Glossary of trading terms

Refers to the offer side of the market dealing.

A very heavy round of selling.

A partial fill happens when only a portion of a limit order is executed, the share price surpasses the specified limit order target during the trade. In this instance shares will only be exchanged up to the price on the limit order, and the rest remain unfilled.  

For example, an order for 500 shares at $50 may limit the fill to 20 shares as the share price tips up to $50.01 mid-trade, leaving the order short of 480 shares. Partial fills are common when using limit orders.   

Waiting for certain levels or news events to hit the market before entering a position.

A physical settlement requires the option seller to deliver the underlying asset if it’s a call. For puts, the option seller must buy the underlying asset from the buyer at the strike price. Physical settlement is more common for stocks and commodities than other financial securities.

Most derivative transactions do not get exercised as they’re traded before the delivery dates. However, physical delivery of the underlying asset can occur with some trades, mostly with commodities.

Clearing brokers and agents organise settlements by physical delivery. After the last day of trading, regulated exchanges’ clearing departments report the transactions of underlying assets at the previous day’s settlement (closing) prices.

Traders with short positions in the physical settlement of futures contract to expiration must deliver the underlying asset.

Traders who don’t own them are obliged to buy them at the current price. Whoever owns the assets are compelled to hand them over to the clearing organisation.

Cash vs physical settlement

The most prominent advantage of cash settlement is that it eases trading futures and options, which would present practical difficulties using the physical settlement method.

Cash settlements enable traders to buy and sell contracts on specific commodities or indices impractical to transfer physically.

The main benefit of physical settlement is potential manipulation by either party is removed because the transaction gets checked by the broker and the clearing exchange.

The cash settlement method is where parties choose to settle the gains or losses of transactions through payment in cash once the contracts expire.

In contrast, physical settlement is a mechanism where parties settle the payment by either paying in cash to secure their long position or deliver the security to own the position.

Cash settlement carries minimal risk, and the physical settlement method has a higher amount of risk.

Cash settlement offers more liquidity in derivatives markets, and physical settlement offers negligible liquidity in the derivatives market.

Cash settlement is rapid because transactions happen in cash, while physical settlement takes longer.

Contract sellers find cash settlement convenient and straightforward, making the method popular. Sellers of a contract will not need to pay extra costs for engaging in cash settlement transactions.

In comparison, the physical settlement method is not that straightforward and can be time-consuming. Parties to the transactions pay extra costs for physical delivery and the physical settlement method, such as delivery, transportation, brokerage fees, etc.

A price level is the cost of goods or services that a consumer or other party has to pay to purchase a service or product. Price levels rise as demand increases and drop when demand decreases.

Price transparency is the extent to which all relevant information is available around trading quantities, bid prices, and ask prices of a security so all agents are operating with the same information. Higher transparency allows traders to make better decisions about what securities to invest in and limits barriers to entry.

Price transparency varies between different exchanges. Some, like the NYSE, offer limited price information, such as the highest and lowest bid. Others, like Nasdaq, provide a full suite of information against each stock including trading quantities, bid prices, and ask prices.

Profit is the revenue earned for a business activity or transaction after subtracting any related expenses. When analysts look for potential investments, profitability will be a crucial indicator of business health. The most common types of profit are gross profit, operating profit, and net profit.

Gross profit considers only sales and the cost of goods sold (COGS.) Operating profit takes gross profit and subtracts the operational costs. Finally, net profit will deduct the taxes and interest from the operating profit to give a complete picture of a company’s overall profit.

A pullback is a moderate drop or a slowdown in an asset or commodity's price after a continuous upward trend. Because pullbacks are considered a temporary pause before resuming its upward journey, it can offer a great opportunity to invest, especially for traders looking to make an entry into an aggressive market.

Pullbacks don't represent a change in the price direction of an asset or commodity but a profit-making opportunity following a strong run. Retracements and consolidations are similar events and can sometimes be used interchangeably with pullbacks, although they typically refer to longer-termed drops in price.

The purchasing managers' index (PMI) measures the economic wellbeing and direction of the manufacturing and services sectors. It looks at key indicators that show signs of retraction or growth in the economy such as inventory levels, production, and employment. As a result, the PMI provides insight and guidance to company decision-makers and investors.

The PMI is calculated monthly by the Institute for Supply Management (ISM), which gives the industry a number between 1-100. An index score above 50 indicates an expansion in the sector, and a score below 50 represents a contraction.  A score of 50 indicates no change.

Measures the outlook of purchasing managers in the service sector. Such managers are surveyed on a number of subjects including employment, production, new orders, supplier deliveries and inventories. Readings above 50 generally indicate expansion, while readings below 50 suggest economic contraction.

Put options are financial contracts that give the owner the right, but not the obligation, to sell an underlying asset at a specified price within a specific time. A buyer of a put can profit when the underlying asset falls in price.