Basic Finance Terms That Beginners Need to Know – R Blog
In this review, we will discuss wide-spread finance terms that will be useful for new-comers to financial markets.
Financial assets are a specific non-physical form of property (something that a person or company owns) that is supposed to generate a profit. Such assets include bank deposits, stocks, bonds, cryptocurrencies, etc. Financial assets are more liquid than other types of assets.
Liquidity is a characteristic of how fast and easily a financial asset can be turned into money without significant losses of its cost.
Bull market is a state of the market in which asset prices are growing, and market participants are optimistic.
Correlation in finance is a statistical measure that shows the relationship between two assets. In other words, correlation is the ability of one asset to move in accordance with the movements of another asset.
Interest rate is the minimum interest under which the Central Bank of a certain company gives loans to commercial banks. The dynamics of currency markets are seriously influenced by changes in interest rates made by the leading Central Banks. These changes are an indirect reaction to other economic indicators and can provoke fast and strong movements in the currency markets.
Leverage is the ratio of the loaned capital to the capital owned by the trader. The higher the leverage, the more money is used in trading, which increases potential profits and losses.
Margin Call happens when the broker requires to additionally deposit the trader’s account when the amount of money on it reaches some critical level. Margin Call and the trading account margin are a protective mechanism that controls the level of the trader’s money on the account and limits the broker’s risks.
Netting is an accounting system that allows for just one open position in one direction. The trader may not simultaneously open a buying and selling trade by one instrument; if they do, positions get mutually closed. Orders opened in one direction, however, are summed up.
Hedging financial risks means making professional use of financial instruments or market strategies to compensate for any unwanted price movements. This accounting system allows for any number of open positions in different directions for one instrument.
In trading, profit is the net profit made on a trading operation or an investment. In other words, profit is earnings minus all expenses.
QE is an instrument used by Central Banks for adding money directly to the country’s economy that needs to be livened up and freed from crisis. QE does not imply printing a lot of new physical money – the process goes by creating non-cash funds. The funds are spent on buying bonds in the private sector, also known as purchase of government debt. All these actions bring down the yield of state bonds and increase the overall quantity of money in the economy.
Volatility is the range in which the price of a financial instrument changes over time (day, week, month, etc.). To put it simply, volatility shows how much the price of a financial instrument may grow or fall over time.
In this review, we have discussed several common terms used in financial markets. They are well-known by experienced traders and investors, and market beginners can use them to increase their erudition and professionalism and to enhance understanding of how financial markets function.