Financial Terms: 5 (and more) You Must Understand as a Trader

A Quick Financial Glossary you should find useful as a day trader too

Just like in all fields, the use of jargon is very common in the financial market. In the technology world, a term such as unicorn which refers to companies that have crossed a billion-dollar valuation is very common.

In law, a term such as plaintiff is used to refer to a person who has brought a lawsuit. In economics, a word such as parity is used instead of equality. In medicine, instead of just saying start of a disease, doctors say the onset of a disease.

In all other fields that you can think about, the use of jargons is very common.

Linguistic researchers have identified that the main reason why professionals use jargon in their careers is to distinguish themselves from ordinary people (who are not in the profession).

In this article, we will look at key financial terms you need to understand as a trader.

1. Arbitrage

Of all the terms that we find quite odd, arbitrage comes first.

In ordinary folk, the term arbitrage is a method of conflict resolution where a neutral person is used as a mediator. However, in the financial world, arbitrage is more complicated than that.

Arbitrage Trading, The “Risk Free” Method

It simply means the simultaneous buying and selling of related assets either in the same market or different geographical markets. For instance, a trader can buy United States oil while simultaneously selling short oil from Europe.

There are a number of types of arbitrage which include:

  • statistical arbitrage (based on mathematical correlation calculations)
  • merger arbitrage (which happens when two firms want to merge)
  • convertible arbitrage (where an investor can sell short a company’s share price while going long its debt)

2. Nicknames

Bonds

In the normal English, gilt refers to a situation where something is covered by a thin layer of gold. In the financial market, gilts are bonds that are issued by the United Kingdom government.

As a result of the UK’s credit rating, these bonds are known for their security. Bonds from most countries are known by their nicknames:

  • From Eurozone they are known as Bunds
  • Those from the US are known as Treasuries
  • From France are known as OATS.

Currency

Ordinarily, we refer to the United States currency as the dollar and the British currency as Pound. In the financial world, investors use different names.

The US dollar is known as the Greenback, British Pound is known as Sterling, Swiss Franc as Swissy, New Zealand dollar as Kiwi, Australian dollar as Aussie, and the Canadian dollar as the Lonnie.

Different currency pairs are also known in different terms with the GBP/USD being referred to as the Cable and the EUR/GBP as the Chunnel.

As a trader, it is important that you become acquainted to these terms because their use might lead to huge movements.

3. Alpha and Beta

In the financial world, these two terms are very important (and also are very common). In real world Alpha is the first world in the Greek alphabet while Beta is the second letter.

In the financial world, Alpha is used to refer to performance that goes against the market in a positive manner. A fund manager achieves alpha is he makes money in a declining market.

Beta on the other hand is performance that is in line with the market conditions. For instance, if the market goes up by 10% and a fund manager scores 10%, then this is known as a beta performance.

4. Quantitative Easing

QE is a term that is gaining a lot of media attention. While central bankers won’t admit it, QE is simply a strategy of printing money to spur growth. This money is used to buy millions of assets.

It was first implemented in the United States after the 2008 financial crisis. Now, EU has started a QE program too following years of secular stagnation.

5. Sweetheart deal

The world of M&E can be brutal because the buyer always want to pay less while the target company want to be paid more money. In case of a sweetheart deal, an acquirer offers to buy a company at a very friendly rate.

The opposite of this is a hostile takeover where the acquirer and the company being acquired are engaged in serious and difficult negotiations.

How to Trade Merger and Acquisitions

Other Useful Links about financial terms

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