Glossary of Financial Terms
Financial Terms & Stock Trading Terms
It’s somewhat daunting for an investor who’s just getting started trading in the stock market. The challenge includes learning new financial terms and trying to speak a new language. At times it can seem downright overwhelming.
After all, how are you supposed to learn how to be a savvy investor when you don’t fully understand what you’re reading about or hearing?
To help you get started, we’ve put together some basic financial terms and stock market terms and vocabulary that you’re likely to encounter from the get-go. Understanding these terms will put you on the right track towards taking control of your financial future while gaining a clearer understanding of the stock market and how it operates. Here are some of the more common terms:
Annual report: This is a financial statement, issued yearly by a company or foundation, which informs shareholders of all activity, liabilities, assets, expenses, and profits.
Ask or Offer: The lowest price that a seller will typically accept when looking to sell a stock. When combined with the bid price information, it forms the basis of a stock quote.
Balance sheet: Also called a statement of financial position, this is a summary of company assets and liabilities, as well as owner equity.
Basic point: One 100th of a percent.
Bear: An investor who believes a specific market will decline, or is currently declining – may be referred to as “bearish.”
Bear market: A period of time when the stock market is trending down and the majority of stocks are going down in price. The average bear market since 1900 lasts about 410 days according to Ned Davis Research. One criterion for a major bear market is when the three major stock indices (the Dow Jones Industrial Average, the S& P 500 and the NASDAQ 100) have corrected 20% or more from their highest recent levels.
Bid and ask prices: The bid price is set by the buyer, and is the amount at which he is willing to purchase a stock. The ask price is how much the seller will accept for the sale of the stock.
Block: A large quantity of shares in a single company, usually more than 10,000.
Blue chip stocks: A stock with the combination of high earning power and a stable credit rating, usually purchased for its stability to help power sustainable growth in an investment portfolio – usually the shares of large, well established companies that are leaders in their industry. These are companies that offer a continuing record of significant dividend payments and have an outstanding reputation for sound fiscal management. The expression is thought to have been derived from blue gambling chips, the highest denomination of chips used in casinos.
Book value: This term has numerous different meanings.
- In a worst-case scenario, the floor on the stock’s price.
- The value per share.
- Total assets, with liabilities and intangible assets subtracted from the total.
Broker: Facilitator of securities trading, paid in commission.
Bull: An investor who believes a specific market will rise, or is currently rising – may be referred to as “bullish.”
Bull market: A market with upward movement, or a market that is expected to grow. The opposite of a bear market. It’s an extended period of time when the major stock indices (see Bear Market above) are moving higher and the majority of stocks are going up in price. The average bull market since the 1960s has lasted more than 1,000 trading days.
Capital: The amount of money invested in a company that allows for its day-to-day functioning and activity.
Capital gain: An increase in the value of capital.
Capital loss: A decrease in the value of capital.
Cash flow: A measurement of company health, indicating the rate of return on a business’s projects.
Commission: A broker’s trading fees.
Common stock: Equity that entitles the owner to voting rights, along with a portion of dividends and capital gains.
Day trading: A trading technique characterized by the practice of buying and selling within the same trading day, before the close of the markets on that day. Traders that participate in day trading are often called “active traders” or “day traders”.
Diversification: A strategy to reduce risk in a portfolio by combining a diverse array of investments.
Dividends: Payments made by a corporation or business to its shareholders.
Dollar-cost averaging: Buying a fixed dollar amount of an investment on a regular schedule, regardless of share price.
Due diligence: An audit or investigation conducted to confirm the facts of a sale, also known as the trader’s responsibility to thoroughly evaluate all transactions.
Equity: Interest in a company’s assets, distributed among shareholders.
Execution: When an order to buy or sell has been completed.
Face value: The value that a coin, bill, or stamp carries on its face – the printed value given to it by a particular country.
Fiscal year A time period used by a company for accounting purposes, usually 12 months.
Fixed charges: Business costs that do not fluctuate, regardless of production levels (for example: equipment and property costs).
Growth stock: Company stock that has demonstrated significant growth in the recent past.
Initial public offering (IPO): The first sale or offering of shares of a stock by a company to the public.
Investment portfolio: The mix of investments held by an individual or institution.
Issue: Distribution of corporate securities.
Leverage: The use of debt to partially finance an investment.
Liability: The legally binding obligation to repay one’s debts.
Limit order: A specified maximum amount one is willing to pay per share for a company’s stock.
Liquidation: Converting an asset into cash.
Liquidity: The ease by which an asset may be converted into cash.
Manipulation: An illegal attempt to interfere with fair and free market activities.
Margin: The risky act of borrowing money to finance investments.
Market order: An order to buy or sell a stock immediately, at the current market price.
Moving average: A stock’s average price-per-share during a specific period of time.
NASDAQ: The NASDAQ Stock Market, also known as the “National Association of Securities Dealers Automated Quotations,” is the largest electronic screen-based securities trading market in the U.S. It is also the second-largest stock exchange by market capitalization in the world, just after the New York Stock exchange.
Net worth: Financial health, calculated by subtracting liabilities from assets.
Open: The term “open” can refer to:
- The start of a trading day.
- The price of a particular stock at the start of a trading day.
- An order that has not yet been executed.
- With trading options, it refers to an option position that a trader is seeking to establish or has already established (i.e. “Buy to Open”, “Sell to Open”).
Open order: An order to buy securities that has not yet been executed.
Order: An investor’s request to buy or sell a certain amount of stock or option contracts, whether immediately (“at the market”) or at a certain price point (“buy limit” or “sell limit”).
Penny stock: Stock that is traded at less than $5 per share.
Portfolio: A collection of investment positions owned by an investor.
Position: An investor’s holdings in a specific stock or options contract (refers to open holdings unless otherwise specified).
Quote: Information on a stock’s latest trade price. Quotes are often delayed by 20 minutes, unless specifically noted as a “real-time quote”.
Rally: A sudden, significant rise in the price of a specific stock or the market at large, especially after a period of falling prices.
ROI: Return on investment, calculated by subtracting the costs from the gains.
SEC: The Securities and Exchange Commission, responsible for regulating all American trading activities.
Short Sale: A strategy of selling borrowed stock from a brokerage in order to take advantage of the anticipated decline of the stock’s price. Short sellers often assume the risk that they will eventually be able to buy the stock for repayment at a lower price, thus covering (buying to pay back) the outstanding borrowed short position and keeping the difference. That “difference” is the amount between the price they sold the borrowed position and the cost of buying-to-cover (repay) the borrowed, shorted position. This kind of transaction is highly speculative.
Speculation: A high-risk form of investing, which involves selecting volatile investments in the hopes of profiting from their movement.
Stock: A measurable unit of ownership or investment in a company. Companies issue shares of stock in order to raise capital without having to borrow money. The issued shares that are offered for sale to the public through the stock exchanges are referred to as “publicly-traded stock”.
Stock dividend: A dividend paid out in company stock rather than in cash.
Stop Loss: A rule to sell a security when it reaches a certain price is a Stop Loss. It is is designed to limit an investor’s loss on a security position. Can also known as a “stop order” or “stop-market order”.
Stop Order: An order to sell (a.k.a. “stop-loss order” or “sell-limit order”) a stock when it reaches a certain price. This is usually done to limit the amount of risk an investor is willing to take.
Trailing Stop: A stop-loss order set at a percentage level below the market price – for a long position. The trailing stop price is adjusted as the price fluctuates. There are various types of trailing stops but the basic principle is to keep the stop-loss price a fixed percentage below a high price point (for long positions). A proper trailing stop can help an investor to stay invested in winning positions and exit losing positions sooner rather than later.
If the stock moves higher than the order with its trailing stop percentage or fixed dollar amount moves up as well. The aim is to set a maximum limit concerning how much of the original investment one is willing to lose. If the stock moves higher the trailing order protects on the downside while allowing the shares to continually move higher in spite of the average volatility in the stock or the stock market.
Volatility: This refers to the swings or price movements of a stock or the stock market. A stock with “average volatility” moves up or down to about the same degree as the stock market or stock index that it’s a part of. Highly volatile stocks are ones with extreme daily up and down movements and wide intraday trading ranges. This is often common with stocks that are thinly traded (i.e. have low daily trading volume).
Yield: Usually referring to the measure of the return on an investment that is generated by the payment of a dividend. You determine the yield by dividing the annual dividend amount by the price paid for the stock. For instance, a stock that you buy for $40-a-share that pays a $1.00-per-year dividend offers a “yield” of 2.5%.
These are some of the more basic terms associated with stock market investing. We encourage you to learn more by visiting the TradeStops Blog.
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