Futures related glossary

Futures and Forex terms

Glossary of Trading Terms

This glossary is intended to assist customers in understanding specialized terms used in the futures and securities industries. It is not inclusive and is not intended to state or suggest a legal significance or meaning of any word or term.

Arbitrage
Taking an economically opposite position in a security futures contract on another exchange, in an options position, or in an underlying security.

Broad-based Security Index
A security index that does not fall under the definition if a narrow-based security index (see narrow-based security inex.) A future on a broad based security index is not a security future. The risk disclosure statement applies solely to security futures and generally does not pertain to futures on a broad-based security index. Futures on a broad-based security index are under exclusive jurisdiction of the C.F.T.C.

Cash Settlement
A method of settling certain futures contracts by having the buyer (or long) pay the seller (or short) the cash value of the contract according to a procedure set by the exchanges.

Clearing Broker
A member of the clearing organization for the contract being traded. All trades, and the daily profits or losses form those trades, must go through a clearing broker.

Clearing Organization
A regulated entity that is responsible for settling trades, collecting losses, and distributing gains and handling deliveries.

Contract
1) The unit of trading for a particular futures contract (e.g., one contract may be 100 shares of an underlying security) 2) the type of futures being traded (e.g., futures on ABC stock).

Contract Month
The last month in which delivery is made against the futures contract or the contract is cash settled. Sometimes referred to as the delivery month.

Day Trading Strategy
An overall trading strategy characterized by the regular transmission by a customer of intra-day orders to effect both purchase and sale transactions in the same security or securities.

EDGAR
The SEC's Electronic Data Gathering, Analysis and Retrieval system maintains electronic copies of corporate information filled with the agency. EDGAR submissions can be accessed through the SEC's website www.SEC.gov.

Futures Contract
A futures contract is
1) an agreement to purchase or sell a commodity for delivery in the future;
2) at a price determined at the initiation of the contract;
3) that obligates each party to the contract to fulfill it at the specified price;
4) that is used to assume or shift risk; and
5) that may be satisfied by delivery or offsets.

Hedging
The purchase or sale of a security future to reduce or offset the risk of a position in the underlying security or group of securities (or a close economic equivalent).

Illiquid Market
A market (or contract) with few buyers and/or sellers. Illiquid markets have little trading activity and those trades that do occur may be done at large price increments.

Liquidation
Entering into an offsetting transaction. Selling a contract that was previously purchased offsets a futures position in the exact same way that selling 100 shares of a particular stock liquidates an earlier purchase of the same stock. Similarly, a futures contract that was initially sold can be liquidated with an offsetting purchase.

Liquid Market
A market (or contract) with numerous buyers and sellers trading at small price increments.

Long
1) the buying side of an open futures contract,
2) a person who has bought futures contracts that are still open.

Margin
The amount of money that must be deposited by both buyers and sellers to ensure performance of the person's obligations under a futures contract. Margin on security futures contracts is a performance bond rather than a down payment for the underlying security.

Mark-to-Market
To debit or credit accounts daily to reflect that day's profits or losses.

Narrow-Based Security Index
In general, and subject to certain exclusions, an index that has any one of the four characteristics
1) it has nine or fewer component securities
2) any one of its component securities compromises more than 30% of its weighting
3) the top five highest weighted securities together comprise more than 60% of its weighting
4) the lowest weighted component securities comprising, in aggregate, 25% of the index's weighting have an aggregate value of daily trading volume of less than $50 Million (or in the case of an index with 15 or more securities, $30 Million). A security index that is not narrow-based is a "broad based security index." (See Broad-based Security Index).

Nominal Value
The face value of the futures contract, obtained by multiplying the contract price by the number of units or shares per contract. If XYZ stock index futures are trading at $50.25 per share and the contract is for 100 shares of XYZ stock, then the nominal value of the futures contract would be $5,025.00.

Offsetting
liquidating open positions by either selling fungible contracts in the same contract month as an open long position or buying fungible contracts in the same contract month as an open short position.

Open Interest
The total number of open long (or short) positions in a given contract month.

Open Position
A futures contract position that has neither been offset nor closed by cash settlement or delivery.

Performance Bond
Another way to describe margin payments for futures contracts, which are good faith deposits to ensure performance of person's obligations under the futures contract rather than a down payment for the underlying security.

Physical Delivery
The tender or receipt of the actual security underlying the security futures contract in exchange for payment of the final settlement price.

Position
A person's net long or short open contracts.

Regulated Exchange
A registered national securities exchange, a national securities association registered under section 15(a) of the Securities Exchange Act of 1934, a designated contract market, a registered derivatives transactions execution facility, or an alternative trading system registered as a broker dealer.

Security Futures Contract
A legally binding agreement between two parties to purchase or sell in the future a specified number of shares of a security (such as common stock, an ETF or an ADR) or a narrow based security index, at a specified price.

Settlement Price
1) The daily price that the clearing organization uses to mark open positions to market for determining profit and loss and margin calls. 2) The price at which open cash contracts are settled on the last trading day and open physical contracts are invoiced for delivery.

Short
1) The selling side of an open futures contract.
2) A person who has sold futures contracts that are still open.

Speculating
Buying and selling futures contracts with the hope of profiting from anticipated price movements.

Spread
1) Holding a long position in one futures contract while holding a short position in a related contract or contract month in an attempt to profit from an anticipated price movement in the relationship between the two contracts.
2) The price difference between two futures contracts or contract months.

Stop Limit Order
An order that becomes a Limit Order when the market trades at a specific price. The order can only be filled at the stop limit price or better.

Stop Loss Order
An order that becomes a Market Order when the market trades at a specified price. The order will be filled at whatever price the market is trading at. Also called a stop order.

Tick
The smallest price movement allowed in a particular contract.

Trader
A professional speculator who trades for his own account.

Underlying Security
The instrument on which the security futures contract is based. This instrument can be an individual equity security (including common stocks, ETF's and ADR's) or narrow-based indexes.

Volume
The number of contracts bought or sold during a specified period of time. This figure includes liquidating transactions.

There is a substantial risk of loss in futures and forex trading. You should only trade with risk capital that you can afford to lose without impacting your lifestyle or retirement plans.

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Futures and Forex terms

Glossary of Trading Terms