Trading Terminology

Understanding Must-Know Front Office Trading Lingo, Stock Market, Trades, Bonds, Shares, Bid-Ask Spread

This article is written for the readers who want to understand the terminology that is used in the trading world.

Article Aim

My aim is to explain the most common phrases and trading terminology in this article.

The goal is to explain each term in a way that can prepare us for the subsequent terms in the article.

This article provides a high-level overview of the trading keywords. My aim is to keep the article simple and straight-forward.

I will explain the terms with questions and answers.

1. Is the stock market bullish or bearish today?

Let’s start with the first key terms: stock market, bullish and bearish.

The stock market is where the traders buy/sell shares (stocks).
The word “bullish” means that the market prices are increasing and hence the market is moving up.
On the other hand, the market is bearish when the prices are decreasing.

I will explain the concept of shares shortly.

2. Is the company ABC Public? Where is it listed?

The two key terms to understand are public and listed.

In this instance, ABC is the name of a company. It could be Apple, Tesla, Microsoft, or so on.

In this context, when a company is public then it means that the shares of the company can be bought freely by the public. We can also use the terms “publicly traded or publicly listed”.
Each publicly-traded company can issues shares. And each publicly-traded company’s market cap value is the product of the share price of the company and the total number of shares that they have issued so far.

When a company is listed then it means that it is trading on a stock exchange or its shares can be bought in over-the-counter markets.

The over-the-counter market is usually a market where the traders trade on customized trades over the phone and the products are traditionally not standardized.

3. When is the IPO for the company GEF?

What does IPO mean here?

The question is asking when the company GEF is going to go through the Initial Public Offering process.

Let me explain!

Let’s consider you start a company today. Let’s call it Alpha. The company is yours and it’s private.
Now let’s also consider that you want to raise investment so that you can invest and buy assets for the company such as furniture, laptops and so on.
You believe in your company and you want the public to invest in your company too.
One of the most common ways to raise cash is to sell parts of your company to the public on paper. The way you do this is to embark on an IPO. IPO stands for initial public offering and essentially it means making your company public or floating your company.
All it means is that now the general public can invest in your company and buy its shares.

There is an IPO process that each target company needs to go through.

4. Can you send me the RIC Code of the product?

The terms to know are the RIC code and product.

RIC stands for Reuters Instrument Code. It is a symbol/code that is used by Thomas Reuters to identify a financial company or an index.
If a company is listed on Reuters then it will get a unique RIC code. As an instance, AAPL.OQ is used to identify the Apple Inc comapny.

When traders use the term “product”, they could mean an asset/security/investment. For now, we can think of a product as one or more company stocks combined (packaged) together.

5. Which exchange is the stock ABC listed on?

The key term to understand is the exchange.

By now, we can see that an exchange is where the traders buy/sell stocks.

For example, if we want to buy groceries, we can go to a grocery shop. We can either go to an organized, well-established grocery store where the prices and products are standard and the prices across their branches are fixed or we can go to a grocery stall in a market and buy our customised grocery products from there.
To buy company stocks, we can go to an exchange to buy the stocks of a publicly listed company. Therefore an exchange is an entity that is open and an organized market where we can buy and sell publicly-listed products or trades. The exchange is organized because the products are standardized.

Each exchange has its own opening and closing times. As an instance, the London Stock Exchange opens at 8.00 am and closes at 4.30 pm. These are the trading hours of the London stock exchange.

6. What is the Bloomberg or BBG Symbol for Apple?

Acrynonmy BBG is one of the common ways to refer to Bloomberg. Apple is the name of a company.

BBG here stands for Bloomberg, BBG Terminal stands for Bloomberg Terminal and BBG Symbol means the identifier that Bloomberg uses to identify a stock/ticker.
The stock prices tick, hence they are also known as tickers on a Bloomberg Terminal and are recognized in Bloomberg by Bloomberg symbols. By the way, the BBG symbol for Apple is AAPL.

7. What is my portfolio PnL today?

The question is what does portfolio and PnL mean here.

A trading portfolio is made up of a number of investments.
These investments can be in bonds, commodities, stocks, and so on. A trader can buy or sell these investments.

The collection of these financial investments are grouped together in a portfolio. Therefore, the portfolio groups the investments together.

The value of the portfolio could be as simple as the sum of the most recent prices of each of the investments. Every day, we can calculate the price of the portfolio, and every day we can produce a PnL report.
PnL stands for Profit And Loss and the report would show the total Profit or Loss at the trade and the portfolio level.

8. What was the last fill-order?

Here the key term is “fill-order”.

The term fill order is an order that has been executed. Fill means execute. Therefore the transaction has been completed and the required stocks have been bought/sold.
The fill order would list out the time, quantity, ISIN, direction and price of the order at minimum.

9. Is the trade 123 a long or short?

The three key terms are trade, long and short.

A trade is a financial transaction e.g. Trader from a bank A buys a bond from a trader in a Bank B. In this instance, it is a trade between the bank A and the bank B.
Long means buying. Therefore in the portfolio of Trader A, we will see a long position for the bond trade.

Short means selling. Therefore in the portfolio of Trader B, we will see a short position for the bond trade.

For every trade, there is a buyer and a seller. Therefore there are always long and a short positions for every transaction.

10. What is the level of the Index?

The key terms here are the level and index.

First, let’s understand what an index is.

An index consists of multiple investment components (also known as constituents) that are bundled together. Each component has a weight associated with it. As an instance, if there is an index with 10 equally weighted components then the weight of each of the components will be 10%. S&P 500 is a stock index that is composed of stocks of 500 leading publicly listed companies. The components are also known as the underlyings of the index.
If these components are stocks then we would call it a Stock Index or if the components are futures then we can call it a Future Index or if the components are options then we would call it an Option index and so on.

Now, let’s go over the term level.

Level is a numerical figure. It’s a number that tells you the value of an index at a specific moment in time. Its level is calculated by summing the product of each company’s shares by their value and weights.
As the value of the shares can change due to various micro and macro economic factors, the level of the index will also change as a result of this impact. Therefore the level of an index is the total value of the components of an index.

11. The benchmark of my portfolio is FTSE 100.

The key terms here are the benchmark and FTSE 100.

Benchmark is a portfolio that is used as the baseline to compare the performance of a portfolio. Benchmarks usually contain a wide range of financial investments and are usually market portfolios that anyone can monitor.

FTSE stands for Financial Times Stock Exchange and FTSE 100 is an index that is composed of 100 largest companies by their market value.

As FTSE 100 is an index, its value is based on the value of its underlyings and is published in realtime. So in short, the portfolio is compared against the FTSE 100 in this instance.

12. Can you tell me the fair value of the bond with ISIN 12345?

The key terms here are fair value, bond, and ISIN.

A bond is a fixed income financial investment. Essentially, a bond is a loan that is given from one party to another
A bond can generate income/periodic coupons for the buyer of the bond.
ISIN stands for International Securities Identification Number. It is a code that is used to identify a specific issue of a security.
Each asset has a fair value price. This is the agreed price between the buyer and seller. Fair value is usually determined by the financial market.

13. What is the bid-ask spread of the trade?

We see and hear these terms every day everywhere on the trading floor. These are the must-know terms.

We understand so far that each tradable company stock or security has a price. There is usually a buyer and seller of the stock right. Bid is the maximum price that the buyer is willing to pay to buy the investment.
Ask, on the other hand, is the minimum price the seller is willing to receive to sell the instrument.

Trade is essentially a transaction between a buyer and a seller when they agree on the price. Bid/ask is usually written as bid/ask.

From the buyer’s perspective, it’s the bid and from the seller’s perspective, it’s the ask price.
The difference between the bid and ask price is known as the bid-ask spread. The spread can help us determine the demand for the instrument. As an example, if party A quotes a price of £5/£6 then it means that it can buy the stock at a maximum of £5 and it will sell the same stock at minimum of £6.
Ask is also known as an offer.

14. What is the quote for the stock ABC?

What does the term quote mean here?

A quote has two main components: Bid and Ask

Therefore when we hear the term stock quote, it simply means bid/ask figures or the maximum price to buy the stock (bid) and the minimum price to sell the stock (ask).

15. Can you send me the level 1 and level 2 data?

The key terms here are level 1 and level 2 data.

For each stock, as an instance, we can see the bid, ask, and volume quotes in real-time. This is the level 1 data.
On the other hand, the level 2 data shows you the order book.

Within the order book, we can see the best bid/ask prices of various parties that are trading the stocks. We can see the orders and demand for the stock.

Therefore the level 2 data shows us who is buying/selling a trade, their order size, bid/ask prices of the order for each of the matched order.

16. Execute a MOC order on the trade

Each exchange has its opening and closing times. The MOC stands for Market On Close.
MOC is an order that is executed just when the market is closing or after the market is closed to ensure the order is executed at the closing/last price for the day.

17. Can you send me the technical and fundamental analysis on the company ABC?

The technical and fundamental analysis is usually performed before buying/selling a company’s stocks. The exercise is executed to determine whether the value of the stock is high or low.
As the name implies, the technical analysis is all about using statistical techniques to identify opportunities in the market. As an instance, the front office analysts would look for stock’s historical prices and compute trends to determine whether the price is going up or down.

The key assumption is that everything that we need is present in the price movements of a stock and we can use the patterns in the data to determine the next movements.

It involves computing averages, standard deviation, and related measures. Hence it’s technical in nature.
On the other hand, fundamental analysis is when an analyst values a stock of a company by assessing the macroeconomic factors such as the overall economy, interest rates, how the management of the company is, and so on.
Therefore, the fundamental analysis uses both the intrinsic value of the stock along the external factors.

18. Let’s review the cashflow breakdown for the trade 1234 over the last 1 year period?

Trade 1234 is the ID of the trade. The new key term here is cashflow.

When a trader buys or sells a security such as a bond, the asset can then provide cashflows throughout its lifetime. These cashflows are the money that is transferred to and from the traders.
The incoming amount is a positive cash flow and the outgoing amount is a negative cashflow. The term cashflow here implies the net (positive and negative) cashflow of a security/portfolio as an instance over a time period.

19. What is the order book of trade ABC?

All of the orders of a trade are stored in an order book. The order book can be used to find/match the buyers and sellers who are interested in an order.

An order contains an order Id, the direction of the order (buy or sell), quantity along with a timestamp at minimum. We also should be able to match the orders.

The order book is used to store the orders. A trader can add, cancel, execute the orders within the order book.

20. What is the book value of ABC?

Lastly, for this article, I wanted to cover the term book value.

A company can be measured by its book value measure. If the company liquidates then the stockholders of the company would receive the book value of the company.
As the name implies, it is the total value of the company’s assets. The book value tells the traders/investors about how financially strong the company is.
The book value is essentially the difference between the assets and liabilities of a company. Hence, this measure is calculated on the factual information which is present in every company’s balance sheet.

Congratulations. We are done with the article.

End Notes

There were way too many terms to consider when I was writing this article. However, I wanted to concentrate on the must-know terms because I wanted the readers to be familiar with the core trading concepts atleast.

Plus as a side effect of reading the article, I am sure you have picked up an interest to know more about how trading works. The article should help one understand the most important trading terms/words.

Please let me know if you want me to include any other traders terms in my next article. Feel free to comment/email me.

Thank you for reading.