The language of trading

Trading comes with its own language and you’ll need to understand a few key concepts. Our jargon buster highlights some of them to help you get off to good start.

Broker – while the image of a broker is someone in a sharp suit who would call if they had a hot tip before heading off to lunch, today’s brokers are just as likely to be a machine. Brokers are any company or individual that buys and sells for someone else. That could be anything from artwork to insurance, but in this case applies to trading on financial markets. The broker will usually take a commission for each deal.

Bid-ask spread – also known as the ‘bid offer spread’, this is the difference between the price at which the broker is willing to buy an asset and the price they are willing to sell. For example, a broker may sell BP shares at 300p and buy them at 290p. That 10p difference is the spread and is often how the broker makes their money alongside commission payments. If individuals are selling a stock they will get the bid price and if they’re buying they’ll get the ask price. The bid/ask spread tends to be wider for less liquid instruments and tight for large blue chips.

Hedge – This is not the green and leafy variety, but a means to manage risk in a portfolio. A trader will put ‘hedges’ in place to protect themselves against the risk that a trade goes significantly against them. If they were nervous about short-term sell-offs in financial markets, for example, they could use derivative instruments (futures, options or contracts for difference to protect against the risk of losses elsewhere in their portfolio. There are many different types of hedging strategy: diversification can be a hedging strategy in itself, while investing in gold is a common move made to hedge against inflation.

Intraday – Literally ‘within the day’, intraday is when a series of actions happen on the same day. In this context, it is used when a trader buys and sells a position within the same trading day. It is often used to profit from short-term changes in the share price. For example, if a company were to announce excellent trading results, but the share price was slow to react, a trader might buy in the morning only to sell out in the afternoon when the share price had caught up.

Leverage - Leveraged trading is when a small amount of capital is used to gain exposure to larger trading positions. A position with 5:1 leverage would mean that the trader would have, for example, £5,000 of exposure, while putting up just £1,000 in capital. It means investors can make a lot of money for a relatively small outlay, but it also means they can make significant losses – sometimes many times more than their initial stake.

Margin - is the capital you need to put down with the broker to sustain open trading positions. It will be calculated as a percentage of your overall exposure to an asset. The requirements will vary from broker to broker and from asset class to asset class. You may be required to top up your margin payments if a position goes against you. Equally, the broker may wind up the trade if the margin call exceeds a person’s available funds.

Short/Long - If an investor is ‘long’ on a particular financial instrument, it means they are positioned for a rise in price. If they are ‘short’, it means they are positioned for a fall in price. These positions can be achieved by buying the asset directly or using derivative instruments.

Volatility – is a measure of how much a share price moves. It is often used as a proxy for risk – higher volatility equals higher risk – but it should be noted that volatility can go in either direction. A stock can still be volatile but move higher. It is possible to trade volatility. Indices such as the VIX allow traders to profit from rising or falling volatility and they can be a way to hedge risk in difficult market conditions.