Essential Trading Terms and Financial Market Concepts

Posted on May 27, 2026 in Finance

Core Market Terminology

Spot Price: The current market price at which an asset (stock, currency, commodity) can be bought or sold for immediate delivery/settlement. Also called the “cash price.”
Bid Price: The highest price a buyer is willing to pay for a security at a given moment.
Ask Price (Offer Price): The lowest price a seller is willing to accept for a security. Bid-Ask Spread = Ask − Bid.
Lot Size: The minimum number of units/shares in one futures or options contract. In India, lot size is fixed by NSE (e.g., Nifty 50 = 25 units per lot).
Expiry Date: The date on which a futures or options contract expires and must be settled. In India, monthly contracts expire on the last Thursday of the month.
Liquidity: The ease with which an asset can be bought or sold in the market without significantly affecting its price.
Volatility: The degree of variation in the price of a security over time. High volatility equals larger price swings; measured by standard deviation (σ).

Stop Loss (SL): A pre-set order to automatically sell (or buy) a security when its price reaches a specified level, to limit the investor’s loss on a position.
Trigger Price: The price at which a stop-loss or stop-limit order gets activated and becomes a market/limit order. The order is placed but executed only when the price hits this level.
Limit Order: An order to buy or sell a security at a specific price or better. It will only execute at the limit price or more favorable.
Market Order: An order to buy or sell immediately at the current best available market price. Guarantees execution but not price.
Stop-Limit Order: Combines stop and limit orders. When the trigger price is hit, it becomes a limit order (not a market order). It may not execute if the price moves past the limit.

Bull Market: A market condition where prices are rising or expected to rise. Investors are optimistic.
Bear Market: A market condition where prices are falling (typically 20%+ from a recent high). Investors are pessimistic.
Long Position: Buying an asset expecting its price to rise. Profit occurs when the price goes up.
Short Position: Selling an asset (often borrowed) expecting its price to fall. Profit occurs when the price goes down.
Settlement Price: The official closing price of a futures/options contract used for daily MTM and final settlement calculations.
Upper Circuit / Lower Circuit: Maximum allowed price rise (upper) or fall (lower) in a trading session, set as a percentage of the previous closing price.

Derivative: A contract whose value is derived from an underlying asset (stock, bond, currency, commodity, index).
Underlying Asset: The asset on which a derivative is based — e.g., shares, index, currency, commodity.
Hedging: Using derivatives to reduce/offset the risk of adverse price movements in a position already held.
Speculation: Using derivatives to profit from expected price movements without owning the underlying asset.
Arbitrage: Simultaneous buy-sell in different markets to profit from price differences, with theoretically zero risk.
Margin: Deposit/collateral required to enter futures contracts. Initial Margin = entry deposit; Maintenance Margin = minimum balance to keep.
Margin Call: Demand for additional funds when the account balance falls below the maintenance margin.
Mark-to-Market (MTM): Daily revaluation of futures positions; profits/losses are credited or debited to the margin account daily.
Open Interest: Total number of outstanding derivative contracts not yet settled or closed.
Premium: Price paid by the option buyer to the option seller (writer) for the rights in the contract.
Leverage: Control a large position with small capital (margin). Derivatives offer high leverage — amplifies both gains and losses.

Forward Contract: An OTC agreement to buy/sell an asset at a fixed price on a future date. Customized; carries counterparty risk.
Forward Price: F₀ = S₀ × e^rT — agreed price today for future delivery. S₀ = spot, r = risk-free rate, T = time.
Futures Contract: Standardized, exchange-traded contract to buy/sell an asset at a set price on a future date. Cleared via a clearing house — no counterparty risk.
Basis: Basis = Spot Price − Futures Price. Converges to zero at expiry (Convergence).
Contango: Futures price > Spot price. Normal for non-dividend assets with positive storage costs.
Backwardation: Futures price < Spot price. Common in commodities with high convenience yield or supply tightness.
Hedge Ratio (h*): h* = ρ × (σ_S / σ_F). Optimal proportion of futures to hold relative to the exposure being hedged.

Option: A contract giving the buyer the right (not obligation) to buy/sell an asset at a strike price before/on expiry, in exchange for a premium.
Call Option: Right to buy the underlying at the strike price. Profit if price rises above strike.
Put Option: Right to sell the underlying at the strike price. Profit if price falls below strike.
Strike Price (K): Pre-set price at which the option can be exercised.
ITM / ATM / OTM: In-the-Money: has intrinsic value (Call: S>K; Put: SAt-the-Money: S=K. Out-of-the-Money: no intrinsic value.
Risk-Neutral Probability (p): p = (e^rΔt − d) / (u − d)
Black-Scholes Model (BSM): Continuous-time model for European options. Call: C = S₀N(d₁) − Ke^−rTN(d₂). Put: P = Ke^−rTN(−d₂) − S₀N(−d₁).
d₁ & d₂: d₁ = [ln(S₀/K) + (r + σ²/2)T] / σ√T. d₂ = d₁ − σ√T.

Delta (Δ): Change in option price per ₹1 change in underlying. Call: 0 to 1. Put: −1 to 0.
Gamma (Γ): Rate of change of Delta. High near ATM and near expiry. Measures curvature of option price.
Theta (Θ): Time decay — option loses value each passing day, all else equal. Usually negative.
Vega (ν): Sensitivity to volatility (σ). Always positive — higher volatility = higher option price.
Rho (ρ): Sensitivity to interest rate changes. Calls: positive Rho. Puts: negative Rho.

Swap: OTC agreement to exchange cash flows over time on a notional principal (usually not exchanged between parties).
Stop Loss Order (Risk Mgmt): Pre-placed order that automatically exits a position at a set loss level to prevent further loss accumulation.