Let’s look at some of the most
important stock market terms you’ll encounter as you learn how to trade stocks. Feel free to bookmark this page so
you can return to it later as a handy reference.
1.
Annual Report
An annual report is a report prepared
by a company that’s intended to impress shareholders. It contains tons of
information about the company, from its cash flow to its management strategy.
When you read an annual report, you’re judging the company’s solvency and
financial situation.
2.
Arbitrage
Arbitrage refers to buying and selling
the same security on different markets and at different price points. For
instance, if stock XYZ is trading at $10 on one market and $10.50 on another,
the trader could buy X shares for $10 and sell them for $10.50 on the other
market, pocketing the difference.
3.
Averaging Down
When an investor buys more of a stock
as the price goes down. This makes it so your average purchase price decreases.
You might use this strategy if you believe that the general consensus about a
company is wrong, so you expect the stock price to rebound later.
4.
Bear Market
Gold cast statuette depicting a
stylized bull and a bear in dramatic contrasting light representing a financial
market trends created by Inked Pixels – Shutterstock.com
Trading talk for the stock market being
in a downward trend, or a period of falling stock prices. This is the opposite
of a bull market. If a stock
price plummets, it’s very bearish.
5.
Beta
A measurement of the relationship
between the price of a stock and the movement of the whole market. If stock XYZ
has a beta of 1.5, that means that for every 1 point move in the market, stock
XYZ moves 1.5 points, and vice versa.
6.
Blue Chip Stocks
The stocks behind large,
industry-leading companies. They offer a stable record of significant dividend
payments and have a reputation of sound fiscal management. The expression is
thought to have been derived from blue gambling chips, which is the highest denomination
of chips used in casinos.
7.
Bourse
This stock market term is a little
murky. Technically, it’s just another name for the stock market and originates
from a house in which wealthy men gathered to trade shares. However, when you
hear it in today’s conversations about the stock market, it usually either
refers to the Paris stock exchange or to a non-U.S. stock exchange.
8.
Bull Market
When the stock market as a whole is in
a prolonged period of increasing stock prices. It’s the opposite of a bear market.
A single stock can be bullish or bearish too, as can a sector, which I’ll
describe later on.
9.
Broker
10.
Bid
The bid is the amount of money a trader
is willing to pay per share for a given stock. It’s balanced against the ask
price, which is what a seller wants per share of that same stock, and the
spread is the difference between those two prices.
11.
Close
The NYSE and Nasdaq close at 4 p.m.,
with after-hours trading continuing until 8 p.m. The
close simply refers to the time at which a stock exchange closes to trading.
12.
Day Trading
The practice of buying and selling
within the same trading day, before the close of the markets on that day, is
called day trading. This is my primary trading strategy, although I
have a long-term portfolio, as well. Traders who participate in day trading are
often called “active traders” or “day traders.”
13.
Dividend
A portion of a company’s earnings that
is paid to shareholders, or people that own that company’s stock, on a
quarterly or annual basis. Not all companies pay dividends. For instance, if
you trade penny stocks, you’re likely not after dividends.
14.
Exchange
Capital tablet exchange screen
skyscraper – created by Jcomp – Freepik.com
A place in which different investments
are traded. The most well-known exchanges in the United States are the New York Stock Exchange (NYSE) and the Nasdaq.
15.
Execution
When an order to buy or sell has been
completed, the trader has executed the transaction. If you put in an order to
sell 100 shares, this means that all 100 shares have been sold.
16.
Haircut
In its most simplest stock market
terms, a haircut is an extremely thin spread between the bid and ask prices of
a given stock. It can also refer to a situation in which a stock price gets
reduced by a specific percentage for margin trades or other purposes.
17.
High
A high refers to a market milestone in
which a stock or index reaches a greater price point than previously. Record
highs can signal that a stock or index has never reached the current price
point, but there are also time-constrained highs, such as 30-day highs.
18.
Index
A benchmark that is used as a reference
marker for traders and portfolio managers. A 10 percent return may sound good,
but if the market index returned 12 percent, then you didn’t do very well since
you could have just invested in an index fund and saved time by not trading
frequently. Examples are the Dow Jones Industrial
Average and Standard & Poor’s 500.
19.
Initial Public Offering (IPO)
hands on a stock market created by
solarseven – Shutterstock.com
An IPO is the first sale or offering of
a stock by a company to the public. It happens when a company decides to go
public rather than remain solely owned by private or inside investors.
The Securities
Exchange Commission (SEC) has
strict rules that companies must follow before issuing an IPO.
20.
Leverage
I’m not a
fan of leverage, but it’s good for
you to know this stock market term. When you use leverage, you borrow shares in
a stock from your broker with the goal of increasing your profit. If you borrow
shares and sell them all at a higher price point, you return the shares and keep
the difference. It’s a dangerous game that I urge you to avoid playing.
21.
Low
Low is the opposite of high. It
represents a lower price point for a stock or index.
22.
Margin
A margin account lets a person borrow
money (take out a loan, essentially) from a broker to purchase an investment.
The difference between the amount of the loan and the price of the securities
is called the margin.
Trading on margin can be dangerous
because, if you’re wrong about the direction in which the stock will go, you
can lose significant cash. You must often maintain a minimum balance in a
margin account.
23.
Moving Average
A stock’s average price-per-share
during a specific period of time is called its moving average. Some common time
frames to study in terms of a stock’s moving average include 50- and 200-day
moving averages.
24.
Open
In the United States, the stock market
opens at 9:30 a.m. Eastern time every day. It’s based on the trading hours of
the Nasdaq and NYSE. Pre-market trading hours
begin at 4:30 a.m. Eastern, but most traders don’t begin paying attention until
about 8 a.m. Essentially, open refers to the time at which people can begin
trading on a particular exchange.
25.
Order
An investor’s bid to buy or sell a
certain amount of stock or option contracts constitutes an order. You have to
put an order in to buy or sell 100 shares of stock, for instance.
26.
Pink Sheet Stocks
new banknotes of dollars of the USA
created by Millenius – Shutterstock.com
The term “pink sheets” refers most commonly to penny
stocks, which are traded at $5 per share or
less. They’re also called over-the-counter stocks because that’s how they are
traded. You won’t find them on the Nasdaq or NYSE, or any other major exchange,
and they’re often smaller companies.
27.
Portfolio
A collection of investments owned by an
investor makes up his or her portfolio. You can have as few as one stock in a
portfolio, but you can also own an infinite amount of stocks or other
securities.
28.
Quote
Information on a stock’s latest trading
price tells you its quote. This is sometimes delayed by 20 minutes unless
you’re using an actual broker trading platform.
29.
Rally
A rapid increase in the general price
level of the market or of the price of a stock is known as a rally. Depending
on the overall environment, it might be called a bull rally or a bear rally. In
a bear market, upward trends of as little as 10 percent can qualify as a rally.
30.
Sector
A group of stocks that are in the same
industry belong to the same sector. An example would be the technology sector,
which includes companies like Apple and Microsoft. Some traders prefer to trade
in a specific sector, such as energy, because they know the industry well and
can better predict stock price fluctuations.
31.
Share Market
Challenge idea game wooden one
corporate created by Mindandi – Freepik.com
Any market in which shares of a
particular company are bought and sold. The stock market is an example — and
probably the most significant example — of a share market.
32.
Short Selling
When you short-sell a stock, you borrow shares from someone else with the
promise to return them at a point down the road. You then sell the stock for a
profit. It’s a way to take advantage of a stock that you believe will decrease
in price. After you sell short, you can buy back the shares at the lower price
point and take the difference in price as your profit.
I use short selling on a regular basis.
It’s often a smart move in a volatile market if you see patterns that indicate
a sharp downward turn for a stock.
33.
Spread
This is the difference between the bid
and the ask prices of a stock, or the amount for which someone is willing to
buy it and the amount for which someone is willing to sell it. For instance, if
a trader is willing to trade XYZ stock for $10 and a buyer is willing to pay $9
for it, the spread is $1.
34.
Stock Symbol
A stock symbol is a one- to
four-character alphabetic root symbol that represents a publicly traded company
on a stock exchange. Apple’s stock symbol is AAPL, while Walmart’s is WMT.
35.
Volatility
The price movements of a stock or the
stock market as a whole. Highly volatile stocks are those with
extreme daily up and down movements and wide intraday trading ranges. This is
often common with stocks that are thinly traded or have low trading volumes.
I’m a big fan of high-volatility stocks
because I can make a big profit off spikes or dips, depending on how I’m
trading, in a short period of time. High volatility often makes trading more
exciting, but it’s also risky if you’re inexperienced.
36.
Volume
The number of shares of stock traded
during a particular time period, normally measured in average daily trading
volume. Volume can also mean the number of shares you purchase of a given
stock. For instance, buying 2,000 shares of a company is a higher-volume
purchase than buying 20 shares.
37.
Yield
Often refers to the measure of the
return on an investment that is received from the payment of a dividend. This
is determined by dividing the annual dividend amount by the price paid for the
stock. If you bought stock XYZ for $40 per share and it pays a $1.00-per-year
dividend, you have a “yield” of 2.5 percent.
The
Bottom Line
Knowing your stock
market terms will make you a better trader. It takes time to grasp the
intricacies of securities trading, but once you do, the stock market terms
above will become part of your daily vocabulary.
I urge you to quiz yourself on stock
market terms until you’re highly familiar with them all. You can also explore
other stock market terms as they pop up in your research so you don’t get
confused.
If you’re interested in learning how to
trade stocks, consider applying for the Trading Challenge. I’m currently
hunting for my next successful student, and I look forward to working with you
in the future.
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