Defining and Interpreting Stock Market Terms
Getting Acquainted with Stock Market Terms
As with any business or occupation there are terms, buzzwords or references unique to the activities of stock market trading and day trading. Those who enter the world of investing are at a distinct disadvantage if they are not aware of the terminology associated with trading activities and the meaning of terms utilized by brokerage firms and online brokers. As there are many types of investments and financial products available to investors not all terms apply to every transaction or investing strategy. Here we will discuss those that are most commonly used across multiple types of trading.
Common Stock Market Terms and How to Interpret Them
Bear vs. Bull Market – Bear market designates a period of downward prices on the stock market. A bull market is the opposite where stocks are on a period of upward trending and rising prices.
Broker / Online Broker – Whatever your investment strategy you need a broker or online broker to execute the trades you want to make. Today’s internet of things (IoT) provides the technology that enables global online brokers to execute traders’ orders quickly and efficiently.
Call – call is basically a contracted option that allows (but does not require) the holder to purchase a specific amount of a security at the price specified in the call, which also includes a time constraint.
Day Trading – this is a practice where investors buy and sell financial assets within a very short period of time, normally on the same day. Trade activities are often turned over within a few hours or minutes. Day traders are sometimes referred to as ‘active traders’.
Forex – foreign exchange or foreign currency investing. Forex trading is the largest market in the world and includes all currencies. There are no limitations on investors who can participate in Forex markets or what currencies investors can trade.
Hedge – remember that all capital invested is at risk. Hedging is a common strategy to reduce risk or exposure from a particular investment. Put simply it amounts to purchasing an offsetting investment in a related security which effectively protects you from losses. This is a practice that is aimed at avoiding impact from market shifts or volatility.
Long-term vs. short-term investing – these terms describe significantly different investment strategies. Long-term investments are also referred to as ‘buy-and-hold’ purchases where the investor intends to own the investment for a long period of time, typically years. An example of long-term investments would be stocks or mutual funds invested for retirement purposes. Short-term investments are those purchased for quick turn-around for short-term gains. These may be purchased and sold again within a few weeks, a few days, or even a few minutes.
Margin – buying on margin is a process whereby a broker allows the account holder to borrow money to execute the purchase of a particular investment. Margin is the difference between the amount advanced to the purchaser and the actual price of the investment.
Market Capitalization – this is a measurement of a company’s enterprise size. It is a calculation of the number of outstanding stock shares times the current market share value.
Risk Tolerance – this varies for every investor depending on your individual financial position. Your risk tolerance is the impact that losses would have on your financial wellbeing. An investor approaching retirement who will need to secure their capital would be much less risk tolerant for example than a very young investor who has a longer period of time to recover from losses.
Spread – as with any supply and demand market there are often differences between the ‘ask’ and ‘bid’ prices. The difference between the price a holder is asking for an investment vs. what a potential buyer is willing to pay is referred to as the spread.
Tactical trading – this is an investment strategy of investing for short term that takes into account anticipated trends in the market. This typically includes a variety of market segments that could include stocks, commodities, and currencies.
Trading Strategy – this impacts every trader. Each has their own financial goals and risk tolerance that effect the selection of financial instruments to buy and sell, setting of entry and exit limits, and analysis of prospective investments. Combined these factors constitute the investor’s specific strategy.
Volatility – there has been a great deal of attention to this term in recent weeks. This term applies to extreme up and down jumps in either individual market segments or more often the market in general.
Applying Your Knowledge of Stock Market Terms
Casual investors, day traders, and long-term investors will all benefit from possessing basic knowledge of investing terminology. With experience you will gain in-depth understanding of how each term applies (or does not apply) to your specific investing strategy. Additional information on investing terms can be found on such web sites as NASDAQ, ValueStockGuide, Investopedia, and many others.
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Disclaimer: SureTrader Blog is not intended for U.S. persons. Stock information is not to be viewed as buy or sell recommendations.