Warrior Trading Blog

Debt Definition: Day Trading Terminology

Debt photo

A debt in financial terms is a legal arrangement that outlines a specific lending and repayment procedure for a given amount of some asset, most often cash.

Most debts will carry a fixed or variable interest rate or payment to compensate the lender for the absence of their asset and the counterparty risk from putting the asset in the possession of the other party.

Debt in Finance

Debts are absolutely central to the functioning of a modern economy.

The complex economic behaviors and interrelationships that are the machinery of a modern economy rely on individuals and corporations being able to interact without full payment being necessary immediately after each and every transaction.

This means that there will always be an uncountable number of outstanding debts being generated and settled at any on time, resulting from the simplest to the most complex economic transactions.

In financial terms debt is generally understood to be either a specific arrangement between two parties (a mortgage between a consumer and a bank, a bond between a corporation and the bondholder, etc) or the totality of one entity’s outstanding liabilities.

Both individuals and corporations use debt to achieve outcomes in the present that they would otherwise need to save to accumulate capital to achieve.

This can mean a corporation taking on debt to buy a new factory or an individual taking on debt to buy a new car. In either scenario they are able to do something in the present by taking on debt that they would otherwise need to wait until some future point to do.

The managing and repayment of debt is critical to both individuals and corporations, and both often encounter major issues in being able to function normally as a result of being unable to meet their outstanding obligations.

The less creditworthy an individual or corporation is, the less debt they will have access to and the more unfavorable the terms of the debt will be. This means that they will have a more difficult time using debt to achieve present outcomes.

Trading and Debt

Day traders will encounter debt in 3 major forms: in tradable securities, on the balance sheets of corporations and in margin lending facilities provided by their brokers.

Tradable debt securities come in many forms, but are defined by the ownership rights that they bestow upon the holder.

Most debt securities will have fixed or variable interest rates, and their value will be largely determined by the perceived creditworthiness of the issuer and comparative rates of interest in the market.

The debt that corporations carry on their balance sheet will have a major influence on their valuation.

Day traders will often examine a corporation’s debts in an effort to identify whether the market is currently under or over valuing the shares or debt instruments of the corporation.

Margin lending facilities are an important element in most day trading strategies. These facilities allow day traders to take on debt provided by their broker so that they can trade in values greater than the cash value of their account.

Final Thoughts

Debt plays an utterly central role in modern finance, so it is essential that day traders understand its general nature and its various manifestations in the contemporary marketplace.