin, you only deposit a percentage of the full amount you wish to trade, starting from 0.25%, 0.5%, 1%, 2%, and so on. For example, if the leverage offered for a specific instrument you wish to trade on is 20:1, the margin that you will need to invest is 5% of your trade size. The value of the full position would be 20 times the value of the deposit required to open the trade.
The key thing to remember when trading margined products is that leverage can increase your profit, but it works the same the other way around as well, so losses will be amplified.
Margin calculators will quickly compute the margin percentage, the required margin, and the amount you need to maintain a trading position, depending on the contract size, accounting currency, and the financial assets you are trading.Example of a Margin Deposit
For example, at CFI the leverage available for retail clients on Equity CFDs is 1:10 meaning you only need to have 10% of the value of a position (the margin deposit) before entering it. This allows you to control a larger position with a smaller amount of money.Key Takeaways
- Trading on margin allows you to control a larger position with a smaller amount of money
- Calculate the margin required by your broker in advance because every broker is different
- Trading on margin, i.e. with leverage can increase your profit, but losses will be amplified as well
Market capitalization, also known as market cap, is the total value of a publicly traded company's stock. Market Capitalisation is one of the most accurate ways to measure a company's size within the stock market. Before buying a company stock you should find out everything you can about that company to gain an understanding of what can be expected for the future of that company. Market Capitalisation is also important because it is an indication of what investors are willing to pay for its stock.
When creating your trading strategy, it is usually recommended that you include a mix of companies with varying ‘market caps’ to keep your stock portfolio well balanced.
- Large-cap companies are usually valued at $10 billion or more, are well established and have a history of steady growth
- Mid-cap companies are between $2 billion and $10 billion in market value that are expected to continue to experience steady growth
- Small-cap companies are usually valued between $300 million and $2 billion and a often younger companies that focus on a niche market. Small-cap companies are generally considered the riskiest to invest in
The way one calculates a company’s market capitalisation is to take the number of shares of stock the company has issued and multiply it by the current market price of the stock. For example, if a company has issued 1 million outstanding shares with each share holding the value of $10, then the company's total market capitalization is $20 million.Key Takeaways
- Market capitalization is the total value of a publicly traded company's stock on the stock market
- It’s important to understand the different between Large-cap, Mid-cap and Small-cap companies
- Include a mix of companies with varying ‘market caps’ to keep your stock portfolio well balanced.
The Market Depth, also known as depth of market, measure provides an indication of the liquidity and market depth for a trading product. It is presented in the form of a real-time electronic list of BUY/SELL orders lined up to be transacted on a trading platform. It is useful because it gives an indication to traders of how many bids and offers have been placed for a security or currency.
Market depth can give a clear indication as to whether the market is likely to rise or fall. If there is a much larger quantity of sell orders compared to buy orders, it could mean that the price of a particular security could drop due to selling pressure.
Financial products are normally listed by volume and by price level and can help traders measure market sentiment.Example of Market Depth
If a commodity is extremely liquid and has many buyers and sellers, purchasing a large amount of that commodity will most likely not result in noticeable price movements. However, if the commodity is not very liquid and does not have a lot of demand for it, purchasing a bulk of that commodity will have a more noticeable impact on its market price.Key Takeaways
- Market Depth provides an indication of the liquidity and market depth for a trading product.
- It gives an indication to traders of how many bids and offers have been placed for a security or currency.
- Market depth shows all bids and offers, so it is a good guide to understanding market sentiment.
A market index, stock index, or stock market index is a method used to track the performance of a group of financial products in a uniformed way. The stock market index is an indication of the value of a segment of the stock market and helps investors compare actual stock prices with past prices to evaluate market performance.
Simply put a market index is a mathematical average of how a certain financial market is doing. An example of an index is if you took the weight of 10 people and then worked out the average weight, that would be an index. As people’s weights change the index would change to.Some of the market’s leading indexes include:
- S&P 500 (top 500 largest companies in the US)
- Dow Jones Industrial Average (30 largest companies in the US)
- Nasdaq Composite (3,000 stocks with a big focus on technology companies)
- MSCI World Index (all major stocks across 23 developed countries)
- Dollar Index (shows how strong the US $ is)
Investing in a portfolio of indexes can be a good way to optimize returns while balancing risk.With CFI, you can trade a diversified number of [Indices] including US, European and Asian products. If you have a certain view on a specific stock market or the stocks of a region, go for Indices as they allow you to have directional views on a large number of companies within one product, instead of buying or selling individuals stocks.
The advantage of cash indices is that they have no expiry date so you can hold them for a short period or an extended time. Furthermore, they replicate the hours of the future contracts that are traded on exchanges.Key Takeaways
- It is used by traders to describe the market, and to compare the return on investments.
- An index is a calculation taken from the prices of a group of stocks using a weighted arithmetic mean
- The S&P 500 is the largest stock market index, is the average of the US’ top 500 largest companies all rolled into one price.
A market maker, sometimes abbreviated to MM, is a company or person who quotes two-sided markets for a financial instrument, providing bid and ask offers. This term came from fixing market prices at levels needed for supply and demand to work harmoniously. To manage their risk and to generate a steady income market makers add a spread to the financial assets that they provide their traders with.
Without market makers (usually banks or brokerage companies), it would be significantly harder and take much longer for buyers and sellers to be paired with each another. It would also mean market liquidity would be reduced, making it more expensive and more difficult for traders to enter or exit positions.
Market makers generally hold a large number of a given financial product in order to cope with a high volume of market orders in a short period of time and at competitive prices. If investors sell, market makers generally keep buying, and vice versa. Market makers take the opposite side of whatever trades are being conducted at any given point in time.Example of a Market Maker
A market maker purchases 100 Apple shares at $100 each (the ask price), they then decide to sell these to a buyer at $100.05 (the bid price). Though there is only a $0.05 difference, when the volumes are big profits soon add up.Key Takeaways
- Market makers ensure there is always a two-sided market where participants can buy and sell more easily and provide a liquid market at all times.
- Marker makers take on a relatively high level of risk because of the large number of units they hold, which we could also call their “inventory”.
- Market makers quote both the buy and a sell price of a product in the hope of getting investors to trade it.
A minor currency pair is a pair of currencies from large, strong economies that do not include the US dollar. The most popular and most traded minor currency pairs include the pound, the euro, and the yen because, besides the US dollar, these are the three most traded currencies.
The Euro (EUR) is the second most held reserve currency, and the second most traded in the world. It accounts for up to 31% of daily trading volume in the market. It has maintained the status of being a major reserve currency since its introduction in 1999. An example of a minor currency pair with the euro is EUR/GBP.
The Japanese Yen (JPY) is the fourth most held reserve currency, and the third most traded in the forex market, accounting for almost 22% of the daily trading volume. The JPY is traded as a reserve currency because it remains stable during turbulent market times. An example of a minor pair with the yen is EUR/JPY.
The Great British Pound (GBP) is the third most held reserve currency, and the fourth most traded in the forex market, accounting for approximately 13% of daily trade volume. An example of a minor currency pair with the pound would be EUR/GBP.The most traded minor currency pairs that you can trade with CFI are
- Euro/British pound (EUR/GBP)
- British pound/Canadian dollar (GBP/CAD)
- Swiss franc/Japanese yen (CHF/JPY)
- Euro/Australian dollar (EUR/AUD)
- New Zealand dollar/Japanese yen (NZD/JPY)
- British pound/Japanese yen (GBP/JPY)
- Minor currency pairs have smaller market share compared to major pairs
- Theyhave lower market liquidity compared to major pairs
- They havewider forex spreads compared to major pairs
Price movements are volatile and can be a confusing place. Moving averages reduce this ‘noise’ to a minimum amount making it simpler to run your analysis of the markets. A moving average is a technical analysis indicator that blends together specific price points of a financial instrument over a set time frame. The number of data points then get divided, to give you a single trend line. It is one of the more popular technical indicators because it helps traders determine the direction of the present trend, while minimizing the effect of indiscriminate price spikes.
There are various ways to use moving averages to determine a market trend. Moving averages identify the trend and provide support/resistance levels and are based on historical data and lag the price but are not predictive. In general, shorter length moving averages are more sensitive than longer term moving averages.
- SimpleMoving Average (SMA) adds up closing values and divides these by the number of observations
- 5-day Simple Moving Average (SMA) = (sum of last five-day closing values)/5
- When a new value is included, first value drops off
- Weighted Moving Average (WMA) gives more recent values a higher weighting with the theory that it catches a new signal in shorter time than the SMA
- Change in direction rather than crossover is where the value lies
- Exponential Moving Average (EMA) uses SMA and applies a multiplier for weighting
- The financial markets must be in a trend for MA’s to provide value
- Short length moving averages provide earlier signals but are often false signals known as ‘whipsaws’
- There are three types of moving averages that should be understood: Simple, weighted and exponential