Common Financial Terms that You Need to Know
- What is a Financial Market Maker?
- How Does Forex Rollover Work?
- What is a Margin Call?
- What Does Financial Default Mean?
- How Do Financial Broker Commissions Work?
- How to Use Leverage in Financial Markets?
What is a Financial Market Maker?
A market maker is a dealer that is tasked with providing prices that help set the liquidity of a given security. Market makers are always willing to purchase on the bid price and sell at the offer prices. Maker makers generally make their revenue by capturing the difference between the bid price and the offer price.
Example: A currency market maker provides the liquidity available for a specific currency pair such as the EUR/USD.
How Does Forex Rollover Work?
A forex rollover is a situation where a position is being settled at some date in the future. Most forex transaction is spot, which means delivered in two business days. To rollover a position to a future date, a dealer would need to unwind the original positions and simultaneously add a new position to a future settlement.
Example: When a dealer or broker rolls a forex positions they are adding or subtraction forward points to the original position.
What is a Margin Call?
When the market value of collateral goes down, the lender asks the investor to deposit additional funds or securities so the account meets the minimum maintenance margin – this is called margin call. In trading, margin refers to cash or securities required to be deposited by the investor to the brokerage firm.
Example: If you borrow loan from a lender, you may have provided a collateral security with the value higher than the loan amount. This margin acts as a safety cushion for the banker.
What Does Financial Default Mean?
Default occurs when a party fails to pay their obligation on a loan. The language that determines if a financial default occurs can be of either interest or principal when it is due. When a default occurs the lending generally has some form of recourse such as collateral.
Example: A trading default can occur when a trader cannot pay his liability from a transaction.
How Do Financial Broker Commissions Work?
Commissions are payments received by brokers for the services they provide. Commissions are generally attached to transactions and are an additional charge that can fluctuate from broker to broker. Some brokers will avoid charging transaction-based commissions by charging a flat fee on a portfolio.
Example: Commissions will vary and in many cases are regulated by an authority.
How to Use Leverage in Financial Markets?
Funds to a company are provided by either shareholders or creditors. The debt-equity ratio is the ratio of long-term debt and shareholders equity. It is a measure of the leverage of a company. Leverage structure Ratio is based on the relationship between borrowed funds and owner’s capital.
Example: Suppose you purchase a house valued at $500,000 by a mortgage loan of $ 400,000 and own fund of $100,000. You are using financial leverage. The leverage ratio is 4:1.