We are excited to meet the investing newbies that read this article, it is very important that you know and understand the basics before diving into any new experience… Especially stock market investing. There is a lot of risk involved when buying and selling shares on the live market, there is a serious chance of losing money.
Here I will be describing in the best possible way what some of the most important terms and phrases used on the trading floor mean. Online brokers throw a lot of terminology at you when you open an account, this isn’t to scare you, it’s to prepare you for what is to come. You need to walk before you can run.
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28 Key Terms You Need To know
Arbitrage - This refers to buying a stock on one market and selling on a different one. An example is if stock ABC was $10 on one market and $10.20 on another, the trader would buy shares at $10 and sell them for $10.20 on the other market and the difference is profit.
Averaging Down - This is where a trader will buy more stock as the price goes down, making their average buying price lower. You would use this strategy if you believe the price will bounce back.
Bear Market - A term used to describe the market being on a downward trend, or a period of falling share prices.
Bull Market - The opposite to a bear market, a bull market describes an upward trending market, or a period of rising share prices.
Beta - A measurement between the price of a stock and the movement of the market, if stock ABC has a beta of 1.5, this means when the market moves 1 point up or down, stock ABC moves 1.5 points.
Blue Chip Stocks - The stocks behind larger companies. They have a track record of paying dividends, and mostly have sound fiscal management.
Broker - A person who buys or sells an investment for you, normally for a commission or fee.
Bid - The bid is the amount of money a person is willing to pay per share for a stock. It’s balanced against the ask price, which is what the seller wants per share. The difference is called the spread.
Dividend - This is a portion of the companies earnings that is paid to shareholders, or people that own the companies stock. Normally paid on a quarterly basis however certain companies do not pay dividends.
Execution - When an order to buy or sell stock has been completed.
High - This refers to a market milestone where the stock has reached its highest price point since last record. It can sometimes cause a reverse in movement.
Index - A benchmark that is used for reference. If a trader has made 10% ROI, but the market index is 12% ROI then you haven’t done as well as you think and you should consider investing in an index fund.
Initial Public Offering (IPO) - An IPO is the first sale or offering of a stock by a company to the public. It happens when a company decides to trade publicly and not be owned by private investors. The SEC has strict rules that companies must follow before issuing an IPO.
Leverage - When you use leverage it is like taking a loan from your broker to buy more stock than you can afford, if the stock price increases that’s great, but if it goes down you could be in a dangerous situation. I would not recommend using massive leverage.
Low - This is effectively the opposite to a stocks highest price point.
Moving Average - A stock's average share price during a specific time period is called its moving average. Popular time frames to look at are 50 and 200 days.
Pink Sheet Stocks - The term pink sheet refers to penny stocks, which are traded for less than $5 per share. You will not find them on the Nasdaq or NYSE, or any other major exchange.
Portfolio - A collection of investments owned by an investor makes up his or her’s portfolio. You can have an infinite amount of stocks or other investments in your portfolio.
Quote - Information on a stock’s latest trading price tells you its quote. This is sometimes delayed by up to 20 minutes unless you are using an actual broker trading platform.
Rally - Rapid movements in the general price level of the market or of the price of a stock is known as a rally. Depending on whether it is a rapid increase or decrease, it could be called a bull rally or a bear rally. In a bear market, upward trends of as little as 10% can qualify as a rally.
Stock Sector - Companies in the same industry belong to the same stock sector. For example, Apple and Mircosoft are both in the technology sector. Some traders prefer to trade in a specific sector, such as construction, because they know the industry well and can better predict stock price fluctuations.
Share Market - Any market in which shares of a particular company are bought and sold. The stock market is an example (and probably the most significant) of a share market.
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 is a way of taking advantage of a stock that you think will decrease in value. After you sell short, you can buy back the shares at the lower price.
Spread - This is the difference between the bid and the ask price of a share. An example would be, if stock ABC has an ask price of $10 and the bid is $9, the spread is $1.
Stock Symbol - A stock symbols is a 1 to 4 character alphabetic root symbol that represents a publicly traded company on a stock exchange. Apple’s stock symbol is AAPL, and Walmarts is WMT.
Volatility - The price movements of a stock are considered volatile if they have extreme up and down movements on a daily basis, they also tend to have wide trading ranges. This is common with stocks that have low trading volume. I am not a fan of trading high-volatility stocks because I prefer a more secure investment over a longer period of time. Even though profits can be made it is harder to predict and a lot more risky.
Volume - The number of shares of stock traded during a particular time, normally measured in 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.
Yield - This often refers to the measure of the return on 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 ABC for $40 per share and it pays $1/year dividend, you have a yield of 2.5%. A good yield in today's market is between 4-6%.
Knowing these stock market terms will make you a better trader. It takes time to grasp the day to day intricacies of the stock market, but once you do these phrases will become part of your daily vocabulary.
Please quiz yourself on stock market terms until you know them inside out. The last thing you want is to be in a situation where there are good deals all around you but you don’t understand what you’re looking at. During your research they will pop up all the time, so don’t get yourself confused, come back and explore to make sure you’re on top of the market.
Check out our articles below on how to begin your journey to becoming an expert stock market trader.
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