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Forex Dictionary Part 3

Forex Dictionary Part 3

Equity derivatives

An equity derivative is a financial instrument that has equity instruments or equity as the underlying asset. An equity instrument is a basket of selected shares of - for example - one sector (energy, automotive, etc.) in the form of an index, or an index of the entire stock market.

Equity dividends

Some businesses do not pay dividends but offer their shareholders free shares. The tax office also considers this to be a dividend, and hence, this revenue is subject to taxation.

Equity funds

Some funds have at least 66% invested in equities. They are characterised by short-term exchange rate fluctuations, even fractions of percentages in a few months. They are risky funds suitable for the most extended investment horizon due to the advantage of the long-term highest appreciation potential.

Equity instruments

Equity instruments can be considered all financial instruments that are in any way linked to shares. They occur in the form of shares that can be traded on stock exchanges. Here, they are listed or in a derivative form, where shares serve as the underlying asset for financial derivatives.

Equity derivative

They are traded both on the stock exchange and on the OTC market. Options give their owner (buyer) the right, but not the obligation, to settle the underlying instruments in the future.

A stock option serves as a "voucher" for the purchase or sale of shares in the future, at a predetermined price, in a predetermined amount. The price at which the buyer has the right to buy or sell the underlying instrument is called the exercise price of the option, or also the strike price. As the seller of the option is disadvantaged, he receives a so-called premium option from the buyer.

Joint Stock Company

It is a company whose capital is made up of a certain number of shares from its members. The Company is responsible for breaching its obligations with all its assets. It's an Anonymous society and has a limited partnership for shares.

Stock indicators

Stock indicators, or equity market indicators, are the technical indicators used by stock market traders to predict stock price developments. Subsequently, they’re useful for measuring when to enter or exit a trade.

Stock Pair Trading

Stock Pair Trading is a trading strategy based on trading two different stocks at the same time. In pair trading, the investor enters one long position (buying) and trades the second share in a short position (selling). By doing so, the shares get covered, and the risk reduces.

In pair trading, we choose two stocks with historically correlated (similar, tied) course developments, mostly from the same sector. We assume that their prices are moving in the same direction, but they are delayed, and the investor expects to return to similar levels. Therefore, one share is rising faster and the other is slower, or the second one may be falling.

This creates a spread between the two stocks. The trader is betting on getting rid of this spread and entering a long position with the stock that "lagged”, while the stock that grew faster" gets shorted.

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