Looking to diversify your portfolio? Then you should consider entering the stock market! Just like other traditional investments such as real estate, taking up the mantle of a trader, studying the field intently, and building a sound investment strategy can yield high returns over time.
However, with so much information to absorb, many people feel intimidated to start their own venture or have difficulty navigating this complex industry.
Whether it’s science, art, or economics, knowing and understanding the right terminologies is the first step in becoming proficient in a field of study. If you want to invest in stocks or learn stock trading in the best way possible way, you need to have a general idea of how the area operates and sustains itself. Having the right foundations will be vital once you begin buying, comparing, and trading shares.
To get you started on the right track, the guide below will discuss stock market terms every beginner should know.
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24 Stock Market Terms You Need to Know:
Bear Market
This refers to the condition where a market experiences a price decline over a prolonged period. When stock prices fall below 20% in a period of two months or so, investors tend to get pessimistic, and this leads to a string of price drops.
Bull Market
If a particular stock, market, or asset’s price continuously rises in value, then this can be labeled as a bull market. While stock prices are naturally volatile, the upward trend caused by high activity can last for months or years.
Bonds
Bonds are debt-centered investments where investors loan money to institutions in exchange for regular interest payments. They are typically used by governments to run operations and finance big projects.
Black Swan
Black swan refers to the occurrence of a market altering event. This term can also be used to describe both positive and negative changes in stock prices, but it is often in the context of a market crash.
Blue Chip Stocks
This term is used to describe the stocks of industry giants. Blue-chip stockholders tend to be the reputable and financially-healthy companies that have been running for years and consistently pay dividends. Some examples of holders are IBM and Coca-Cola.
Stockbroker
A broker is a firm or professional who buys or sells stocks for you. They are veterans in the field and can provide all kinds of investment advice to help you generate profits. Most brokers are usually compensated through service fees but can also be paid through commissions.
Buy and Hold
Arguably the most popular investment tactic, buy and hold refers to the act wherein an investor purchases stocks and holds on to them for a set number of the term. This strategy is generally passive, and investors who opt for this practice usually ignore short-term price fluctuations.
If you plan to start a stock trading venture, you should stick to the method until you have a better grasp of trading.
Call Option
A call option is a type of contract that gives the owner the right (but not necessarily the obligation) to purchase a company’s shares. Once an agreement has been set, you are given the privilege to buy securities at a specific price and time frame. Note that traders tend to buy and sell call options as a part of their strategy.
Compound Annual Growth Rate (CAGR)
CAGR is the hypothetical rate your investment would have grown from its beginning to its ending balance. Considering that your asset’s value steadily increases over time, taking note of your CAGR is one of the best ways to calculate your potential returns.
Crash
A crash is a large and sudden unexpected drop in asset values. Crashes are usually caused by market panic, which can be attributed to disasters or an unexpected event. An average stock market crash usually results in a drop of 30% or more in just a few days.
Day Trading
This is a practice within the stock industry wherein a trader buys and sells shares on the same day. By buying low and selling high, they are able to attain a primary source of income.
Dividends
This term refers to the cash a corporation distributes among its shareholders. When a company generates large amounts of revenue within a set time frame (usually a financial year), a part of the profit is divided among its shareholders. Generally speaking, more shares will result in more dividends.
Exchange-Traded Fund
Similar to mutual funds, an exchange-traded fund (ETF) is a collection of securities that can be bought or sold just like any other asset. ETFs contain all types of investments ranging from commodities to bonds.
Exchange
An exchange is a place where investors gather to make transactions. Its primary purpose is to ensure that trades are orderly and fair by providing the necessary prices and information. The most well-known exchange in the world is the New York Stock Exchange
Expectancy
This refers to the amount of profit you expect to make for each dollar you risk over a trade. By calculating your win-loss ratio, you will be able to determine whether your current strategy is effective or not. Knowing what your expectancy is will allow you to make quick adjustments and prevent you from incurring bigger losses.
Initial Public Offering
An initial public offering or IPO is when a private corporation decides to offer shares to the public. This allows stakeholders to raise capital, which will help them maximize the gains of their investment.
Limit Order
Limit orders specify the price you are willing to pay up or sell down whenever you are in the process of trading. This is used to determine the best and worst prices to pay, assuming that your transaction pulls through.
Liquidity
Liquidity refers to the volume of buying and selling with a particular stock. High-liquidity stocks are usually easier to trade since there are many traders around the market. Meanwhile, less liquid stocks are harder to buy and sell since the activity is limited within this sphere.
If you are looking for a market with high liquidity, then you should try venturing into Foreign Exchange (FX)
Market Capitalization
More commonly known as the market cap, it refers to the market value of a company’s shares. It is determined by multiplying the total number of a company’s outstanding shares with the current price of a single stock. This is used by investors and traders to rank companies in contrast to their overall sales or assets.
Market Order
A market order is a request made by an investor if he wishes to buy or sell a security at the current market price. It’s especially useful if you are planning to enter a high volume market since it will allow you to make the best transactions as soon as possible.
Mutual Fund
A mutual fund is a type of investment vehicle that requires you to pool your money with other investors. If you are looking to diversify your portfolio, but your capital is limited, then this investment instrument is something you should look into. As long as you have a credible fund manager, you can rest easy knowing that your money is in good hands.
Stop Order
A stop order is a command to buy or sell a security when it reaches a certain threshold. It is usually triggered whenever a stock reaches the ideal price point and is followed up with a market order. In turn, this allows investors and traders to get the most out of their assets.
Trading Strategy
A trading strategy is a system of actions traders follow to ensure that they meet their objectives. It takes multiple parameters, such as time and risk, into consideration to outline how they should buy or sell their securities over time.
A fundamental trading strategy should include entry plans and risk management procedures, and it must be changed whenever it does not produce positive results.
Volatility
Volatility refers to how much a stock’s price fluctuates over time. Highly volatile stocks tend to spike up or crash in large amounts over time. If its price expands beyond the usual trading range, then the phenomenon called volatility breakout happens.
Understanding a stock’s volatility will be extremely useful as a trader since this will help you know an asset’s level of risk.
Master the Stock Market
Entering the stock market can be an overwhelming experience. Given that it requires investors to spend vast amounts of their money and have an in-depth understanding of complex stock market terms and topics, it’s no surprise why many end up unsuccessful or avoid this endeavor altogether. But just like any other venture, success can be attained as long as one stays patient and diligent.
If you plan to invest in the market, having a firm grasp of the general stock market terms in trading will allow you to set the necessary strategies in place. Afterward, constantly updating yourself with the latest trends in the field will enable you to navigate the industry with ease.
I am a seasoned financial expert with a deep understanding of the stock market and investment strategies. Over the years, I have successfully navigated the complexities of the financial industry, demonstrating proficiency in various concepts related to stock trading. My knowledge is grounded in practical experience, and I have a comprehensive understanding of the terminology and strategies crucial for successful investing.
Now, let's delve into the stock market terms mentioned in the article to provide a clearer understanding for beginners:
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Bear Market:
- Definition: A market condition where prices decline over an extended period (usually more than 20% in about two months).
- Significance: Pessimism among investors leads to a series of price drops.
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Bull Market:
- Definition: A market condition characterized by a continuous rise in the value of stocks, assets, or a specific market.
- Significance: Indicates a positive and upward trend, potentially lasting for months or even years.
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Bonds:
- Definition: Debt-centered investments where investors lend money to institutions in exchange for regular interest payments.
- Significance: Often used by governments to fund operations and large projects.
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Black Swan:
- Definition: Refers to a market-altering event, either positive or negative, causing significant changes in stock prices.
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Blue Chip Stocks:
- Definition: Stocks of well-established, financially healthy companies with a reputation for consistent dividends (e.g., IBM, Coca-Cola).
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Stockbroker:
- Definition: A professional or firm that buys or sells stocks on behalf of investors, providing investment advice.
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Buy and Hold:
- Definition: An investment strategy where investors purchase stocks and hold onto them for a set period, ignoring short-term fluctuations.
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Call Option:
- Definition: A contract giving the owner the right (not obligation) to purchase a company's shares at a specific price and time.
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Compound Annual Growth Rate (CAGR):
- Definition: The hypothetical rate at which an investment would grow from the beginning to the ending balance.
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Crash:
- Definition: A sudden, large drop in asset values, often caused by market panic due to unexpected events.
These are just a few of the terms discussed in the article. If you have any specific questions or would like more detailed explanations, feel free to ask.
