The world of trading is full of jargon, and in an already complicated industry this can leave those wanting to find out more about the market feeling despondent. In this blog, we will take you through some of the main terms used in trading and explain what they mean.
For more information about trading with derivatives, you can watch our explanation here:
about:blankClick to accept marketing cookies and enable this contentThis video explains the concepts behind derivatives trading.
A
Accounts Receivable – a fancier way of saying money owed for a service that has been provided. Once the invoice is sent, these become assets on the providing company’s balance sheet.
Accumulator – A structure which uses a combination of options to leverage your position, giving the ability to secure a market price more favourable than currently trading
Advance Against Documents – loans made against the security of documents covering a shipment of goods
Advising Bank – handles letters of credit for foreign banks, and informs the exporter of the associated conditions of the Letter of Credit
Aggregate demand – the total demand for goods and services in a particular market environment, showing how current price relates to GDP (gross domestic product).
Aggregate supply – the total value of goods and services in a particular market environment, showing the amount of goods that can be produced at different times over a period of time.
Arbitrage – This is a means of profiting from a difference in price by buying or selling commodities in one market and selling them in another market for a higher price.
Assets – resources that are controlled or owned to create financial benefit can be called assets. In trading, the ‘asset’ being traded can vary but will still be called the asset – whether it’s sugar, packaging or an immaterial asset such as stocks or bonds.
Asset Based Lending – a method of leveraging company assets as collateral for a loan.
At the money – Also known as ATM, this is a term used to describe an options contract with a strike price that is identical to the underlying market price.
Average Life – an estimate of the average time for which an asset will be outstanding.
B
Backwardation – This is when the price of a futures contract is trading lower than the spot price. This is most commonly seen when the market becomes undersupplied
Barter – a trade where materials are traded directly for other materials
Base rate – the interest a central bank will charge commercial banks or funds for loans.
Bearish – No, it’s nothing to do with bears…this means expecting that a market will experience a downward trend, and acting accordingly.
Bear call spread – A trading strategy constructed by combining a short call option and a long call option with a higher strike. You would use this to use the advantage of downward market movement by limiting profit and loss.
Beneficiary – the person for whom a Letter of Credit is drawn
Bid – the price a trader is willing to pay for a certain asset.
Bid-Ask Spread –The difference in price between the best buy (bid) and best sell (offer) price for an asset.
Bill of Exchange – an order requiring payment from one party to another at an agreed, fixed date.
Bill of Lading – a document that establishes terms of a contract to establish terms under which freight is to be moved, at specific points for a specific price. It serves as a document of title, contract of carriage and receipt for goods. Clean Bills of Lading indicate goods received in good condition, and Foul Bills of Lading indicate they are not up to the agreed standard.
Bonded Warehouse – has been authorised by customs for the storage of goods on which payment of duties is deferred until the goods are moved
Book value – a business’ book value is its valuation based on its books (or financials). It’s also known as market capitalisation.
Broker – An independent person or company who organises and executes a financial transaction on behalf of another party.
Bullish – Nothing to do with bulls…this means expecting a market to have an upward trend, and acting accordingly. The exact opposite of being bearish.
Bull call spread – A trading strategy constructed by combining a long call and a short call with a higher strike. It takes advantage of upward market movements while limiting profit and loss. It can be traded at 0 cost initially, making it attractive.
Blue chip – This is a term often used to describe stocks and shares that are reputable, stable and long-established. The companies considered to hold this status can change over time, though it tends to be companies at the top of the sector.
Bottom line – this term refers to a business’ net income, or the total profit minus any spend. It can also refer to earnings per share (EPS), which is net income divided by the number of shares available in the company.
C
Calendar Spread – A calendar spread is the difference in the price of the same asset from one futures contract to another. For example, if the price for white sugar was $5/MT higher against the March futures contract than the May futures contract, this would be the value of the March May calendar spread.
Call Option – A contract giving the buyer the right, but not the obligation, to BUY a specific amount of an underlying contract (e.g No. 11 Futures) at a specific price (strike price) at a specific time (Option expiration date).
Carriage And Insurance Paid To (CIP) – the seller of goods also pays for cost of carriage to the agreed destination. They also insure the goods at their own cost.
Carriage Paid To (CPT) – the seller of goods also pays for cost of carriage to the agreed destination.
Carnet – a customs document allowing the holder to temporarily send goods into a foreign country without paying duties.
Cash in Advance (CIA) – payment being made before shipment of goods.
Cash flow – money passing through a company’s accounts.
Cash Price – Not to be confused with Prompt or Spot price, the cash price refers to the current price being traded for a commodity for immediate delivery off the exchange. The cash price and spot futures price should converge the closer you get to the spot futures contract expiry.
Cash With Order (CWO) – payment being made at the same time as the ordering of goods.
Closing price – the last price at which an asset was traded before market close on any particular day of trading. Closing price is often used when creating information about a market over a certain period. They can be measured against each other to read price movement over a single day.
Commercial Finance – the offering of loans to businesses by banks or other lenders, often secured by business assets, accounts receivable or unsecured loans.
Commissioning – the date on which the commodity is confirmed as delivered or received as specified in any agreements.
Commitment Fee – a fee that is payable on undrawn balances, to reserve the availability of a loan.
Common Carrier – the individual or entity that transports goods in exchange for payment.
Comprehensive Coverage – insurance that covers both commercial and political risks.
Confirmed Letter of Credit – a Letter of Credit issued by a foreign bank and accepted by a domestic bank. This ensures payment will be made even if the foreign buyer or bank defaults.
Contango – When the price of a futures contract is higher than the spot price. This is typically seen when the market is well supplied. Here we would expect the higher price of the futures contract to reflect the commodity cost of carry.
Consignment – delivery of commodities from an exporter (the consigner) to an agent (the consignee) with the agreement that the agent will sell to the benefit of the exporter. The exporter retains ownership until sale of the goods, whereupon the agent typically receives a commission.
Cost and Freight (CFR) – The seller pays for transport to the agreed port, then full risk and responsibility for the traded commoditiy passes to the buyer as soon as the goods cross the ship’s rail.
Cost Insurance and Freight – As above, but with the seller also taking out cargo insurance.
Cost of Carry – This is the cost to hold a physical commodity over time. This has a number of components including interest charges, forex costs and physical storage. It can vary greatly between firms.
Countertrade – when payment is made wholly or partly in the form of physical commodities from a foreign country.
Credit Report – a detailed document supplied by a third party, which summarises a company’s financial history and position.
Credit Risk – a risk that the insured will be unable to recover all or part of the receivables (agreed goods in the trade), or payment for them, due to an unforeseen circumstance.
Credit Risk Insurance – insurance that covers any loss or non-payment as detailed above.
Customs – an agency of government that is authorised to collect duties on imports and exports.
Customhouse Broker – an individual or company that is licenced to clear goods through customs.
D
Day order – This is an instruction to buy or sell an asset at a specific limit. The order will remain valid for the course of the day, and will either fill at the target or expire unfilled if the market does not reach the target. A day order will not continue working after the market close.
Day trading – a short-term investment strategy which closes out all trades before the market closes.
Derivative – a financial product that derives its value from the price of an underlying asset (e.g sugar).
Demurrage – a charge levied by the shipping line to the importer in cases where they have not taken delivery of the full container and move it out of the port/terminal area for unpacking within the allowed line free days.
Detention – a charge levied by the shipping line to the importer in cases where they have taken the full container for unpacking (let’s say within the free days) but have not returned the empty container to the nominated empty depot before the expiry of the allowed line free days.
Devaluation – officially lowering the value of currency in relation to other currencies.
Dispatch – a fee paid by a ship’s operator if the loading or unloading takes a different amount of time then what was agreed.
Dock Receipt – a document that acknowledges the arrival of a shipment at the carrier’s dock or warehouse.
Duty – tax that is imposed by the customs authorities of a country. The amount is ordinarily based on the value of goods, the amount of goods or a combination.
E
Exchange – the exchange is an open, organised marketplace for financial instruments including stocks, shares, commodities and derivatives. Sometimes, this term is used interchangeably with ‘the market.’
Exchange delivery settlement price (ESDP) – the price at which derivative contracts are settled (when using the exchange).
Exchange Rate – the price of one currency in relation to another.
Expiry (of a futures contract) – This is the date, explicitly communicated by the respective exchange, when a trading position automatically closes down, or expires. If a position is not closed out before expiry then a physical delivery, physical receipt or a cash settlement will be triggered, depending on exchange rules.
Export Licence – a document issued by the government that allows the holder to export certain goods to certain destinations.
F
Facility – a form of debt financing whereby a loan is given by a bank or lender to a business. The loan is used as operating capital to carry out activity such as the movement of goods.
Free Alongside Ship (FAS) – a term meaning the quoted price includes the cost of delivering goods alongside a shipment.
Free On Board (FOB) – a term indicating that the quoted price covers all expenses up to and including the delivery of goods on a ship provided by or for the buyer.
Free Trade Zone – a port that is designated by government to be duty-free.
Force Majerure – a legal clause that exempts contracted parties from performing the agreed terms if this is due to circumstances beyond their control, like war, natural disasters of global pandemics (never say never!)
Forex – Often knows as foreign exchange, it is the rate at which you can convert one currency into another. The rate may vary depending on the value date at which the forex transaction is booked for.
Forward contract – This is a contract with a defined date of expiry. It can be customised to include stipulations of a specific amount of the asset being traded.
Forward Transaction – an agreement to buy one currency and sell another at a preagreed price on an agreed date in future. These are often used to eliminate exchange risk.
Futures contract – A futures contract is an agreement to buy or sell a particular asset at a predetermined price at a specified time in the future.
G
General Agreement on Tariffs and Trade (GATT) – an agreement intended to reduce blocks between collaborating countries in terms of tariffs.
Gross domestic product (GDP) – the total value of the goods and services produced in a country over a period of time (often a year). This can be used to indicate the country’s economic position.
GTC order – This stands for `good `till cancelled` and is an instruction to buy or sell an asset at a specific limit. The order will remain valid and working in the market until it is either filled or cancelled.
H
Hedge – Not the green garden kind, this is a term to describe an investment or trade that is made to reduce your existing exposure to risk.
Historical simulation method – This is an approach to measuring VAR that uses analysis to predict price.
I
Iceberg order – When executing large futures orders in times of lower liquidity, it can be preferable to work the order slowly to ensure the best result is obtained by the client. An Iceberg order divides this large order into smaller segments, automatically working each segment in the market when the previous one has been filled.
Import Licence – a document from the government that authorises the holder to import goods into a country.
Interest Rate – a fee for borrowing money from a bank or lender, which is ordinarily a percentage of the amount borrowed.
In the money – Also known as ITM, this phrase refers to an option whose strike price is currently profitable. For example, a long call option where the market price is higher than the option strike, or vice versa for a long put option.
J
J Curve – This is a theory that says the trade deficit of a country will worsen after a currency depreciation – caused by higher prices to import from overseas and how this in the short term more than offsets the reduced import volume.
K
KYC – This stands for ‘Know Your Customer’, which is the process banks, financial institutions and the like use to verify a customer and takes place prior to onboarding or acceptance of an agreement or contract.
L
Letter of Credit – a document issued by a bank that authorises the seller of a commodity to draw an agreed amount of money under specified terms.
Leverage – This is where a market participant amplifies their exposure to the market. An example of this would be an option position, where more risk can be taken on, compared to an outright futures position. This can amplify profits, however also increases the risk of large losses.
Limit orders – These are most common type of order, and are instructions to buy or sell at a specific price or better. The priority is therefore price and not immediate execution.Limit orders carry the risk of not filling if the market trades further away from the limit. Limit orders are either `day` or `GTC` orders.
Long – This refers to a position that makes a profit if the assets market price increases – for example buying the underlying asset. Often referred to as ‘going long’ or ‘taking a long position’.
Long Butterfly Spread – This is a more complex trading strategy combining 4 options. 1 long ITM call, 2 short ATM calls and 1 long OTM call.This is equivalent to a short straddle, but losses are limited. The profit however, is unable to be as large as with a simple short straddle. We would be selling volatility in this scenario.
Long and short straddle – When going long on a call and long on a put with identical strikes, the trader will make profit if the market moves either way. The loss is therefore whatever was paid as a premium to gain the position.Here, the trader is expressing a view on volatility – executing a long straddle if they believe the market will trade higher or lower, and a short straddle if they believe it will remain rangebound.
Lot – A group of assets that is traded instead of a single asset. For example, lots of sugar come in standardised sizes, according to the market. 1 lot of white sugar amounts to 50 metric tonnes.
M
Margin call – These can be broken down into initial and variation margin calls:
Margin calls are charged by the exchange in order to limit exposure to the participants executing futures, mitigating risk of counterparty default. An initial margin is charged as a percentage of the notional commodity value, and protects the exchange from one day of market movement risk.
The variation margin is charged at the day to day change in value of the position, and must be settled the next working day by the participant. If you have bought futures and the price on the market rises, you will receive a cash call. If the market falls, you will pay a cash call. This ensures counterparty performance on the exchange.
Market order – This is the most basic order. It instructs the broker to buy or sell a security at best price currently available. The priority here is on execution, not price. This type of order is typically used for smaller orders in more liquid markets, where the participant wishes to execute their position without delay.
Monte Carlo – This is a method of measuring risk by developing a model and using it to predict future investment prices. This data is then used to predict the worst-case loss on the investment.
N
Non-current assets – an organisations’ long-term investments, which won’t be fully realised during the current accounting year. This can also mean assets such as property or land, that don’t have a fixed expiry.
O
OCO (one cancels the other) or stop-limit order – This allows many orders to be placed at once. Whichever order is filled first will cancel the others automatically. This order can be used to take advantage of volatility within a market or to stop an existing position.
Open Account – an agreement where goods are shipped to a foreign buyer without guarantee of payment. This can be quite a risky strategy.
OTC trade – An Over the Counter trade is not executed through an exchange, however as a bilateral agreement between two counterparties. This brings the advantage of flexibility over executing orders on the market, as contractual terms can be negotiated.
Option – Options are a type of derivative, and therefore are also specifically linked to an underlying asset. However, the Buyer of an option has the choice of whether or not to receive futures relating to an asset at a predetermined price, volume and expiry date in the future.
Out of the money – you guessed it – the opposite of in the money. An out of the money options contract has not yet reached the value of its strike price.
P
Political Risk – risks associated with current situations in world affairs, local government policy or war.
Port Storage or Quay Rent– a charge levied by the port for the prolonged stay of a container at port after expiry of free days granted by the port to the shipping line. Different ports/terminals offer different days free of storage (free days).
Position – a market commitment held by a trader, that will generate a profit or loss. An open position means the position is still able to incur a profit or loss, while a closed position is one that can no longer generate value, being closed.
Put Option – A contract giving the right, but not the obligation, to SELL a specific amount of an underlying contract (e.g No. 11 Futures) at a specific price (strike price) at a specific time (Option expiration date).
Q
Quantative Analysis – Contrary to ‘qualitative analysis’ which can not be based on anything concrete, quantative analysis relies on a mathematical and factual analysis of a companines finances and includes things like turnover, asset value and debt.
R
Rally – a rally is a period of sustained upward price movement, often coming after a period of flat or declining price.
Receivables – a term that covers all financial obligations owed to a company by its debtors or customers. This includes all debts owed, even if they are not currently due, and are recorded in the company’s balance sheet.
Retention – also known as holdback. A contractual condition whereby money is withheld until the goods meet requirements, or an agreed time has passed.
Risk Management – the process of evaluating and managing current and emerging risks in order to decrease a company’s exposure.
S
Secured Funding – a loan that is backed up by physical assets, which reduces the amount of risk taken on by the lender.
Short – This refers to a position that makes a profit if the asset’s market price falls in price. An example of this is selling an asset that you do not own, with the requirement to buy it back at a subsequent point in time. Often referred to as ‘going short’ or ‘taking a short position’.
Short squeeze – when an asset starts moving up in price, causing traders to rush to cover their positions.
Slippage – the difference in price between where you thought you’d trade at, versus where you actually traded at. This difference occurs in highly volatile markets.
Spot Price – The price quoted on the exchange for the earliest possible delivery.
Spread – the difference in price between the bid (buy) and offer (sell) prices of an asset.
Stop Loss Order – A limit order which triggers at a predetermined price. This can be useful for closing out a position in a volatile market when the market suddenly trades against you. Typically a stop loss order will be part of an OCO order.
Strike Price – The agreed price for an underlying asset, this then forms the basis of an options contract.
Structured Trade Finance – cross-border trade finance in emerging markets where the flow of commodities is used to repay a loan.
Swap Contract – an agreement between two parties that they will make payments to one another at an agreed point in the future.
T
Tare Weight – the weight of a shipping container and packaging without the weight of the goods it will carry.
Trade Credit Insurance – a risk management product designed to protect balance sheets against loss due to credit risks.
Trailing stop – A type of stop loss that automatically follows positive movements in the market for the asset you are trading. The level that the order will `stop` at constantly revises, taking into account the movement in the market. As an example the trailing stop can be set at $5/MT lower than the high of the day, if the market is pushing new daily highs.
U
Uniform Rules for Collections (URC) – A set of rules to help institutions and individuals in the collections process. They are not legally required, but help identify the understanding of a contract.
V
Value at Risk (VAR) – Risk measures and quantifies the level of financial risk within a firm or investment portfolio over a specific time frame. It is most commonly used by investment and commercial banks to determine the extent and occurrence ratio of potential losses in their international portfolios.
Vanilla derivatives – These are relatively simple and common derivatives contracts. A straight forward futures contract would be considered a vanilla derivative, compared to an accumulator which is a complex derivative formed of multiple instruments.
W
Warehouse Receipt – a receipt issued by a warehouse listing goods received.
Wharfage – a payment requested by a dock owner for the handling of cargo.
White Premium – This is a term you will hear a lot in the sugar industry. It means the difference in price between the raw sugar and white sugar futures markets in Dollars per metric tonne. A higher white premium gives an opportunity to buy raw sugar, refine it, and sell the refined sugar at a profit.
Working Capital – the cash available for the day-to-day running of a company. It is calculated by deducting liabilities from current assets, and is used to measure the ability of a company to meet its short-term financial obligations.
Working order – either a stop or limit order to open, often triggered by a certain price being reached.
Read our other blog for more information about how we use derivatives trading and we hope this series has cast some light on the often mysterious world of trading. We will continue to share insights into our trading services and current market.
X
XW – This is a symbol that indicates that a stock has no warrants attached, and is therefore trading ‘ex-warrants’.
Y
Yield Curve – The yield curve is the graph illustrating the relationship between yield on bonds against maturities.
Z
Zero Coupon Convertible Security – After a stock reaches a certain price, a zero-coupon bond is convertible into the common stock that issuing company, usually linked to a ‘put option’ which is inherent to the security of which the bond is held.
