Archive for October, 2011

The financial world is filled with lots of technical and complex concepts. Hence, if you really want to fully understand how it works and what you can do to gain income from it, then what you need to do is to start understanding some basic concepts first. This can be done by picking some basic terminologies that you can define.

In this view, among the most basic terms that you have to understand are the cash settled, derivative, settlement risks, open interest as well as inside market and equivalency. This article will define the basic meanings of these terms and probably provide illustrations and examples, if necessary.

Cash Settled

Cash settled is a short term of cash-settled options. This is one of the options that a trader can choose when dealing with securities. This is because it does not required the physical or actual delivery of the specific security primarily because of the high costs that will be incurred from transportation. In some cases, this is the option of traders, specifically buyers, who do not want to get hold of the physical security.

Derivative

On the other hand, the second basic term is the derivative, which refers to the instrument being used for trading. This serves like a contract between two or more parties wherein there are some specifications on the terms like price, interest and the like.

Settlement Risk

As its name suggest, settlement risk is a kind of risk that usually occur when the counterparty was not able to deliver its commitment according to the agreed contract or terms and conditions. This is very common in all kind of trade, but one can minimize it by monitoring and checking that the seller, for instance, will deliver its commitment no matter what.

Open Interest

Open interest can mean two things. On the one hand, it can refer to the specific number of the buy market orders that are available even before the opening of the stock market. On the other hand, it can also mean that total options and futures contracts that were not delivered during the specific trade.

Inside Market

This is specifically important for people who are engaging in security trading. This is because inside market means that highest bid and the lowest level of offered price between the different competing market makers, specifically in the field of security trading at the NASDAQ market.

Equivalency

Last, but not the least important of these basic terms that you need to understand, is the equivalency. This term can actually mean different things. However, among the most common usage of this is on the cash equivalency, which is very much related to its root word equivalent. For example, when it comes to the cash equivalency, this can mean an asset tat can be changed easily into cash.

Risks and diversifications are among the most basic concepts that you need to understand when you are planning to enter CFDs trading, share dealing as well as spread betting. As a matter of fact, these two aspects can also be considered as the foundations of successful financial trading. Hence, this is to say that risks and diversifications always go hand in hand when it comes to contracts for difference or CFDs, share dealing and even spread betting. These can be understood by explaining the basic concepts of risks and diversification.

On the one hand, there are so many kinds of risks depending on the type of instrument that you are using or trading. In the world of finance, a more appropriate term for this is the financial risk, which refers to the generic term for risks that are associated with different kinds of financing. When it comes to the field of investment, this can also be referred as the investment risks, but they both have the same essence.

The risks always go hand in hand with the different kinds of trading and financial transactions because those are always filled with uncertainties. There are some predictions and forecasting tools that you can use, but those are not 100% accurate since they are just estimates of what would most likely happen in the future. Hence, with these uncertainties, the investors can decide whether to cast the deal or give it a shot. By recognizing that there are risks associated with such transaction, deciding to push it through definitely involves different levels and intensity of risks.

On the other hand, diversification is one of the best ways that an investor or trader can explore in order to minimize the risks linked with a specific financial transaction. As a matter of fact, what the term diversification means in a nutshell is to reduce the level of risk by investing on different varieties of assets.

There are of course some clarifications for this in order for this concept to be used properly. For example, there is a specific meaning on what different varieties of assets are. This does not mean different brands or names. Specifically applying this with financial transactions, this does not mean that stocks on the same industry are different. This must be highlighted because the rationale behind diversification in CFDs, share dealing and financial spread betting is that you must enter into different instruments from different industries.

Another illustration of justification is that, you cannot invest on a different stock under the industry of metal trading. This is because when a crisis hit that specific industry or market, you will totally be hit as well. Hence, the proper diversification means you have to put your eggs on different baskets so that when one basket fell, you still have other eggs on different baskets.