Glossary

Welcome to Fineco’s Glossary! It will help you better understand the financial terminology and master your financial skills.

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Obligation

In a financial sense, obligations are any outstanding debts or payment commitments someone has made. Obligation is a very broad term that encompasses bank loans, bonds, mortgages, credit card debt, money itself (an obligation to be credited with the value of the note or coin), and many other forms of liabilities.

Oil trading

Oil trading is the buying and selling of oil or oil-based financial instruments in order to make a profit. Few oil traders actually trade in the physical commodity itself; rather, they gain exposure to oil through derivatives like contracts for difference (CFDs), options, and futures.

An oil future, for example, is an agreement to sell a set amount of oil at a fixed price on a given date in the future. Most traders who buy oil futures sell them before they expire so they avoid having to deal with the commodity itself. But the price of futures moves with the price of oil itself, allowing traders to profit from these movements.

The prices of commodities like oil are often very volatile, providing ample opportunities for traders to profit (or incur losses) from swings.

Options

An option is a financial arrangement under which someone has a right (but not an obligation) to buy or sell an underlying asset (a commodity, security, or currency) at a certain price and on a certain date. Options are divided into call options (the right to buy an asset) and put options (the right to sell an asset).

For example, an investor might purchase a 3-month call option on stock in Company A at a strike price of $1000 and with a premium of $20. After three months, the stock is worth $1100, and the investor exercises the call option and takes delivery of the stock. The investor’s profit is the current value of the stock minus the strike price and premium ($1100-$1000-$20), or $80. Options traders usually sell options at their market price before they expire, thus cashing in on price changes but avoiding having to handle the underlying asset.

Options on futures

Options on futures, also referred to as futures options, are a right but not an obligation to buy or sell futures contracts on a certain date for a pre-established price. Like any other options, futures are divided into calls and puts. Options are less risky and less volatile than trading directly in futures contracts. Since futures themselves are derivative instruments, which means they are based on the value of an underlying asset and are not the asset itself, options on futures are second derivatives, adding an additional degree of complexity.

OTC trading

OTC trading stands for over-the-counter trading, which is a system where securities are exchanged directly through broker/dealer networks without being channelled through an official exchange that supervises the transaction, a method known as exchange trading. OTC trading is also known as off-exchange trading.

Securities that trade over-the-counter include stocks of small companies that do not meet the requirements to be listed on an exchange, as well as bonds, which are issued directly by corporations or government institutions. Some investors view OTC trading as risky. The OTC market gives smaller firms access to financing they would not be able to achieve otherwise.