In trading and investing, there are countless terms traders come across every day. However, some of those terms are crucial to know and understand, regardless of whether you are new to trading or someone with years of experience.
Below is the list of 44 terms we believe every trader should get familiar with.
American Depositary Receipt (ADR) refers to a stock issued by a bank that represents securities of a foreign company. The certificate allows US investors to invest in non-US companies on local exchanges.
As opposed to bidding, ask represents the lowest price the seller is willing to sell the asset or security. Also known as the offer price, the ask price is always higher than the bid price, and the difference between the two is called the spread.
If a trader is buying additional shares of a depreciating asset that they previously bought at a higher price, it means they are averaging down.
A bear market, or a bear run, represents a time period during which prices of securities or assets are depreciating. There are several causes of a bear market, with the most common ones being geopolitical tensions, a slowing economy, pandemics, and more.
Beta is a term that gauges a security’s volatility relative to the broader market as well as to understand a risk associated with a stock in question. The wider market has a beta of 1, which means that stocks that have a beta of more than 1 are more volatile than the broader market.
In contrast to the ask price, the term bid represents the highest price an investor or trader is prepared to pay to purchase an asset. The bid price is always lower than the ask or offer price.
This term refers to the difference between the highest price a buyer is prepared to pay to purchase an asset and the lowest price a seller is willing to sell an asset. Once a bidder and a seller come to an agreement about the proposed prices, they make the trade.
Blue-chip stocks are stocks of well-established and financially strong companies, which are usually leaders in their respective sectors. These companies typically perform exceptionally for many years and are able to endure periods of turmoil significantly better than other, smaller companies.
When the value of assets or securities is rising over a period of time, it means the market is currently in a bull market. Bull markets typically occur when the economy is thriving and when unemployment drops.
Buying is a trading term that refers to purchasing a financial instrument from someone else in exchange for cash or another asset.
Cash flow represents the amount of money that is being transferred in and out of a business. There are several types of cash flow with the two most common types are inflows (cash received) and outflows (cash spent).
A contract for difference (CFD) represents a binding contract between a buyer and a seller that requires a buyer to pay the seller the difference between the current value of a security and the value it reached at contract time.
A day order is the type of order to buy or sell a stock at a specified price level. This order expires automatically at the day’s close if it does not get executed the day it is placed.
Day trading is an investment trading practice that involves buying and selling securities within a single trading day. Traders engage in day trading using a mix of techniques and strategies to take advantage of market inefficiencies.
Derivatives are financial products tied to the value of the underlying asset. As the name itself says, derivatives extract their value from something else and not its own value. Underlying securities can include stocks, currencies, cryptocurrencies, commodities, etc.
A dividend represents the distribution of a portion of a company’s profits to its shareholders. Dividends are usually distributed by well-established, financially sound companies, while smaller companies are less likely to pay dividends.
A dividend yield represents the size of a company’s dividend relative to its stock price. It is expressed as a percentage.
A Direct Stock Purchase Plan (DSPP) refers to a plan that allows investors to purchase stocks directly from a company, instead of going through a broker. Generally, investors buy stocks through brokerage firms like investment platforms or banks where these brokers serve as a middleman between the investor and the company that owns the stock.
Earnings per share (EPS) is a financial metric used to show the overall profitability of a single company. EPS is calculated by dividing the company's profit divided by the number of outstanding shares of its common stock.
An exchange-traded fund (ETF) refers to a basket of securities tracking a specific index. Just like companies’ shares, ETFs can also be traded on stock exchanges.
Execution is when a broker completes the buy or sell order the trader has requested. A buy or sell order is executed once it is filled out, rather than when it is placed by the trader.
Foreign Exchange, also known as Forex or just FX, refers to a global market that allows the trading of currencies. Since it is a global marketplace, forex is believed to be the largest and most liquid market in the world.
Going long refers to a market position that investors take to purchase an asset, hoping the price of an asset will appreciate and bring them profits.
As opposed to going long, going short is when investors sell the stock because they believe its price will depreciate, allowing them to buy it back at a cheaper price and make a profit.
Good ‘Til Cancelled (GTC) order is a type of order investors place to purchase or sell a stock and remains in effect until it is completed or cancelled.
A hedge fund is a fund that pools money from investors who use riskier and more complex investment strategies in the expectation of substantial returns.
An index measures the stock market performance of a basket of assets. The most popular stock market indexes are the S&P 500, teach-heavy Nasdaq, Dow Jones Industrial Average (DJIA), Russell 2000, FTSE 100, and Dax 30.
Initial Public Offering (IPO) is when a company lists its shares on a stock exchange in order to sell them to institutional and retail investors. The process is typically underwritten by one or more investment banks.
Individual Savings Account (ISA) represents a tax-free savings account available in the United Kingdom. The main difference between an ISA and a normal savings account is that it offers interest payments free of taxes, allowing U.K. residents to save more money.
Leverage allows traders to increase their exposure to the market. Instead of paying the full price, leverage allows investors to pay less than the full price but still take a larger position in the asset.
A limit order is an order that investors give to their broker to buy or sell an asset at a particular price level or better. For example, investors place a buy limit order to purchase an asset at a specified price or lower, while a sell limit order is filled only at the limit price or higher.
In simplest terms, liquidity describes how easily an asset or security can be purchased or sold without significantly affecting its price. If there is a high demand for a stock, it means that the market is more liquid, allowing investors to easily buy and sell that stock.
Margin refers to a trading practice that involves borrowing money from a broker in order to purchase a stock. It also represents the difference between the full value of an investment and the amount that was loaned from the broker.
Market capitalization, or just market cap, represents the total value of a company’s shares that are listed on the market. The term market cap is most commonly used to determine the size of a company.
A market order refers to a direction that investors give to their broker to purchase an asset or stock at the best possible price point. It is the most common type of order investors and traders make in the market.
A moving average is one of the key technical indicators used to combine important data points over a particular time frame while filtering out random price movements.
A mutual fund is an investment company that pools money from numerous investors to buy assets and securities. These funds are managed by expert money managers, who develop investment strategies and invest the pooled money to bring profits to its investors.
Outstanding shares represent all of the shares that have been issued and owned by investors. Outstanding shares include both shares owned by institutional investors and those held by corporate insiders.
P/E ratio stands for price/earnings ratio, which basically aims to calculate the valuation of a given company. Their ratio is calculated by simply dividing the stock price by the company’s earnings per share.
Price Quote refers to the last price level at which a stock has traded. In other words, it represents the price point at which investors can buy or sell a stock. A quotation is also closely associated with high, low, open, and close values.
A price rally is when the stock’s price appreciates at a rapid pace over a period of time.
The public float, also referred to as free float, represents the portion of a company’s shares that are listed on the market and available for trading. In layman trades, it represents the number of shares that are available for buying and selling by investors.
Regulators refer to government agencies that regulate capital markets and companies. In the U.S., there is a number of individual regulators with their respective responsibilities. While these agencies operate independently of each other, they have similar goals.
A secondary offering is when a company’s shares that were already sold in an IPO are sold again on a secondary market by investors. Proceeds from these offerings are distributed to investors who are re-selling the shares, and not to the company.
A sector refers to a collection of companies and institutions that develop and sell similar types of products and services. Categorizing the economy by different sectors allows economists and analysts to evaluate the economic activity within those particular areas.
In contrast to buying, selling refers to liquidating an asset the trader has previously bought in exchange for cash. Investors typically sell assets to take a profit or cap further losses. Closing a long position actually means that investors is ‘selling’.
SIPP stands for self-invested personal pension (SIPP), a pension program that allows investors to save money for their retirement. Working as a personal pension, SIPP is actually very similar to a standard personal pension, with the key difference being that SIPP offers more flexibility on which investments you want to make. Hence, the biggest advantage of SIPPs is that it gives you control over your investments.
Spread betting offers traders a chance to speculate on financial markets without actually becoming owners of the underlying security. In layman's terms, investors are betting on whether the asset price will go up or down.
A stockbroker is a licensed financial professional that facilitates transactions between buyers and sellers. The majority of stockbrokers today work for brokerage firms and help millions of retail and institutional investors with their transactions.
A stock chart is a graph that provides a visual representation of a stock’s price movement over a specific period of time. Stock charts usually consist of X and Y axis lines, with the former representing the time period while the latter representing the price movement.
A stock exchange is a market where investors and traders buy and sell certain securities including stocks, bonds, and exchange-traded products. It is important to note that stock exchanges do not own shares.
A group of stocks owned by an investor is called a stock portfolio. Stocks and bonds are usually the core constituents of each investor’s portfolio, but it can also include other assets like gold, cryptocurrencies, commodities, real estate investment trusts, etc.
A stock symbol is a unique abbreviation that identifies publicly-traded companies on a stock exchange. Upon going public, companies select a unique collection of series of letters or numbers that differentiates them from other companies on that exchange. Stock symbols are also known as ticker symbols.
A trading mentor is a professional that provides less experienced traders with useful advice and helps them learn important aspects of trading.
Trading volume represents the total amount of securities that have been traded between buyers and sellers over a specific time period. Investors and analysts look at the trading volume to evaluate the market's activity and liquidity.
Market volatility, or just volatility, is a term that indicates unpredictable and sometimes sharp short-term price movements of a security. Riskier assets are generally more volatile than other assets because they are less predictable.