Take a look at our list of the financial terms associated with trading and the markets. From beginners starting their trading journey to experts with decades of experience, all traders need to clearly understand a huge number of terms.
Financial leverage refers to the use of borrowed money to increase the potential return on an investment. It is the process of using borrowed money to increase the purchasing power of an investor, by using debt to amplify the trading outcomes from an investment. This leverage can increase returns but also increases the risk of loss, as the interest and principal payments on the debt must be made regardless of the performance of the investment. In other words, it is the amount of debt used to finance a firm's assets and it is measured by debt-to-equity ratio.
What is a financial leverage ratio?
In trading, financial leverage ratio is a metric used to measure the level of leverage used by a trader or a trading firm. It is the ratio of the value of the trader's or firm's assets to the value of their equity capital. Leverage ratios in trading can be used to identify traders or firms that are using a high level of leverage, meaning they are using a large amount of borrowed money to invest in markets.
What affects financial leverage?
In trading, financial leverage is affected by a number of factors, including:
Margin requirements: The amount of money or collateral required by a broker to open a leveraged position.
Risk tolerance: A trader's willingness to take on risk and their ability to handle potential losses.
Investment horizon: A trader's investment time frame and goals can affect their use of leverage.
Market conditions: Volatility, liquidity, and other market conditions can influence a trader's decision to use leverage.
Capital: The amount of capital a trader has available to invest, will influence their use of leverage.
ProShares Ultra Silver, also known as AGQ, is a single-day bet, not a buy-and-hold ETF. AGQ is a leveraged ETF that aims to deliver daily investment results that equate to twice the daily price performance of silver bullion, measured by US Dollar for delivery in London.
ProShares Ultra Bloomberg Crude Oil ETF (UCO) is a leveraged asset that seeks to deliver twice the daily investment results of the Bloomberg WTI Crude Oil Subindex. This is a single-day bet and is not suitable for buy-and-hold investors. Results can vary significantly if held for periods longer than one day. This is a leveraged ETF so traders take on more risk than with an unleveraged product.
ProShares UltraShort Russell2000 (TWM) is a leveraged product that seeks to deliver twice the inverse of the daily performance of the USA2000 Index. Results aims to be 200% of the opposite to the movement of the index. This is a daily-bet, so results will vary dramatically for positions held longer than one day.
The USA2000 Index covers US small cap companies and a broad range of sectors including finance and tech. Holdings include Etsy, Planet Fitness and Hubspot.
UPRO, ProShares Ultra Pro S&P500, provides 3x daily exposure to the S&P 500 Index. The ETF aims to deliver daily returns that are three times that of the S&P 500 Index, which comprises US large cap equities. The S&P 500 represents some of the largest and most liquid US stocks on the market.
This is a leveraged product and, as such, carries more risk. It is an aggressive instrument, design for intraday trading, and should not be used as part of a buy-and-hold strategy.
SSO, also known as ProShares Ultra S&P500, is a leveraged product that looks to deliver twice the daily performance of the S&P500. This is a single-day product so the returns over periods of more than one day will differ.
S&P500, the index that it tracks, is considered a benchmark for large-cap US equities. It comprises 500 leading companies, many of which are household names, and a broad range of sectors – although tech firms feature heavily. Holdings include Microsoft, Apple, Amazon, Berkshire Hathaway and Johnson & Johnson.
ProShares UltraShort Bloomberg Crude Oil (SCO), aims to deliver results that are twice the inverse daily performance of the Bloomberg WTI Crude Oil Subindex. It is an ETF product for traders looking to short crude oil in a single day bet. Trades that last for more than a day are not expected to see the same returns.
The subindex reflects WTI Crude Oil prices and only consists of futures contracts on WTI Crude Oil. This is a leveraged product, all leveraged products carry more risk than unleveraged products.
ProShares UltraPro Russell2000 (URTY) seeks to deliver daily results that are three times daily performance of the USA2000 Index. This is an aggressive single-day bet and results will vary if positions are held for longer than a day.
This ETF is a leveraged product, which carry more risk. It aims to deliver results that are 300% of the returns of the USA2000 Index. The USA2000 Index covers US small cap companies and a broad range of sectors including finance and tech. Holdings include Etsy, Planet Fitness and Hubspot.
The Direxion Daily Financial Bear 3 (FAZ) Shares ETF tracks the inverse performance of the Russell 1000 Financial Services Index by 300%. It is the opposite of the The Direxion Daily Financial Bull 3X Shares ETF (FAS). Traders benefit when the underlying stocks fall, rather than rise. It is leveraged in the same way, so comes with high levels of volatility and risk.
This ETF allows traders to take a bearish view on the performance of commercial banks, a reduction in lending is what FAZ traders will be looking for.
ProShares UltraShort S&P500 (SDS) looks to deliver daily investment results that are twice the inverse of the daily performance of the S&P500. This is a leveraged product and designed as a single-day bet. Returns for periods longer than one day could expose investors to performance drift.
S&P500, the index that it inversely tracks, is considered a benchmark for large-cap US equities. It comprises 500 leading companies, many of which are household names, and a broad range of sectors – although tech firms feature heavily. Holdings include Microsoft, Apple, Amazon, Berkshire Hathaway and Johnson & Johnson.
Direxion Daily Small Cap Bear 3x Shares (TZA) seeks to deliver daily results that are three times the inverse of the daily performance of the USA2000 Index. This is an aggressive single-day bet against the USA2000, and results will vary if positions are held for longer than a day.
This ETF is a leveraged product, which carry more risk. It aims to deliver results that are 300% opposite the returns of the USA2000 Index. The USA2000 Index covers US small cap companies and a broad range of sectors including finance and tech. Holdings include Etsy, Planet Fitness and Hubspot.
ProShares Ultra QQQ (QLD) aims to deliver daily investment results that are twice the performance of the Nasdaq 100 Index. This ETF provides leveraged exposure to a market-cap weighted index of 100 non-financial stocks listed on the NASDAQ. This is a single-day bet and traders are advised that returns can vary dramatically if they hold positions for longer than one day. All leveraged products carry more risk than unleveraged products.
The Nasdaq 100 is dominate by tech firms, so the performance of the index is closely tied to the sector. Top holdings include Apple, Amazon, Facebook and Tesla.
ProShares UltraShort 20+ Year Treasury (TBT) aims to deliver daily investment results that reflect twice the inverse of the daily performance of the ICE US Treasury 20+ Year Bond Index. Traders would look to get a 200% return opposite to the movement of US Treasury Securities.
This is a leveraged product, and so carries more risk. As with many leveraged ETFs, it delivers daily results and it designed as a single day bet. Positions that are held for longer than a day will get differing results. This ETF can be a useful tactical position or hedge against rising interest rates.
ProShares UltraPro QQQ (TQQQ) is a leveraged ETF that tracks the performance of the Nasdaq 100 index. This ETF aims to deliver a daily output that is three times the daily performance of the Nasdaq 100. That means TQQQ will deliver results that are 300% of how the index has moved.
The Nasdaq 100 includes the largest companies on the Nasdaq stock market and holdings include Apple, 21st Century Fox Inc, Kraft Heinz and Facebook. This is a single-day bet and is not recommended for use for longer than periods of one day, as the results will differ. Leveraged products carry more risk.
ProShares UltraPro Short S&P500 (SPXU) seeks daily investment results that are 300% the inverse of the daily performance of the S&P 500. This is a single day bet for traders looking to go short on S&P500 or hedge other trades. Like any leveraged product, there is more risk involved in this ETF than in unleveraged products.
S&P500, the index that it inversely tracks, is considered a benchmark for large-cap US equities. It comprises 500 leading companies, many of which are household names, and a broad range of sectors – although tech firms feature heavily. Holdings include Microsoft, Apple, Amazon, Berkshire Hathaway and Johnson & Johnson.
ProShares UltraShort QQQ (QID) aims to deliver daily investment results that are twice the inverse daily performance of the Nasdaq 100 Index. This is a single-day bet and traders are advised that returns can vary dramatically if they hold positions for longer than one day. This is the sister product to QLD, which delivers two times the daily performance of the Nasdaq 100.
As with most inverse and leveraged products, this fund is designed to provide inverse exposure on a daily basis, not as a long-term inverse bet against the index. All leveraged products carry more risk. Nasdaq 100 holdings include Apple, Amazon, Facebook and Tesla.
NUGT, also known as the Direxion Daily Gold Miners Index Bull 3x Shares, aims to deliver three times the daily return of the NYSE Arca Gold Miners Index. This is a leveraged fund. It is designed for intraday trades and it is not recommended for periods of greater than one day.
The NYSE Arca Gold Miners Index is a market-cap weighted index of public companies with global operations in developed and emerging markets. The companies in the index are primarily involved in gold mining, with some also involved in silver mining. Top holdings include Newmont Mining, Barrick Gold, Franco Nevada and Newcrest Mining. Canadian companies represent 52.14% of the asset.
The Direxion Daily Financial Bull 3X (FAS) Shares ETF is a leveraged ETF, aiming to secure traders three times the daily returns on the performance of the Russell 1000 Financial Services Index. This increased exposure also increases risk, so this ETF is more suited to traders with the capital to withstand volatility and with a high risk tolerance.
The portfolio is composed of 70% stocks. Sector exposure is mostly financial services, which make up 77.21% of holdings, with another 15.99% in Real Estate. Commercial banks account for a high proportion of this ETF, with stocks including Berkshire Hathaway Inc, JPMorgan Chase & Co, Bank of America Corp, Visa, Wells Fargo and Citigroup all featuring.
JNUG, also known as Direxion Daily Junior Gold Miners Index Bull 3X Shares, aims to deliver three times the daily returns of junior gold and silver mining companies from developed and emerging markets. It seeks 300% of the performance of the MVIS Global Junior Gold Miners Index. The term junior refers to the size of the firms, which are considered to be small-cap.
This is a single-day fund, and funds should not be expected to provide three time the return of the benchmark index if positions are held for longer than one day. As a leveraged ETF, this asset carries more risk than ETFs that are not leveraged. This asset is aimed at intraday traders and is not suitable for all investors.
ProShares UltraPro Short QQQ (SQQQ) is an inverse leveraged ETF that tracks the performance of the Nasdaq 100 index. This ETF aims to deliver a daily output that is three times the inverse of the daily performance of the Nasdaq 100. That means SQQQ will deliver results that are 300% opposite to how the index has moved. They are a useful product for traders looking to go short or to hedge their other positions.
The Nasdaq 100 includes the largest companies on the Nasdaq stock market and holdings include Apple, 21st Century Fox Inc, Kraft Heinz and Facebook. This is a single-day bet and is not recommended for use for longer than periods of one day, as the results will differ. Leveraged products carry more risk.
Negative balance protection is a safety measure for retail traders, designed to ensure that they do not lose more than the balance on their own account while trading leveraged products such as CFDs. This feature takes into account instances where market moves quickly. The markets.com trading platforms provides retail clients with Negative Balance Protection, making it a good option for traders that benefit from this feature.
Can you trade with negative balance?
No, you cannot trade with a negative balance as it is not financially viable.
What happens if you go into negative balance?
If you go into negative balance on your trading account, you may be subject to additional fees and/or penalties. You may also be restricted from making any further trades until the balance is brought back up to a positive amount.
Does mt4 have negative balance protection?
Yes, MetaTrader 4 has negative balance protection which prevents trading accounts from going into debt.
Maintenance Margin, or “variation margin,” is considered as the minimum amount of equity (i.e., funds) which needs to be maintained in a trader’s margin account before a margin call is issued as due to the account value being below a minimum threshold and not being able to support open margin trade positions. Margin accounts are what leveraged trades use to trade, where they can purchase securities such as stocks, bonds, or options with funds borrowed from the brokerage.
How do you avoid maintenance margin?
To avoid maintenance margin issues, traders should monitor their account closely and adjust their leverage if needed. If your maintenance margin is not maintained it will result in a margin call, which may indicate that the trader should reconsider the risk exposure of their portfolio.
Why are maintenance margins important?
Maintenance margins are important to protect against losses due to fluctuations in the market. They ensure that traders maintain adequate capital reserves and can cover any potential losses.
Financial Derivatives are financial products that derive their value from the price of an underlying asset. These derivatives are often used by traders as a device to speculate on the future price movements of an asset, whether that be up or down, without having to buy the asset itself.
What are the four financial derivatives?
The four most common types of financial derivatives are futures contracts, options contracts, swaps and forward contracts.
What are the advantages of financial derivatives?
Financial derivatives can provide several benefits such as hedging, leveraging and portfolio diversification. These financial instruments help in managing risk by protecting investors from price volatility, enable high leverage to increase profits and also allow for better portfolio diversification through a wider range of investments.
Financial Derivatives examples
The most common underlying assets for derivatives are:
• Stocks
• Bonds
• Commodities
• Currencies
• Interest Rates
• Market Indexes (Indices)
Note: In CFD Trading traders get access to all the above Financial Derivatives as well as additional ones more suitable for trading CFDs. As such, CFDs enable traders to buy a prediction on a stock (up or down) without owning the stock itself.
Exposure in finance and trading refers to the potential financial loss or gain that an individual or entity may incur as a result of changes in market conditions or prices. It can refer to the overall risk of a portfolio, or to the specific risk associated with a particular security or market.
What is Leverage? How does leverage effect exposure?
Leverage refers to the use of debt or other financial instruments to increase the potential return on an investment. In trading, leverage allows an investor to control a larger position with a smaller amount of capital. Leverage can increase exposure to potential losses as well as gains, as a small change in the value of the underlying asset can have a larger impact on the value of a leveraged position.
How do you calculate exposure in trading?
Exposure in trading can be calculated by multiplying the size of a position by the current market price of the underlying asset. The VaR method also can be used by taking into account the volatility of the market and any potential correlation with other assets in the portfolio.
CFDs are a leveraged financial instrument that allow traders to gain exposure to an underlying asset, such as shares, commodities or indices. While this provides great potential for profits, it also carries significant risks. The main risk is the possibility of losses greater than your initial deposit if the market moves against you. CFDs also have costs associated with trading such as commissions and spreads. Make sure you understand the risks before trading with CFDs.
What are the disadvantages of CFDs?
CFDs are complex instruments and may not be suitable for everyone due to the risk of leverage. CFDs also come with costs, including spreads and commissions which can cut into potential profits. Furthermore, it's important to understand how margin calls work as well as potential losses from unanticipated price movements or illiquidity in the market.
How much can you lose in a CFD trade?
In a CFD trade, you can potentially lose more than your initial investment, as the loss is based on the difference between the entry and exit price of the trade. It is important to set stop loss orders to limit potential losses. Additionally, using proper risk management strategies can help to minimize losses.
The term Spreads in trading is defined as the gap between the highest price to be paid for any given asset, to the lowest price the current asset holder is willing to sell at. Different markets and assets generate different spreads. For example, the Forex market, where both buyers and sellers are very active with this “gap” or spread will be small.
In trading, a spread is one of the key costs of online trading. Generally, the tighter the spread, the better value traders get from their trades. Also, spreads are implied costs, where it is presented to traders in subsequent trades, as the assets traders buy on leverage must increase above the level of the Spread, rather than the above the initial price, for traders to make profit.
What is the importance of a Spread?
The Spread is important, even a crucial piece of information to be aware of when analysing trading costs. An instrument’s spread is a variable number that directly affects the value of the trade. Several factors influence the spread in trading:
• Liquidity. How easily an asset can be bought or sold.
• Volume. Quantity of any given asset that is traded daily.
• Volatility. How much the market price changes in a given period.
What is a margin in finance?
A margin in finance is the amount of money an investor borrows to purchase or trade securities. It is the difference between the total value of the borrowed funds and the market value of the collateral provided as security for the loan. Margin trading allows investors to buy more securities than they would otherwise be able to purchase with just their own capital.
What is margin vs profit?
Margin and profit are related but different concepts in finance and trading.
Margin refers to the amount of money or collateral that is required to open a leveraged position, such as a margin account, which allows traders to buy securities by borrowing money from a broker. Profit, on the other hand, refers to the amount of money that is gained from a trade or investment, after all costs and expenses have been subtracted. Profit is the result of a successful trade, which is the difference between the buying and selling price.
How do I calculate margin?
There are a few different ways to calculate margin, depending on the context and the type of trade or investment.
One of the most common ways to calculate margin is to use the following formula:
Margin = (Value of Trade / Leverage) x 100%
Arbitrage is trading that makes use of small differences in price between identical assets in two or more markets. An asset will most likely be sold in different markets, forms or via a different financial products.
Arbitrage is one alternative trading strategy that can prove exceptionally profitable when leveraged by sophisticated traders. It also carries risks which need to be considered prior and during an arbitrage.
Arbitrage as a trading strategy is when an asset is simultaneously bought and sold in different markets, thus taking advantage of a price difference, and generating a potential profit. Arbitrage is commonly leveraged by hedge funds and other sophisticated investors.
What is an example of arbitrage?
Without going into actual trading advice, here are several examples of Arbitrage in Trading:
• Exchange rates
• Offshore operations
• Cryptocurrency
And perhaps the most obvious and common form of arbitrage which is acting as a go between or affiliate, earning commission on price differences between the seller and the buyer.
Types of arbitrage traders use:
• Pure arbitrage - Traders simultaneously buying and selling assets in different markets to take advantage of a price differences.
• Merger arbitrage – When two publicly traded companies merge. If the target is a publicly traded company, the acquiring company must purchase its outstanding shares Convertible arbitrage.
• Convertible Arbitrage. It is related to convertible bonds, also called convertible notes or convertible debt.
A share is a partition of the total value of a company. Each share represents a unit of ownership in that company, and therefore also the value that it holds. Should a company choose to sell shares as a means of fundraising, this is known as equity finance.
A share owner is called a shareholder (or stockholder). The ongoing value of a share, once it is introduced to the market, is its trading value at any given time, which can be either lower or higher than the original value. A share is worth whatever price it is currently trading at. An actual transaction of shares between a buyer and a seller is usually considered to provide the best market indicator as to the "true value" of that share at that time. The difference between current price and open price will represent either a profit or a loss to the investor who purchased it.
There are different types of shares in the trading domain, including Cumulative & Non-cumulative Preference Shares, Participating & Non-participating Preference Shares, Convertible & Non-convertible Preference Shares, Redeemable & Un-redeemable Preference Shares.
It is also possible to use CFDs to trade shares. This enables traders to take a leveraged position on whether a share rises or falls. This different type of share trading opens up more trading opportunities by either buying or selling the asset without physically owning it.
The FTSE China A50 index, also known as the China 50, is a Chinese benchmark index that allows investors to trade A Shares, which are securities of companies that are incorporated in mainland China that are permitted to be traded by international investors thanks to government regulation.
The index comprises the 50 largest companies on the Shanghai and Shenzhen stock exchanges by market capitalisation and is free float-adjusted and liquidity screened. The instrument is priced in US Dollars on the {%brand.name%} platform.
The index was launched on 13th December 2003, with a base date of 21st July 2003 and a base value of 5,000.
The China 50 index is dominated by banks, with a weighting of 33%. The second-largest sector is Insurance, with a share of 14.58%, followed by Food & Beverage with 13.28%.
China 50 index futures allow you to speculate on, or hedge against, changes in the price of Chinese stocks. Futures rollover on the 4th Friday of every month.
Margin trading refers to the practice of borrowing money from a broker to purchase securities. It allows traders to buy more securities than they could afford to buy with cash alone, by leveraging the securities they already own as collateral. This increases the potential returns but also increases the potential risks, as the trader is responsible for paying interest on the borrowed money and must also cover any losses. Margin trading is considered to be a high-risk strategy and is only suitable for experienced traders with a good understanding of the risks involved.
How much money do you need for margin?
The amount of money required for margin trading depends on the minimum deposit requirement set by the broker. For markets.com this is 100 of your local currency, with the exception of South Africa where it is 1000 rand.
What level of margin is safe?
The level of margin that is considered safe depends on the trader's risk tolerance and investment goals. A lower margin level is generally considered to be safer, as it reduces the potential for large losses
ProShares Ultra Bloomberg Crude Oil ETF (UCO) is a leveraged asset that seeks to deliver twice the daily investment results of the Bloomberg WTI Crude Oil Subindex. This is a single-day bet and is not suitable for buy-and-hold investors. Results can vary significantly if held for periods longer than one day. This is a leveraged ETF so traders take on more risk than with an unleveraged product.
ProShares UltraShort Bloomberg Crude Oil (SCO), aims to deliver results that are twice the inverse daily performance of the Bloomberg WTI Crude Oil Subindex. It is an ETF product for traders looking to short crude oil in a single day bet. Trades that last for more than a day are not expected to see the same returns.
The subindex reflects WTI Crude Oil prices and only consists of futures contracts on WTI Crude Oil. This is a leveraged product, all leveraged products carry more risk than unleveraged products.
Arbitrage is trading that makes use of small differences in price between identical assets in two or more markets. An asset will most likely be sold in different markets, forms or via a different financial products.
Arbitrage is one alternative trading strategy that can prove exceptionally profitable when leveraged by sophisticated traders. It also carries risks which need to be considered prior and during an arbitrage.
Arbitrage as a trading strategy is when an asset is simultaneously bought and sold in different markets, thus taking advantage of a price difference, and generating a potential profit. Arbitrage is commonly leveraged by hedge funds and other sophisticated investors.
What is an example of arbitrage?
Without going into actual trading advice, here are several examples of Arbitrage in Trading:
• Exchange rates
• Offshore operations
• Cryptocurrency
And perhaps the most obvious and common form of arbitrage which is acting as a go between or affiliate, earning commission on price differences between the seller and the buyer.
Types of arbitrage traders use:
• Pure arbitrage - Traders simultaneously buying and selling assets in different markets to take advantage of a price differences.
• Merger arbitrage – When two publicly traded companies merge. If the target is a publicly traded company, the acquiring company must purchase its outstanding shares Convertible arbitrage.
• Convertible Arbitrage. It is related to convertible bonds, also called convertible notes or convertible debt.
The FTSE China A50 index, also known as the China 50, is a Chinese benchmark index that allows investors to trade A Shares, which are securities of companies that are incorporated in mainland China that are permitted to be traded by international investors thanks to government regulation.
The index comprises the 50 largest companies on the Shanghai and Shenzhen stock exchanges by market capitalisation and is free float-adjusted and liquidity screened. The instrument is priced in US Dollars on the {%brand.name%} platform.
The index was launched on 13th December 2003, with a base date of 21st July 2003 and a base value of 5,000.
The China 50 index is dominated by banks, with a weighting of 33%. The second-largest sector is Insurance, with a share of 14.58%, followed by Food & Beverage with 13.28%.
China 50 index futures allow you to speculate on, or hedge against, changes in the price of Chinese stocks. Futures rollover on the 4th Friday of every month.
The Direxion Daily Financial Bear 3 (FAZ) Shares ETF tracks the inverse performance of the Russell 1000 Financial Services Index by 300%. It is the opposite of the The Direxion Daily Financial Bull 3X Shares ETF (FAS). Traders benefit when the underlying stocks fall, rather than rise. It is leveraged in the same way, so comes with high levels of volatility and risk.
This ETF allows traders to take a bearish view on the performance of commercial banks, a reduction in lending is what FAZ traders will be looking for.
NUGT, also known as the Direxion Daily Gold Miners Index Bull 3x Shares, aims to deliver three times the daily return of the NYSE Arca Gold Miners Index. This is a leveraged fund. It is designed for intraday trades and it is not recommended for periods of greater than one day.
The NYSE Arca Gold Miners Index is a market-cap weighted index of public companies with global operations in developed and emerging markets. The companies in the index are primarily involved in gold mining, with some also involved in silver mining. Top holdings include Newmont Mining, Barrick Gold, Franco Nevada and Newcrest Mining. Canadian companies represent 52.14% of the asset.
The Direxion Daily Financial Bull 3X (FAS) Shares ETF is a leveraged ETF, aiming to secure traders three times the daily returns on the performance of the Russell 1000 Financial Services Index. This increased exposure also increases risk, so this ETF is more suited to traders with the capital to withstand volatility and with a high risk tolerance.
The portfolio is composed of 70% stocks. Sector exposure is mostly financial services, which make up 77.21% of holdings, with another 15.99% in Real Estate. Commercial banks account for a high proportion of this ETF, with stocks including Berkshire Hathaway Inc, JPMorgan Chase & Co, Bank of America Corp, Visa, Wells Fargo and Citigroup all featuring.
Financial Derivatives are financial products that derive their value from the price of an underlying asset. These derivatives are often used by traders as a device to speculate on the future price movements of an asset, whether that be up or down, without having to buy the asset itself.
What are the four financial derivatives?
The four most common types of financial derivatives are futures contracts, options contracts, swaps and forward contracts.
What are the advantages of financial derivatives?
Financial derivatives can provide several benefits such as hedging, leveraging and portfolio diversification. These financial instruments help in managing risk by protecting investors from price volatility, enable high leverage to increase profits and also allow for better portfolio diversification through a wider range of investments.
Financial Derivatives examples
The most common underlying assets for derivatives are:
• Stocks
• Bonds
• Commodities
• Currencies
• Interest Rates
• Market Indexes (Indices)
Note: In CFD Trading traders get access to all the above Financial Derivatives as well as additional ones more suitable for trading CFDs. As such, CFDs enable traders to buy a prediction on a stock (up or down) without owning the stock itself.
Exposure in finance and trading refers to the potential financial loss or gain that an individual or entity may incur as a result of changes in market conditions or prices. It can refer to the overall risk of a portfolio, or to the specific risk associated with a particular security or market.
What is Leverage? How does leverage effect exposure?
Leverage refers to the use of debt or other financial instruments to increase the potential return on an investment. In trading, leverage allows an investor to control a larger position with a smaller amount of capital. Leverage can increase exposure to potential losses as well as gains, as a small change in the value of the underlying asset can have a larger impact on the value of a leveraged position.
How do you calculate exposure in trading?
Exposure in trading can be calculated by multiplying the size of a position by the current market price of the underlying asset. The VaR method also can be used by taking into account the volatility of the market and any potential correlation with other assets in the portfolio.
Financial leverage refers to the use of borrowed money to increase the potential return on an investment. It is the process of using borrowed money to increase the purchasing power of an investor, by using debt to amplify the trading outcomes from an investment. This leverage can increase returns but also increases the risk of loss, as the interest and principal payments on the debt must be made regardless of the performance of the investment. In other words, it is the amount of debt used to finance a firm's assets and it is measured by debt-to-equity ratio.
What is a financial leverage ratio?
In trading, financial leverage ratio is a metric used to measure the level of leverage used by a trader or a trading firm. It is the ratio of the value of the trader's or firm's assets to the value of their equity capital. Leverage ratios in trading can be used to identify traders or firms that are using a high level of leverage, meaning they are using a large amount of borrowed money to invest in markets.
What affects financial leverage?
In trading, financial leverage is affected by a number of factors, including:
Margin requirements: The amount of money or collateral required by a broker to open a leveraged position.
Risk tolerance: A trader's willingness to take on risk and their ability to handle potential losses.
Investment horizon: A trader's investment time frame and goals can affect their use of leverage.
Market conditions: Volatility, liquidity, and other market conditions can influence a trader's decision to use leverage.
Capital: The amount of capital a trader has available to invest, will influence their use of leverage.
JNUG, also known as Direxion Daily Junior Gold Miners Index Bull 3X Shares, aims to deliver three times the daily returns of junior gold and silver mining companies from developed and emerging markets. It seeks 300% of the performance of the MVIS Global Junior Gold Miners Index. The term junior refers to the size of the firms, which are considered to be small-cap.
This is a single-day fund, and funds should not be expected to provide three time the return of the benchmark index if positions are held for longer than one day. As a leveraged ETF, this asset carries more risk than ETFs that are not leveraged. This asset is aimed at intraday traders and is not suitable for all investors.
Negative balance protection is a safety measure for retail traders, designed to ensure that they do not lose more than the balance on their own account while trading leveraged products such as CFDs. This feature takes into account instances where market moves quickly. The markets.com trading platforms provides retail clients with Negative Balance Protection, making it a good option for traders that benefit from this feature.
Can you trade with negative balance?
No, you cannot trade with a negative balance as it is not financially viable.
What happens if you go into negative balance?
If you go into negative balance on your trading account, you may be subject to additional fees and/or penalties. You may also be restricted from making any further trades until the balance is brought back up to a positive amount.
Does mt4 have negative balance protection?
Yes, MetaTrader 4 has negative balance protection which prevents trading accounts from going into debt.
Maintenance Margin, or “variation margin,” is considered as the minimum amount of equity (i.e., funds) which needs to be maintained in a trader’s margin account before a margin call is issued as due to the account value being below a minimum threshold and not being able to support open margin trade positions. Margin accounts are what leveraged trades use to trade, where they can purchase securities such as stocks, bonds, or options with funds borrowed from the brokerage.
How do you avoid maintenance margin?
To avoid maintenance margin issues, traders should monitor their account closely and adjust their leverage if needed. If your maintenance margin is not maintained it will result in a margin call, which may indicate that the trader should reconsider the risk exposure of their portfolio.
Why are maintenance margins important?
Maintenance margins are important to protect against losses due to fluctuations in the market. They ensure that traders maintain adequate capital reserves and can cover any potential losses.
What is a margin in finance?
A margin in finance is the amount of money an investor borrows to purchase or trade securities. It is the difference between the total value of the borrowed funds and the market value of the collateral provided as security for the loan. Margin trading allows investors to buy more securities than they would otherwise be able to purchase with just their own capital.
What is margin vs profit?
Margin and profit are related but different concepts in finance and trading.
Margin refers to the amount of money or collateral that is required to open a leveraged position, such as a margin account, which allows traders to buy securities by borrowing money from a broker. Profit, on the other hand, refers to the amount of money that is gained from a trade or investment, after all costs and expenses have been subtracted. Profit is the result of a successful trade, which is the difference between the buying and selling price.
How do I calculate margin?
There are a few different ways to calculate margin, depending on the context and the type of trade or investment.
One of the most common ways to calculate margin is to use the following formula:
Margin = (Value of Trade / Leverage) x 100%
Margin trading refers to the practice of borrowing money from a broker to purchase securities. It allows traders to buy more securities than they could afford to buy with cash alone, by leveraging the securities they already own as collateral. This increases the potential returns but also increases the potential risks, as the trader is responsible for paying interest on the borrowed money and must also cover any losses. Margin trading is considered to be a high-risk strategy and is only suitable for experienced traders with a good understanding of the risks involved.
How much money do you need for margin?
The amount of money required for margin trading depends on the minimum deposit requirement set by the broker. For markets.com this is 100 of your local currency, with the exception of South Africa where it is 1000 rand.
What level of margin is safe?
The level of margin that is considered safe depends on the trader's risk tolerance and investment goals. A lower margin level is generally considered to be safer, as it reduces the potential for large losses
ProShares UltraShort Russell2000 (TWM) is a leveraged product that seeks to deliver twice the inverse of the daily performance of the USA2000 Index. Results aims to be 200% of the opposite to the movement of the index. This is a daily-bet, so results will vary dramatically for positions held longer than one day.
The USA2000 Index covers US small cap companies and a broad range of sectors including finance and tech. Holdings include Etsy, Planet Fitness and Hubspot.
UPRO, ProShares Ultra Pro S&P500, provides 3x daily exposure to the S&P 500 Index. The ETF aims to deliver daily returns that are three times that of the S&P 500 Index, which comprises US large cap equities. The S&P 500 represents some of the largest and most liquid US stocks on the market.
This is a leveraged product and, as such, carries more risk. It is an aggressive instrument, design for intraday trading, and should not be used as part of a buy-and-hold strategy.
SSO, also known as ProShares Ultra S&P500, is a leveraged product that looks to deliver twice the daily performance of the S&P500. This is a single-day product so the returns over periods of more than one day will differ.
S&P500, the index that it tracks, is considered a benchmark for large-cap US equities. It comprises 500 leading companies, many of which are household names, and a broad range of sectors – although tech firms feature heavily. Holdings include Microsoft, Apple, Amazon, Berkshire Hathaway and Johnson & Johnson.
ProShares UltraPro Russell2000 (URTY) seeks to deliver daily results that are three times daily performance of the USA2000 Index. This is an aggressive single-day bet and results will vary if positions are held for longer than a day.
This ETF is a leveraged product, which carry more risk. It aims to deliver results that are 300% of the returns of the USA2000 Index. The USA2000 Index covers US small cap companies and a broad range of sectors including finance and tech. Holdings include Etsy, Planet Fitness and Hubspot.
ProShares UltraShort S&P500 (SDS) looks to deliver daily investment results that are twice the inverse of the daily performance of the S&P500. This is a leveraged product and designed as a single-day bet. Returns for periods longer than one day could expose investors to performance drift.
S&P500, the index that it inversely tracks, is considered a benchmark for large-cap US equities. It comprises 500 leading companies, many of which are household names, and a broad range of sectors – although tech firms feature heavily. Holdings include Microsoft, Apple, Amazon, Berkshire Hathaway and Johnson & Johnson.
Direxion Daily Small Cap Bear 3x Shares (TZA) seeks to deliver daily results that are three times the inverse of the daily performance of the USA2000 Index. This is an aggressive single-day bet against the USA2000, and results will vary if positions are held for longer than a day.
This ETF is a leveraged product, which carry more risk. It aims to deliver results that are 300% opposite the returns of the USA2000 Index. The USA2000 Index covers US small cap companies and a broad range of sectors including finance and tech. Holdings include Etsy, Planet Fitness and Hubspot.
ProShares Ultra QQQ (QLD) aims to deliver daily investment results that are twice the performance of the Nasdaq 100 Index. This ETF provides leveraged exposure to a market-cap weighted index of 100 non-financial stocks listed on the NASDAQ. This is a single-day bet and traders are advised that returns can vary dramatically if they hold positions for longer than one day. All leveraged products carry more risk than unleveraged products.
The Nasdaq 100 is dominate by tech firms, so the performance of the index is closely tied to the sector. Top holdings include Apple, Amazon, Facebook and Tesla.
ProShares UltraPro QQQ (TQQQ) is a leveraged ETF that tracks the performance of the Nasdaq 100 index. This ETF aims to deliver a daily output that is three times the daily performance of the Nasdaq 100. That means TQQQ will deliver results that are 300% of how the index has moved.
The Nasdaq 100 includes the largest companies on the Nasdaq stock market and holdings include Apple, 21st Century Fox Inc, Kraft Heinz and Facebook. This is a single-day bet and is not recommended for use for longer than periods of one day, as the results will differ. Leveraged products carry more risk.
ProShares UltraPro Short S&P500 (SPXU) seeks daily investment results that are 300% the inverse of the daily performance of the S&P 500. This is a single day bet for traders looking to go short on S&P500 or hedge other trades. Like any leveraged product, there is more risk involved in this ETF than in unleveraged products.
S&P500, the index that it inversely tracks, is considered a benchmark for large-cap US equities. It comprises 500 leading companies, many of which are household names, and a broad range of sectors – although tech firms feature heavily. Holdings include Microsoft, Apple, Amazon, Berkshire Hathaway and Johnson & Johnson.
ProShares UltraShort QQQ (QID) aims to deliver daily investment results that are twice the inverse daily performance of the Nasdaq 100 Index. This is a single-day bet and traders are advised that returns can vary dramatically if they hold positions for longer than one day. This is the sister product to QLD, which delivers two times the daily performance of the Nasdaq 100.
As with most inverse and leveraged products, this fund is designed to provide inverse exposure on a daily basis, not as a long-term inverse bet against the index. All leveraged products carry more risk. Nasdaq 100 holdings include Apple, Amazon, Facebook and Tesla.
ProShares UltraPro Short QQQ (SQQQ) is an inverse leveraged ETF that tracks the performance of the Nasdaq 100 index. This ETF aims to deliver a daily output that is three times the inverse of the daily performance of the Nasdaq 100. That means SQQQ will deliver results that are 300% opposite to how the index has moved. They are a useful product for traders looking to go short or to hedge their other positions.
The Nasdaq 100 includes the largest companies on the Nasdaq stock market and holdings include Apple, 21st Century Fox Inc, Kraft Heinz and Facebook. This is a single-day bet and is not recommended for use for longer than periods of one day, as the results will differ. Leveraged products carry more risk.
CFDs are a leveraged financial instrument that allow traders to gain exposure to an underlying asset, such as shares, commodities or indices. While this provides great potential for profits, it also carries significant risks. The main risk is the possibility of losses greater than your initial deposit if the market moves against you. CFDs also have costs associated with trading such as commissions and spreads. Make sure you understand the risks before trading with CFDs.
What are the disadvantages of CFDs?
CFDs are complex instruments and may not be suitable for everyone due to the risk of leverage. CFDs also come with costs, including spreads and commissions which can cut into potential profits. Furthermore, it's important to understand how margin calls work as well as potential losses from unanticipated price movements or illiquidity in the market.
How much can you lose in a CFD trade?
In a CFD trade, you can potentially lose more than your initial investment, as the loss is based on the difference between the entry and exit price of the trade. It is important to set stop loss orders to limit potential losses. Additionally, using proper risk management strategies can help to minimize losses.
The term Spreads in trading is defined as the gap between the highest price to be paid for any given asset, to the lowest price the current asset holder is willing to sell at. Different markets and assets generate different spreads. For example, the Forex market, where both buyers and sellers are very active with this “gap” or spread will be small.
In trading, a spread is one of the key costs of online trading. Generally, the tighter the spread, the better value traders get from their trades. Also, spreads are implied costs, where it is presented to traders in subsequent trades, as the assets traders buy on leverage must increase above the level of the Spread, rather than the above the initial price, for traders to make profit.
What is the importance of a Spread?
The Spread is important, even a crucial piece of information to be aware of when analysing trading costs. An instrument’s spread is a variable number that directly affects the value of the trade. Several factors influence the spread in trading:
• Liquidity. How easily an asset can be bought or sold.
• Volume. Quantity of any given asset that is traded daily.
• Volatility. How much the market price changes in a given period.
A share is a partition of the total value of a company. Each share represents a unit of ownership in that company, and therefore also the value that it holds. Should a company choose to sell shares as a means of fundraising, this is known as equity finance.
A share owner is called a shareholder (or stockholder). The ongoing value of a share, once it is introduced to the market, is its trading value at any given time, which can be either lower or higher than the original value. A share is worth whatever price it is currently trading at. An actual transaction of shares between a buyer and a seller is usually considered to provide the best market indicator as to the "true value" of that share at that time. The difference between current price and open price will represent either a profit or a loss to the investor who purchased it.
There are different types of shares in the trading domain, including Cumulative & Non-cumulative Preference Shares, Participating & Non-participating Preference Shares, Convertible & Non-convertible Preference Shares, Redeemable & Un-redeemable Preference Shares.
It is also possible to use CFDs to trade shares. This enables traders to take a leveraged position on whether a share rises or falls. This different type of share trading opens up more trading opportunities by either buying or selling the asset without physically owning it.
ProShares Ultra Silver, also known as AGQ, is a single-day bet, not a buy-and-hold ETF. AGQ is a leveraged ETF that aims to deliver daily investment results that equate to twice the daily price performance of silver bullion, measured by US Dollar for delivery in London.
ProShares UltraShort 20+ Year Treasury (TBT) aims to deliver daily investment results that reflect twice the inverse of the daily performance of the ICE US Treasury 20+ Year Bond Index. Traders would look to get a 200% return opposite to the movement of US Treasury Securities.
This is a leveraged product, and so carries more risk. As with many leveraged ETFs, it delivers daily results and it designed as a single day bet. Positions that are held for longer than a day will get differing results. This ETF can be a useful tactical position or hedge against rising interest rates.
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