COMMON TERMS

ASK

The Ask is the price at which one can acquire the asset on the market. In online trading, it is used to calculate expiry levels.

ASSET/INSTRUMENT

An asset (or an instrument) is an object that can produce value and which can be traded in financial markets. This can be currency, commodity, stocks, real estate, and insurance products.

BID

The Bid is the price at which one can sell the asset on the market. As well as the Ask, it is used in online trading to calculate expiry levels.

COMMODITIES

Commodities are primary products traded on the markets. They may include energy sources (oil, coal, gas); precious metals (gold, silver, platinum); forest products; agricultural goods (dairy products, cocoa, rice, wheat).

 BUY / GO LONG

The long-term position refers to entering a CFD trade when the trader expects to profit from the increase in the price or value of the underlying asset.

That’s how it happens: The trader buys the asset cheaply, which, in his/her opinion, soon should rise in price. Then, he/she waits for the price to increase, sells the asset, and thus profits from the growth of the market.

Making profit from long-term deals usually takes more time than from the short-term, as in this case, the increased interest of traders, as well as the stability of the main market and economy play an important role.

Going long is essentially not different from an investment when you are looking for and buying such stocks, the cost of which is expected to grow in the future, but only in a shorter period of time.

 SELL / GO SHORT

The short-term position refers to entering a CFD trade when the trader speculates on the reduced price hoping to profit from the fall in the value of the underlying financial asset. With CFDs, it is quite easy to carry out a short-term deal, but limitations may be introduced under certain extreme market conditions.

That’s how it happens: The trader loans from the broker stocks which, in his/her opinion, will fall in price. The more the price for these stocks will fall in the future, the higher profits the trader will get. The trader sells stocks on the open market at high prices. When the stock price falls, he/she buys stocks on the open market cheaply and pays the loan to the broker. The trader pays the loan to the broker in the form of the stock price. This trade is carried out via the margin account, which means paying interest to the broker. The trader keeps the margin between the expensive sale and the cheap purchase remains – this is the profit.  The price, at which the trader buys stocks, is called buy-to-cover price and the order for the purchase of the number of stocks equal to the borrowed one ‘covers’ the short-term sale and allows to return the stock to the original creditor.

In short-term positions, the trader can obtain considerable sums of money much faster than in the long-term positions. How does it work?

When the fall in the price of stocks increases, a certain panic begins on the market, when traders quickly sell the cheapened stocks. Due to the fear of losing more, traders sell the cheapening stocks as soon as possible at any possible price.

There is only one obstacle in the short-term position: you cannot short a stock when its price decreases, so you need to catch a short-term surge in prices. One solution in this situation is to use ETFs, where the acquisition of the short-term position can be carried out regardless of the dynamics of the stock prices.

Theoretically, the number of losses in short-term deals is unlimited since there is no upper limit on the price of stocks. In long-term deals, your losses will be equal to only the price of stocks. You have to be very unlucky to be in such a position, but you should place the Stop Loss (see below) in both short-term and long-term positions to minimize the risks.

 STOP LOSS

 The Stop Loss is an automated way to limit the losses and minimize the risks in any deal.

In the long-term deal, the trader places the Stop Loss under the quota price. In this situation, the Stop Loss means closing the position and selling the stock if the price falls to the established mark.

In the short-term deal, the trader places the Stop Loss above the quota price. Here the Stop Loss means closing the deal by purchasing stocks for the ‘cover’ when the stock price rises to the established mark.

 You should know that the stop loss order can complete your deal when you did not plan this and when you didn’t even think to keep track of final prices. Why? This is due to fluctuations in the price of stocks during the day, which can go beyond the stop marks.

This means that even if the dynamics of fluctuations at the beginning and in the end of the day shows that the trade goes well, you can still lose. The solution to this problem is to establish the stop marks far enough away from the price. Some traders believe the fluctuations during the day to be the normal process and, for greater certainty, set the stop mark two or three times above/below the quota.

Some traders will advise you not to use the stop mark. They conditionally define some price marks and manually check whether it is reached every day. Such people believe that price fluctuations can be used to ‘capture’ their stocks before the change of direction in the movement. If you choose this strategy but will not track the price fluctuations during the whole day, the risks to lose are big.

The good news is that the stop marks can be adjusted to always keep them ahead of falling or growing market and make income.

TAKE PROFIT

The Take Profit is a stop mark set at a certain price level upon reaching which the order automatically closes fixing the profit. Even if the stock price returns or stops, the trader still makes the profit. This is the point which all deals must ideally reach, and most of them will definitely reach it if you learn with us.