Trading in stocks is a risky pursuit, especially if you’re a day trader. There is nothing like a sure stock, which means that no stock is immune to market volatility.
Your money can go up in smoke in only a matter of seconds. You can also win big time. But winning will largely depend on your understanding of the stock market.
Deep knowledge of stock trading will greatly reduce the possibilities of losing money. That’s why it helps a lot to have the stock market terms in the back of your mind before taking the plunge.
With that in mind, here are the common stock market terms every first-time or accustomed stock trader must have.
Basic Market Terminology:
A stock is a piece of ownership in a company. For instance, if you buy a stock in Walmart, you own a part of the retail store. Day traders buy company stocks with the aim of making profit at the end of the trading day.
A stockbroker is a regulated professional who is responsible for buying and selling stocks, as well as other securities for stock traders through a stock exchange. They get a fee or commission for doing that. Essentially, a stockbroker links a stock trader to a stock market.
- Stock market
It’s a place where buyers and sellers come together at any given time to trade stocks.
- Online brokerages
They are like stock brokers; only they are institutions that allow you to create an account with them in order to buy stocks easily. Basically, you transfer money from your bank account into these brokerage accounts to easily invest in stocks.
- Bull market
A bull market situation is where stocks are going up or are projected to go up. That means the entire stock market is doing great. A bull market means there is great optimism, trader confidence and greater possibilities for higher ROI.
- Bear market
Bear market is the exact opposite of bull market. In this market, stocks are on a downward spiral. Bear market is characterized by plummeting prices and typically shrouded in pessimism. This kind of market typically manifests during economic recessions and depressions.
Smart day traders can benefit from both bull markets and bear markets by utilizing strategies and ideas that can bring in greater returns under different conditions. Short Selling, Put Option, and Short ETFs (short Exchange Traded Fund) are the main ways to profit from a bear market.
Smart traders can also profit from a bull market through Long Positions, Call Option, and Exchange Traded Funds (ETFs).
It means buying stocks in a company. A day trader buys stocks in a company and sells them before the close of the day’s trading.
This means selling of stocks that you’ve purchased. Traders can decide to sell their stocks because they’ve accomplished their objective or because they want to cut their losses.
Liquidity is the ability of your stock to be turned into cash quickly. For example, money in a bank is highly liquid, which means you can instantly get to it whenever you want some. A house, on the other hand, is not liquid because it might take you time to turn it into cash. Day traders, in particular, need to choose high liquid stocks as their aim is to buy and sell quickly (on the same day).
Ask represents the price that a stock seller is willing to accept from a stock buyer to get rid of their stock.
Bid is the highest amount of price a stock trader is ready to pay to buy shares of a given stock.
If you subtract the Ask price from the Bid price, you get the spread.
Close represents the final stock price at the end of the day’s trading.
- Short term trader
A short-term trader seeks to hold out stocks for a few weeks or a few months before selling. Short term traders usually predict that a certain stock is going to rise in a few weeks or months and buy the stock. They later sell the stocks when the prices have actually gone up and make huge profits.
- Long-term investor
Unlike a day trader, a long-term investor seeks to invest in a stock for the long-term (a minimum of one year). Normally, long-term investors think of 3, 5, to 10 years.
- Day trader
Unlike a long-term trader, a day trader seeks to make profits by buying a stock or stocks each day and selling before the close of trading day.
- Short seller
This is a stocker trader who predicts that a stock price or the whole market will go down and so they sell their stock at that moment. When the stock price actually goes down, they buy back their stock at a much lower price. Essentially, they are betting on the market going down to make profits on stock sales.
- Individual investor
An individual investor is any regular person who goes out there to by a stock.
- Institutional investor
As the name suggests, an institutional investor is an entity (investment bank, hedge fund, mutual fund) buying a stock.
- Large stock investor
This is an individual who invests in large companies such as Microsoft, Apple, Coca-Cola and much more. We are talking about companies with a wealth portfolio of 50, 100 and 200 billion dollars.
- Mid-stock investor
A mid-stock investor, on the other hand, is an individual who invests in companies with wealth portfolios of between 20 to 50 billion dollars.
- Small stock investors
Small stock investors seek to invest in companies with wealth portfolios of half a billion dollars to five billion dollars.
- Micro-stock investor
Micro-stock investors seek to invest in small companies that are still publicly traded. These kinds of investors target companies under $250 million market cap.
IPO stands for Initial Public Offering. It’s sometimes known as stock market launch. IPO is a kind of offering where a company sells its shares to institutional investors. Institutional investors then list the shares for sale to the general public. Companies announce IPOs in order to raise capital for their expansion.
- Secondary offering
A company can sell its stocks and realize later that they’re doing well and decide to initiate another offering in order to sell more stocks to raise more money for expansion. This is called secondary offering.
- Market capitalization
Market capitalization or market cap is basically the value of a company in the stock market. This value is arrived at by multiplying the number of shares of a company by the price of the stock. Market capitalization is not the real value of a company, as most people tend to think. The value of a company takes multiple factors into account, including assets, liabilities, and cash.
Short for foreign exchange. Simply means a marketplace for trading different currencies. You usually trade currencies through a forex broker.
- Authorized stock
Authorized stock represents the amount of shares a company is legally allowed to issue. This amount can only be increased through a shareholder vote. Companies typically don’t issue all of their authorized stocks. They reserve some for future needs.
- Issued stock
Issued stock represents all authorized stocks that have already been issued to traders or investors. Although authorized stocks are not all issued, all issued stock is normally authorized. Some companies usually buy back the issued shares. Why? To utilize them to increase earnings-per-share, for future procurement purposes, and to have a huge stock reserve to sell later at a much higher price.
- Treasury stock
Treasury stocks are stocks that have been repurchased by the issuing company. After the company buys back these stocks, they are at liberty to retain, cancel or reissue them. However, treasury stocks do not come with privileges such as voting rights or claim to dividend.
- Outstanding stock
Outstanding stocks represent stocks that haven’t been repurchased yet, which means they are still possessed by the investors.
- Trading volume
Trading volume represents the number of shares being traded every day. Trading volume says a lot about a stock’s liquidity.
Buying on margin is the act of borrowing money from a stockbroker to buy stocks. It’s, essentially, a loan from a brokerage. Margin lets you buy more stock than you would be able to afford. To trade on margin, you must have a margin account.
- Margin account
A margin account is a type of account offered by brokerages that enables traders to lend money to buy stocks. For example, a stock trader may only have 50% of the value of the stock. With a margin account, they will be able to borrow the remaining 50% to be able to buy the stock.
If a company makes a good profit, it can decide to distribute a portion of it to its shareholders. These are called dividends. Note that not all companies give dividends to its shareholders.
Yield is the return on your investment. It’s usually calculated as a percentage of your total investment. It is typically paid out as dividend.
Hedging is the act of managing risk by offsetting the possibilities of loss coming from stock price fluctuations. In essence, it’s the transfer of risk without buying insurance policies.
Volatility is the frequency and gravity with which the prices of stocks fluctuate. If the stock price swings a lot, it means the market is more volatile. When the volatility of the market is low, stock prices remain stable. When there is a lot of volatility, there is too much fear, which triggers panic. That’s when you see stocks being traded rapidly back and forth.
A rally is a period of rapid increases in stock prices. This kind of price movement may occur during a bull or bear market. And that’s when you hear of terms like bear market rally or bull market rally.
- Moving average
This is the average price-per-share of stock in a specific time period, usually 50 and 200 days.
This is the platform or market where different stocks are traded. The most popular exchange in the world include New York Stock Exchange and London Stock Exchange
ADRs stand for American Depository Receipts. It’s a program that allows United States investors to buy foreign stocks while in the country. They can buy stocks in dollars and receive their dividends in dollars. ADRs allow American companies to increase their shareholder base, which in turn, increases their bottom-line.
- Blue chips stocks
These are stocks from large-scale organizations that have established a reputation for high quality, and capability to operate profitably in both good and bad environments. Essentially, they are stocks of companies that have been in business for a very long time and are very stable.
- Going long
Long-term investors typically buy low-priced stocks in anticipation that the price will increase someday so that they can sell for a bigger profit.
- Stock market Index
Stock market index is simply the measurement of the value of a part of the stock market. It’s usually calculated from the prices of given stocks. It’s actually how the stock market traded. Were they up or down? So when someone says they want to buy an index fund, they mean a fraction of what the stock market is at that time.
Portfolio is the entire investment owned by a stock trader or an investor. An investor is allowed to possess as little as one stock or an unlimited amount of stock.
When we say a stocked popped, it means a stock went up substantially.
When a stock crashed, it means the stock went down significantly. So you can only use crashed when the stock price went down substantially.
Volume is the amount of stock that traded the previous day. That means if you experienced a high volume day, including high volatility, then the volume was high. If you experienced a low volume day, and low volatility, it means a lot of stock was traded.
If a stock is labeled a dog, it means it’s a bad stock. Most day traders keep off such stocks. This term was very popular in the 90s, but it’s uncommon these days.
- Market sentiment
Market sentiment is a term that describes how confident or how less confident a stock market is at a given time. If the market sentiment is high, traders feel very confident and optimistic. If the market sentiment is low, traders are not confident in the stock market, and there is a lot of pessimism.