Trader Dictionary For Beginners: Main Concepts

We collected several dozen basic terms of investors and traders, which need to be understood so as not to be lost in complex and constantly changing crypto terminology.

Investor Base Terms

• An exchange is a place where buyers and sellers can trade in securities, goods, currencies, etc., and the exchange is also an organization that provides and regulates the trading process. There are commodities, currency, futures, and stock exchanges. They sell and buy, respectively, exchange-traded goods (precious metals, energy, industrial raw materials, etc.), currencies and cryptocurrencies, futures contracts, and securities.
• The concept of a stock exchange is closely adjacent to the stock market or the securities market - the relationship between investors, issuers, and their intermediaries related to the issuance and circulation of securities (shares, bonds, futures), which give their owners certain (financial) rights.
• Market securities - one type of financial instrument - are rights to tangible or intangible assets with a certain value. They are a real or a virtual document - a contract between two parties - as a result of which one of them receives financial assets, and the other imposes financial obligations.
• Asset (base asset) - a common name for goods traded on the exchange: securities, raw materials, etc. Assets are also the property of a company or a private person, tangible and intangible (for example, a brand) property that has a monetary expression and is capable of turning a profit. Assets are divided into capital (real estate and equipment), financial, and intangible (business reputation) ones. The material and intangible assets of the company are called capital.
• On the other side of the balance sheet, there are always the liabilities of the organization, that is, its obligations, for example, debts or loans.
• The value of an asset after deducting all obligations from it is called equity. This indicator is important for assessing the financial condition of the company and the feasibility of investing in it, for example, buying its shares.
• A derivative is a financial contract, as well as an obligation to perform a certain action relative to the underlying asset. The value of the derivative is linked to and based on the price of the underlying asset but is not necessarily equal to it.
• There are different types of derivatives, for example, futures - contracts under which the parties undertake to make a purchase and sale transaction of a certain asset at a predetermined price on a predetermined date, as well as options - contracts that give the right (not an obligation!) to buy a certain asset at a predetermined price at a predetermined time.
• One of the most important indicators for any asset is its liquidity, that is, the ability to exchange the asset for cash at market value and vice versa quickly and without loss.
• Market capitalization is an indicator that allows you to estimate the value of a company expressed through the value of all shares issued by it. To calculate it, you need to multiply the market price of the share by the total number of shares. Market capitalization allows traders to assess the size and reliability of the company.
• IPO (Initial Public Offering) - initial placement of securities or other assets of the company on the stock exchange. Anyone can acquire them and become a shareholder in a company that as a result changes its status and turns from private to public. Thus, companies attract finance for their development.
• Fiat currencies (fiat) - national currencies, for example, the US dollar, euro, and yuan.
• The stock market index (stock exchange, stock index) is an indicator that represents the combined price of shares of its constituent companies, monitors the behavior of shares, and allows measuring their effectiveness. Indexes can track stocks of companies of a particular industry or size. For example, the Dow Jones Industrial Average is calculated based on the share prices of the 30 largest US companies that trade on the New York Stock Exchange, and the FTSE 100 is based on the 100 largest companies on the London Stock Exchange. The index is calculated as the average or weighted average of the prices of all shares included in it. As a rule, all indexes have a starting number of 1000, which varies depending on the growth or fall in the value of shares.

Prices

• Bid (demand price) - the maximum amount that the buyer is ready to pay for the purchase of an asset.
• Its opposite is the ask (offer price) - the minimum price that the seller of the asset agrees to.
• The price of demand will always be lower than the supply price and the difference between them is called a bid-ask spread or just a spread. Bid and ask allow traders to estimate the objective value of an asset at the moment.
• Target price - the expected price at which the trader is ready to sell or buy an asset in the future. It allows you to define a strategy for entering the market and closing your positions. As a rule, it is determined based on technical and fundamental analysis.
• Opening price - the cost of an asset at the time of opening the market. Depending on various factors, it may be more or less than the closing price, that is, the price of the last recorded transaction at the close of the trading session.
• The gap between these two prices is called a gap, and their analysis allows traders to build their trading strategy.
• Fluctuations in the price of an asset and its deviation from the average or ordinary value are called volatility.

Bull And Bear Markets, FUD And HODL

• A bull market or growing market is a period of constant growth in the value of an asset over a long period (from several months to several years). As a rule, a bull market is said to be happening if asset prices rose by 20% compared to their last low and continue to grow for more than six months. During the bull market period, a frequent short-term price decline is possible, which at a value of 10% of the last maximum is called a correction. A 20% drop in prices from the last maximum value means the end of the bull market period.
• The opposite of the bull market is a bear market, that is, a period of constant decline in the value of the asset. Its onset signals a price drop of 20% or more from its last maximum value.
• FUD means fear, uncertainty, and doubt - reflects market sentiment, especially when it is a big price shift.
• This state of mind often affects how and when crypto enthusiasts make transactions and buy or hold their coins. The act of the holding is usually called HODL - to hold on to dear life.

Cryptocurrency Dictionary

• Cryptocurrency is virtual (digital) money, the issue, and turnover of which takes place in electronic form. They have no physical expression and, unlike world currencies, are not controlled by the state. All accounting of cryptocurrency and transactions conducted with it is carried out by a decentralized payment system, which works offline. Cryptocurrency transactions are usually irreversible (there is no way to block or cancel the transaction).
• There are various cryptocurrencies, the most famous of which is Bitcoin (although such coins as Ethereum, Monero, and Litecoin are worth mentioning too). BTC allows you to freely make payments from user to user without intermediary and commissions in the 24/7 format, but at the same time, this cryptocurrency is very volatile and subject to price fluctuations. The total number of bitcoins is limited to 21 million coins. Existing bitcoins can be purchased on crypto exchanges, and new ones are generated during mining.
• Mining is a process of conducting and checking transactions that allow you to generate new coins. In practice, this means that miners solve complex mathematical problems, and their results are checked by the system and the miner is issued a reward in the form of coins (Proof of Work (PoW) approach). Depending on the type of cryptocurrency, the mining process can be very energy and labor-intensive and require special equipment, as in the case of Bitcoin.
• Blockchain is a database that is used to conduct cryptocurrency payments without intermediaries. Each transaction is included in a block, checked by the network, and associated with the previous block. The process is controlled by the entire blockchain network, which helps protect transaction records from unauthorized changes.
• Stablecoin is a cryptocurrency that is tied in value to another asset: currency, precious metals, or another cryptocurrency. This ensures greater price stability. A stablecoin should be provided with a reserve stock of the relevant asset, for example, a currency account or precious metals in the warehouse.
• A token is a cryptocurrency that makes it possible to access: a certain asset (for example, tokenized securities or a coin that means possession of some amount of precious metals), a product (tokens for payment), or a service (utilitarian tokens). They can be exchanged for other cryptocurrencies, as well as converted into fiat, and a special compound contract allows you to take and lend tokens and earn interest on this.
• Sometimes tokens can be obtained free of charge if certain conditions are met — for example, if you own other cryptocurrencies. Such distribution is called airdrop and is often carried out to draw attention to a project. It can also be the beginning of an ICO - the initial placement of tokens to raise funds for the development of a company or project.
• DeFi, short for "decentralized finance," is a general term for a group of financial products built on a blockchain. It should be understood that this is not some particular technology, but rather a lot of software solutions.

Trader Tools and Strategies

• One of the basic concepts and tools of trading is an order (order, bid) created by an investor to the exchange to conduct a certain operation with a particular asset on given conditions. There are two main types of orders: market and deferred.
• The market order is executed immediately after entering the exchange at the best current price.
• Deferred order - only when certain conditions are fulfilled, as a rule, reaching a certain level at a price. For example, a stop loss order ("moose") provides for the automatic closing of a position (sale of an asset) when the price of it drops to a certain level, which allows you to reduce the loss of an investment, and a take profit order - when it reaches a given maximum.
• Depth of Market - a list of purchase and sale orders, as well as transactions and information about securities and other financial instruments. As a rule, at the top, sales orders are displayed, and at the bottom, purchase orders are displayed. Another section of the exchange cup contains information about the value and volume of the last transaction. The best of the offers that are presented in the exchange glass form the values ​ ​ of the bid, ask, and spread for the asset. A warrant is useful for a trader in that it allows you to determine the attractiveness of an asset, its purchase or sale.
• To predict price fluctuations, traders use two main methods: technical and fundamental analysis.
• Technical analysis in assessing financial instruments and their investment opportunities is based on historical data and an idea of​ repeated market cycles. That is, the trader studies the history of the asset (special attention is paid to its price and volume in the market), using statistical methods or diagrams, and looks for and reveals patterns in the behavior of prices.
• The fundamental analysis, unlike the technical one, studies and takes into account a wide range of factors: financial statements of the company and the industry, possible development prospects, political, and social factors, etc. The trader builds his forecasts based on research, as well as macro (state of the economy as a whole) and microeconomic (income, profit, equity of the company) factors. Technical analysis is most often used for short-term investments, and the fundamental one allows you to identify undervalued or revalued financial instruments (for example, stocks) and win on their purchase/sale when the market catches up with fundamentals.
• It is also possible to determine the degree of risk and profitability of an asset - an indicator that measures the volatility of any securities compared to another, reference asset. It is calculated by comparing the dynamics of the value of specific shares with the dynamics of the stock market as a whole. If the beta ratio is greater than 1, this means that the risk level of this asset is higher than the market average, if less - lower.
• A long position is a strategy in which a trader buys an asset to resell it in the future at a higher price. As a rule, opening such a position, that is, buying shares or another asset, the investor is not going to sell it shortly and expects that the price of it will increase.
• The opposite of a long position is a short position (short) - an earnings strategy that is based on belief in lowering the price of a certain asset. The trader sells securities, the value of which he believes will fall soon, and then redeems them at a lower price. At the same time, initially, the investor receives securities on credit from a broker.
• Diversification is an approach that involves the distribution of capital between assets with various risks, returns, etc., to minimize investment risks. That is, losses on one asset (for example, shares) can be offset by profits on another: gold or cryptocurrency.
• Hedging is another strategy that aims to protect investments from losses by balancing risks. Most often, when hedging, a trader opens opposite positions in economically interconnected markets, for example, buys shares that move in different directions (aircraft and oil-producing companies), or uses futures and derivatives. Usually, hedging is used to generate income in the short term.