A lot of traders in the forex trading market often mistakenly identify stock option as a substitute for higher leverage and has lesser value as a requirement of capital because it is used as a bet to direct a stock’s price.
However, stock options are far more complex and have a lot of terminologies that needed to be remembered by traders in order for them to master this aspect of trading.
In this short article, let me give you a run through about the important terminologies forex trading that will be useful for traders when it is needed the most https://www.byfx.com/en/spot-forex-and-bullion/.
First off, in the forex trading market, there are two types of stock option which are named as calls and puts. If you purchase a call, you will earn the rights but not the obligation to buy a stock for a strike price at any given time before the option expires. Put meanwhile gives you the right but not the obligation just like the call but you can strike prices at any given time before it gets expired. Puts and calls are mostly used when dealing with stock options trading.
Here are the terms you should know about forex trading outlined below before you even start investing in spot forex
- Option Pricing- In other terms, this is what they call the premium. The buyer does not have an option to lose the initial premium based on what the contract’s payment appears regardless of what will be the circumstances that underlie the security. It is risky for the buyer if the amount of the payment is more for the given option of the stock they are planning to buy.
- Option types- There are basically two styles of the option, the American and the European which has its own distinct characteristics that make each other unique. The American style option can be used at any given time from the date of the stock’s purchase and its expiration date while the European-style option can only be used during the expiration date of the purchase of the stock but the latter is widely used in the index options of the forex market scene.
- Spread- This the difference between the bid and the asking price that you can see in the market quotes once you start trading. The asking price can be applied to a buy order, and the bid price can be applied to a sell order on the other hand.
- Leverage- Just like what the root word means, you have the leverage to control huge amounts of money in the forex markets. The leverage enables the trader to create more meaningful profits on a normal minuscule on the daily currency movements, and also, at the same time, it only involves minimal risk on the given capital regardless of the position. The leverage can also exponentially increase the profits of the trader as well as the losses so it would be a crucial step for traders to use the leverage wisely because the bigger position size of the leverage, the larger the pip value will create a bigger impact on the trader’s profit or loss.