Stock Trading Terms
Familiarize yourself with common stock terms
There are numerous technical terms and concepts that you need to get a grasp of before you can really understand and make your way around the stock market. The first step to successful trading is to learn the various terminologies and concepts used in the industry. This list of relevant terms and their definitions will make an ideal starting point.
Arbitrage is the act of purchasing and selling the same security on two separate markets at different prices. For instance, if a particular stock is trading at $50 in one market and $60 in another, a trader can purchase the stock for $50 and then sell it in the other market for $60. The trader will pocket the difference of $10.
Averaging down refers to when an investor buys more of a stock as the price goes down. The idea here is that if the price of the stock rises (according to the investor’s expectations), he/she will sell them at a higher price.
A bear market is a stock market that’s stuck in a downward trend. It’s the opposite of a bull market. In a bear market, stock prices tend to fall or plummet. Stocks showing bearish signs means they are likely to fall in price.
A bull market is a market in a period of increasing stock prices. Certain types of stocks and sectors can be bullish while others are not, but a market is generally bullish if the overall market is experiencing price gains over a certain period of time.
Beta is the measurement of the connection between the price of a stock and the movement of the overall market. For instance, if a particular stock has a beta of 1.3, it means that every time the market moves by 1 point, the stock moves 1.3 points and vice versa.
Blue Chip Stocks
These are stocks belonging to large companies who are industry leaders. Such companies have a solid track record of market performance and, sometimes but not always, high dividend payouts.
Initially, this term was used to describe a house in which wealthy men used to gather in to trade stocks. Nowadays, it just refers to either the Paris stock exchange or any non-U.S. stock exchange.
A broker is an individual who buys and sells securities for you in exchange for a commission. He or she is the middle-man (or middle-person) between stock companies and traders.
Bids represent the amount of money that a trader is willing to part with in order to acquire a particular stock. The asking price is what the seller wants to receive per share of the stock. The difference between these two is the spread.
Day trading is the system of purchasing and selling stock within the same trading day before markets close. Traders who participate in day trading are referred to as day or active traders.
Dividends are portions of a firm’s earnings that are paid out to shareholders instead of being held back as retained earnings. They are often paid by stable and well-established companies; not all companies pay dividends, however.
An exchange is a marketplace where securities are traded. Some of the most popular stock exchanges are the New York Stock Exchange and the Nasdaq.
Execution represents a completed buy or sell order.
Short for Initial Public Offering, an IPO is the first, initial sale or offering of a company’s stock to the public. IPOs take place when companies decide to go public.
An index is a benchmark that is used as a reference marker for portfolio managers and stock traders. Popular examples include the SP500 (Standard & Poor’s 500) and the Dow Jones Industrial Average.
A margin allows a trader to borrow money or take a loan from a broker to purchase a security. The difference between the price of the security and the loan amount is the margin. Margin trading can be risky if utilized improperly. Hence the need for proper education before diving into the market.
Open is the time at which the stock market opens and people can begin to trade stocks. For instance, in the U.S., the stock market begins, or opens, at 9:30 a.m. every weekday.
A portfolio is a collection of investments that an investor has.
A rally refers to a rapid change in the price level of a stock or the market as a whole. It can either be a bear rally or a bull rally, depending on the situation.
A sector refers to a collection of stocks that are in the same industry. Examples of sectors include the technology sector and the energy sector.
Volatility is the price movement of a particular stock or the stock market as a whole. Highly volatile stocks have extreme price movements and are riskier investments than stocks with low volatility.
A yield is the return on a security that is received as a dividend payout.
Buy and Hold
This is a long-term stock trading strategy in which stocks are purchased and held for a long period before they are eventually sold. This is done when it is estimated that in the long-run, the prices of the stock or stocks that are purchased will rise above their current rates.
While there are many other terms that you will come across as you begin your trading journey, the terms above are the most common ones that every aspiring stock trader should be comfortable with. They will help you grasp the intricacies of stock trading and understand much of what is discussed in news articles and company reports. Add them to your vocabulary and add new terms as you progress and gain more trading experience!